Inside the Market’s roundup of some of today’s key analyst actions
Seeing the probability of a shutdown of Enbridge Inc.’s (ENB-T) Line 5 “significantly diminished” after a U.S. judge ruled Monday that the Dakota Access Pipeline may remain operational as an Environmental Impact Statement is prepared, iA Capital Markets analyst Elias Foscolos raised his rating for its shares to “strong buy” from “buy.”
“The Company is still locking horns with the State of Michigan with respect to Line 5, which runs acrossthe Straits of Mackinac,” he said in a research note released Tuesday afternoon. “The State had ordered the pipeline to be shut down on May 12 by cancelling ENB’s easement due to uncertainty over the safety of the line if there is an oil spill in the Straits. Despite all the news Line 5 is receiving, we believe that the State of Michigan has an extremely weak legal case.
“First, Line 5 is federally regulated, and it has been deemed to be safe despite its age. Second, ENB has proposed to relocate the portion of Line 5 that runs along the bottom of the Straits in a tunnel making it even safer. Third, closing Line 5 infringes on interstate commerce which is federally regulated. Fourth, Line 5 supplies both Quebec and Ontario refineries. An treaty exists between Canada and the U.S. which explicitly allows the transport of Canadian oil via the U.S. into Canada. Finally, the DAPL ruling raises the threshold for shutting down Line 5 to a virtually insignificant probability as the line has been deemed safe and all permits are in place.”
Mr. Foscolos called the DAPL ruling a “further hurdle” for the State of Michigan, which he thinks will “need to demonstrate a likelihood of irreparable harm in the event of an oil spill.”
“In our opinion, with the short-term uncertainty around the Line 5 and DAPL essentially cleared, and a surge in cash flow from Line 3 expected in Q3, we are increasing our rating,” he said.
The analyst maintained a $54 target for Enbridge shares. The current average on the Street is $51.79, according to Refinitiv data.
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Though he likes the rationale behind Canadian National Railway Co.’s (CNR-T) US$29.8-billion acquisition of Kansas City Southern (KSU-N), Desjardins Securities analyst Benoit Poirier thinks the regulatory risk is too high to justify buying its stock at this point.
“On that front, we expect some noise over the coming weeks as key stakeholders voice their opinion,” he said in a research note. “At this point, we prefer to remain on the sidelines in relation to CN while awaiting additional details on the regulatory process. For CP, we expect management to evaluate its strategic options if the transaction between CN and KCS is approved, which would warrant a premium for CP in our view.”
Mr. Poirier called the acquisition a “bold move to protect the superiority of its network and unlock further growth opportunities with its intermodal franchise.” He thinks the transaction will help solidify CN’s position in the growing intermodal segment and unlock shareholder value, projecting a value of $172.89 per share in 2023.
“While we are not adjusting our forecasts to reflect CN’s revised offer, we have updated our scenario analysis to assess the value creation potential of the proposed transaction,” he said. “We assume that the voting trust closes at the end of 2021 and that the transaction closes at the end of 2022 — a conservative assumption as CN is aiming to complete the transaction by mid-2022. We assume that of the proposed US$1-billion in synergies, 30 per cent would be achieved in 2023, 60 per cent in 2024 and 100 per cent in 2025. In 2021, the interruption of the buyback program is expected to result in 2-per-cent adjusted EPS dilution (vs initial estimates). In 2022, the implementation of the voting trust upon shareholder approval of the transaction is expected to result in 6-per-cent adjusted EPS dilution (vs initial estimates) as the issuance of shares and debt to finance the acquisition will be more than offset by the dividend received from the voting trust (we derive C$947-million using KCS’s 2022 FCF consensus of US$791-million and a 5-per-cent tax rate). Upon closing, we derive adjusted EPS accretion of 0 per cent in 2023 (vs management’s comment that the transaction should be accretive in the first full year upon STB approval; was 1 per cent previously), 0 per cent in 2024 (vs 1 per cent previously) and 9 per cent in 2025 (management is aiming for solid double-digit accretion upon full realization of synergies; was 11 per cent previously).”
Maintaining a “hold” rating for CN shares, Mr. Poirier trimmed his target to $145 from $147 to reflect the US$700-million payment for Kansas City Southern’s break fee with Canadian Pacific Railway Ltd. (CP-T). The average target on the Street is $148.67.
For CP, he kept a “buy” rating, seeing it “well-positioned strategically whether or not the transaction between CN and KCS goes through,” with a $106 target, down from $529 after its recent 5-for-1 stock split. The average is $104.49.
“Assuming the merger between CN and KCS goes through, we expect CP to consider its strategic options and look to a potential merger with a US Class l railroad (CSX and NSC could be potential suitors, in our view),” he said.
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Touting a “strong foundation for superior returns,” BMO Nesbitt Burns analyst Devin Dodge upgraded Toromont Industries Ltd. (TIH-T) to “outperform” from “market perform” on Tuesday, seeing it “well-positioned” to deliver double-digit earnings growth.
“Equipment orders in Central/Eastern Canada have been very strong in recent months, which implies growing confidence among TIH’s customer base,” he said. “As restrictions ease and activity levels pick up, we expect demand for some of TIH’s highest-margin services to shift higher (product support, rental, etc.). Layering in TIH’s intense focus on cost discipline and incremental benefits from improving operational performance at Toromont QM (leveraging the rollout of TDMS, optimizing rental operations, material handling profit improvement, etc.), we project a three-year EPS CAGR [earnings per share compound annual growth rate] in the mid- to high teens.”
Seeing an attractive valuation versus its Canadian peers, Mr. Dodge raised his target for Toromont shares to $114 from $105. The average is $112.67.
“In our view, Toromont is one of the highest-quality industrial companies in Canada and has a number of attractive attributes (top-tier management team, industry-leading margins, strong ROIC, spare balance sheet capacity, dividend growth),” he said. “Moreover, the demand outlook in its territories is very favourable, which should support strong incremental margins and earnings growth.”
“We believe valuation is the primary hurdle for investors when considering TIH. We believe TIH’s valuation appears attractive relative to other leading industrial names, particularly given the outlook for strong growth that has upside optionality should an attractive acquisition opportunity arise. Given the robust demand recovery in TIH’s markets and the growing political uncertainty in South America, we expect the multiple spread with FTT to remain wide.”
Conversely, seeing political uncertainty in Chile likely to “keep a lid” on its valuation, Mr. Dodge downgraded Finning International Inc. (FTT-T) to “market perform” from “outperform” with a $34 target, down from $39 and below the average on the Street is $38.72.
“Historically, the multiple spread between Finning and Toromont narrowed significantly during cyclical upturns, including some brief periods when Finning traded at a premium,” he said. “In the current recovery, we had expected the valuation discount to Toromont to narrow closer to its historical average (3-4 turns), as the expected delay in mining sector investments in Chile from the political uncertainty partially muted the cyclical upside, at least in the near term. However, we believe the recent developments in Chile have exacerbated these concerns and weakened the argument for a compression of the multiple gap with Toromont.”
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Seeing it gaining in an increasing share of the “not-so-niche” digital investigation software market, Canaccord Genuity analyst Doug Taylor initiated coverage of Magnet Forensics Inc. (MAGT-T) with a “buy” rating on Tuesday.
The Waterloo, Ont.-based tech firm began trading on the Toronto Stock Exchange on April 28 following a $115-million initial public offering.
“Magnet’s leading software solutions for the digital investigations market are allowing it to rapidly gain share with law enforcement and corporate customers,” he said. “The company targets 30-per-cent annual revenue growth in its largely recurring revenue base through expansion of its revenue per customer and new customer additions. The business model has many attractive qualities that justify a high valuation multiple, in our view; shares currently trade at 10.5 times sales. However, we see upside to the current share price as the company extends its track record of profitable growth and further demonstrates the ability to penetrate a wider enterprise customer base.”
Mr. Taylor is projecting 26-per-cent organic growth in 2021 at the low end of its guidance of 26-30 per cent, citing both 25-per-cent growth in the first quarter and the impact of COVID-related headwinds. However, he is forecasting 27.2-per-cent growth in fiscal 2022 and 27.7 per cent in 2023.
Seeing “an all-around tidy financial model with several enviable attributes supporting steady profitability,” he set a target of $28, emphasizing “strong revenue growth and FCF are expected to be the primary drivers of share price appreciation.
“Among the model highlights that investors should like: 93-95-per-cent gross margins; 70-per-cent-plus recurring revenue (and growing); 120-per-cent net dollar retention rate. The predictability of the financial model and efficacy of sales and marketing efforts have meant high profitability even while experiencing strong growth. EBITDA has been consistently positive in recent years, expanding to 30-per-cent EBITDA margins in 2020 due in part to certain one-time benefits (an 18-per-cent margin normalized). Management has, in our view, conservatively aimed for 15–17-per-cent EBITDA margins in 2021 and beyond as it reinvests in sales and marketing efforts and R&D.”
Elsewhere, others initiating coverage include:
* BMO Nesbitt Burns’ Thanos Moschopoulos with an “outperform” rating and $27 target.
“Magnet is a leader in the Digital forensics market, which is increasingly playing a key role in criminal investigations, as more of our lives are being spent online and on our devices. We believe it can sustain a 38% recurring revenue CAGR over the next three years, with a mid-teens operating margin. We view the stock as attractive given this rare combination of growth and profitability, which, in our view, isn’t adequately reflected in its current valuation,” said Mr. Moschopoulos.
* RBC Dominion Securities’ Paul Treiber with an “outperform” rating and $30 target.
“Our positive investment thesis reflects the expected shareholder value creation from Magnet growing revenue at 30-per-cent per annum over our forecast period. We believe the shares are compelling, in light of valuation below peers and visibility to growth,” he said.
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Raymond James analyst Daryl Swetlishoff expects the wild ride taken by building materials stocks to continue in the near term.
However, pointing to the potential brought on by volatility in lumber future contracts and last week’s “bombshell” from the U.S. Department of Commerce, which is seeking to double tariff rates against most Canadian softwood producers, he sees investors gaining an “alpha opportunity.”
“Building materials stocks have exhibited increased volatility during 2021 as commodities have soared to previously uncontemplated levels - offset by negative fund flows as investors (including strategic) have taken profits,” said Mr. Swetlishoff. “Building materials pricing has once again far outpaced our forecasts – resulting to the second US$200/mfbm lift to our 2021 WSPF benchmark lumber forecast (from US$750 to US$950). Looking ahead, investors currently have to weigh several variables, 1) Stocks discounting bargain-basement lumber pricing (sub US$500/mfbm) – less than a third of current spot. 2) Phenomenal current profitability with the 4th successive quarter of record quarterly earnings on tap. Our fresh estimates imply top picks Interfor and West Fraser will earn 20-25 per cent of their market cap during 2Q21 alone!”
“These tailwinds are balanced by, 3) A high probability that the next move in cash building materials commodity pricing is likely to the downside, which we expect could weigh on the stocks despite current bargain-basement valuations. In the very near term we view last week’s news of the U.S. Dept of Commerce preliminary 2nd Administrative Review effectively doubling lumber duties to 18.3 per cent from 9.0 per cent as a negative (esp. for Canfor whose preliminary rate goes to 21.0 per cent from 4.9 per cent). However, as an offset, similar to contract expirations over the past 12 months we expect July futures recently finding a level and trading higher to temper the sell-off in building materials share prices. We also forecast higher floor pricing as BC breakeven cost levels increase and are upping our 2022 lumber price forecast by US$50 to US$600.”
With increases to his price deck for commodity prices, Mr. Swetlishoff raised his 2021 financial estimates by an average of 35 per cent, leading to a series of target price changes for stocks in his coverage universe. They are:
- Canfor Corp. (CFP-T, “strong buy”) to $53 from $46. The average on the Street is $41.83.
- Conifex Timber Inc. (CFF-T, “outperform”) to $3.85 from $3. Average: $3.08.
- Interfor Corp. (IFP-T, “strong buy”) to $60 from $47. Average: $47.67.
- Western Forest Products Inc. (WEF-T, “outperform”) to $3 from $2.50. Average: $2.78.
- West Fraser Timber Co. Ltd. (WFG-T, “strong buy”) to $170 from $145. Average: $137.13.
- Mercer International Inc. (MERC-Q, “strong buy”) to US$27 from US$24. Average: US$20.10.
“We highlight target prices increase across the board, with our top picks West Fraser and Interfor up approximately 20 per cent; with our new targets implying 86-per-cent upside for each company,” he said. “With quarter-to-date lumber prices running 20 per cent ahead of 1Q21 levels, our new estimates imply Interfor is on track to earn more than 25 per cent of its current market cap in 2Q21 alone. West Fraser is highly levered to rallying OSBprices, up 38 per cent quarter-over-quarter, with our new forecast suggesting quarterly earnings close to US$2.0-billion which equates to over 20 per cent of market cap!”
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In a research note titled Revisiting the Renewable Reset, Credit Suisse analyst Andrew Kuske trimmed his target prices for TSX-listed renewable-energy stocks in his coverage universe on Tuesday.
“During the year-to-date, renewable stocks faced a rollercoaster of market performance with the core group of five renewable names (BEP, BLX, INE, NPI and RNW) delivering an average capital return of 75 per cent in 2020 which was followed by a peak average appreciation of 14 per cent in early January 2021 (year-to-date basis), but now down 16 per cent on average for YTD performance for this sub-group,” he said.
“Based on Refinitiv data, focusing on the five major Canadian renewable power focused stocks, peak valuations on January 8 averaged 19.3 times on EV/EBITDA and 2.40 per cent on yield. From peak to now, EBITDA multiples contracted by 4.4 times and yields expanded by ~100bps. From our perspective, the extent of the broader renewable downdraft is a bit curious given the fundamental outlook. Yet, on a pragmatic basis, we revised a number of targets to reflect adjusted multiples in the preferred NAV framework for the sector.”
His changes include:
- Algonquin Power & Utilities Corp. (AQN-N/AQN-T, “neutral”) to US$16.60 from US$17.50, which is the average on the Street.
- Boralex Inc. (BLX-T, “neutral”) to $43 from $48. Average: $50.60.
- Innergex Renewable Energy Inc. (INE-T, “outperform”) to $26 from $30. Average: $24.90.
- Northland Power Inc. (NPI-T, “outperform”) to $54 from $56. Average: $50.56.
- TransAlta Corp. (TA-T, “outperform”) to $18 from $18.50. Average: $13.75.
- TransAlta Renewables Inc. (RNW-T, “neutral”) to $21 from $22. Average: $19.81.
“Our highest conviction stock continues to be TransAlta Corporation (TA) that is executing the strategy that is combined with delivering solid financial results in the first publicly reported quarter from Alberta’s power market evolution. Core Alberta exposure is also available with a higher dividend yield (and growth rate) from Capital Power Corporation (CPX) – also at an attractive valuation. Both of these Alberta focused stocks are Outperform rated and offer transition themes. Amongst the pure play renewables, we carry Outperform ratings on both Innergex Renewable Energy Inc. (INE) and Northland Power Inc. (NPI) – for different reasons, but both underpinned by interesting valuations largely being overlooked in our view,” he said.
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Mining equity analysts at CIBC World Markets increased their near-term copper price estimates “significantly” and our long-term estimates “modestly” on Tuesday.
“We now forecast copper prices to average $5.25 per pound from Q4/21-H1/22, before lowering in subsequent periods to our $3.30 per pound long-term estimate (revised slightly from $3.25 per pound,” said Bryce Adams and Alex Hunchak. “As vaccines continue to roll out, we view a global economic recovery, additional government stimulus, and rising inflation expectations as positive momentum drivers for base metals. On the supply side, we continue to see COVID-19 as a potential disruptor to operations and projects, and that rhetoric around higher taxation and royalties in Peru and Chile add a further layer of support for copper fundamentals.”
With those changes, Mr. Adams made these target changes:
- Capstone Mining Corp. (CS-T, “outperformer”) to $7.50 from $7. The average on the Street is $6.73.
- Copper Mountain Mining Corp. (CMMC-T, “outperformer”) to $6 from $5.50. Average: $5.05.
- First Quantum Minerals Ltd. (FM-T, “outperformer”) to $38.50 from $36.50. Average: $33.78.
- Hudbay Minerals Inc. (HBM-T, “outperformer”) to $15 from $14. Average: $13.15.
- Lundin Mining Corp. (LUN-T, “neutral”) to $17 from $16. Average: $16.21.
- Teck Resources Ltd. (TECK.B-T, “neutral”) to $34 from $33. Average: $31.60.
Mr. Hunchak made these adjustments:
- Ero Copper Corp. (ERO-T, “neutral”) to $33.50 from $28. Average: $27.64.
- Sierra Metals Inc. (SMT-T) to $6 from $5.50. Average: $5.24.
“We continue to recommend First Quantum and Capstone as top picks. FM provides exposure to elevated copper prices that dovetail with Cobre Panama now ramped up, enabling significant balance sheet deleveraging in 2021E. With Q1 financials, FM reduced net debt by $347-million to $7.1-billion, at CIBC deck prices, we model $5.5-billion net debt at year-end. CS provides above-average copper exposure and copper growth. As well, we expect further de-risking of its large-scale development project, Santo Domingo, to provide key catalysts in the year ahead, including a strategic partner and a rail agreement,” they said.
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Ahead of the release of its fourth-quarter 2021 financial results on June 1, MKM Partners analyst William Kirk raised his rating for Canopy Growth Corp. (WEED-T) to “buy” from “hold.”
He made the move despite not expecting a significant operational beat, emphasizing a difficult retail environment after rival Aurora Cannabis Inc. (ACB-T) showed a sequential decline in revenue.
However, Mr. Kirk thinks Canopy will return to sequential growth as the Canadian economy reopens and is likely to have better alignment with its supply chain to capture demand opportunities.
Also feeling investors are underestimating recent cannabidiol distribution deals with Southern Glazer’s Wine & Spirits, he has a $55 target for Canopy shares. The average is $37.81.
Elsewhere, Desjardins Securities analyst John Chu trimmed his sales forecast “on the back of ongoing market conditions, which include industry sales seasonality, provincial destocking of inventories and delayed purchase orders, as well as pandemic-related store closures.”
He’s now forecasting quarterly revenue of US$142.6-million, down from US$178.3-million and below the consensus on the Street of US$155.3-million. His projection of an EBITDA loss of $72.2-million rose from a $57.3-million deficit (versus a consensus of a loss of US$64.1-million).
“We are taking down our numbers based on the market conditions noted and given most LPs (ACB, ROMJ, etc) have seen a 20–30-per-cent quarter-over-quarter decline in recreational sales,” said Mr. Chu. “Further, as at May 18, Headset data for Ontario showed that Canopy had the #3, #5 and #9 flower, and the #2, #5, #6, #7 and #10 beverages, suggesting lost market share.”
He maintained a “hold” rating and $55 target for Canopy shares. The average on the Street is $37.81.
“Canopy should continue to roll out new products nationally and internationally, which may help mitigate the headwinds,” he said.
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Seeing it poised to benefit from the “attractive” Michigan market, Haywood Securities analyst Neal Gilmer initiated coverage of Gage Growth Corp. (GAGE-CN) with a “buy” recommendation.
The Detroit-based retailer began trading on the Canadian Securities Exchange on April 6.
“Gage is a single state operator that has established itself in the Michigan market and begun to demonstrate an ability to be a leader in the state,” he said.
“We expect Gage is positioned to report meaningful increases in revenue throughout 2021 and into 2022 as it expands out is cultivation capacity (both internally and contract grow). In addition, the Company should see a noticeable expansion in margins in 2021 to generate positive EBITDA, with significant margin capture in 2022 with a full year of significantly increased scale and retail presence.”
Mr. Gilmer set a $4.50 target for its share, noting: “We believe 2021 is a year that should unlock significant value as the company leverages its brand partnerships, expanding cultivation and more than doubling its retail footprint.”
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In other analyst actions:
* Canaccord Genuity analyst Brendon Abrams raised his target for Firm Capital Property Trust (FCD.UN-X) to $7.50 from $6.75, maintaining a “buy” rating. The average on the Street is $7.33.
“Firm Capital Property Trust (FCPT) reported steady Q1/21 results that were largely in line with our expectations,” he said. “However, in our view, the bigger focus for the quarter is the continued execution of the Trust’s capital recycling strategy whereby proceeds from the sale of non-core retail assets are being used to increase exposure to the industrial and multi-family sector.
“To this end, year-to-date, FCPT has completed $13.9-million of dispositions, with an additional $9.6-million of non-core assets expected to be sold by the end of Q3/21. The Trust has also acquired $38.7-million of multi-family and MHC assets. We understand that, on average, dispositions were completed at or above IFRS values, while acquisitions were completed at cap rates between 5 per cent to 6 per cent. While there could be some temporary dilution to cash flow resulting from these transactions, we expect this to be modest, and believe this is more than offset by the potential benefit from growth in NAV and cash flow per unit through increased exposure to asset classes with stronger fundamentals.”
* Scotia Capital analyst Mario Saric raised his target for American Hotel Income Properties REIT LP (HOT.UN-T) to $5 from $4.50 with a “sector perform” rating. The average is US$3.78.
“On virtually all accounts, May is better than April which was better than Q1/21, which was better than Q4/20; things are getting better! A debt covenant prevents the reinstatement of the distribution in 2021, but we suspect we’ll see something by Q3/22 given the cash flow recovery reflected in our forecast,” said Mr. Saric.
* National Bank Financial analyst Vishal Shreehar raised his target for shares of Saputo Inc. (SAP-T) by $1 to $40, reiterating a “sector perform” rating. The average on the Street is $41.88.
With files from Reuters
David Leeder