Inside the Market’s roundup of some of today’s key analyst actions
RBC Dominion Securities’ Energy & Utilities Equity Team made a series of changes to its “Global Energy Best Ideas” list on Tuesday, adding and removing several Canadian companies.
“In May, the RBC Global Energy Best Ideas List was up 4.8 per cent compared to the iShares S&P Global Energy Sector ETF (IXC) up 5.8 per cent,” they said. “Since its inception in February 2013, the RBC Global Energy Best Ideas List is up 37.3 per cent compared to the S&P Global Energy Sector ETF down 12.4 per cent.”
The firm added three companies to the list, which is now comprised of 20 stocks with “outperform” ratings.
Those joining are:
1. Algonquin Power & Utilities Corp. (AQN-N, AQN-T)
“Algonquin has a $9.4 billion 5-year capital investment program focused on growing its regulated utility rate base and renewable energy generation capacity, supporting management’s forecast 8-10-per-cent EPS growth profile,” said Nelson Ng. “The company has been successful in growing its regulated utility business organically and through M&A, and the company also has a large renewable energy development pipeline. Management has a good track record of adding renewable energy capacity inside (greening the grid) and outside (on a contracted basis) of its regulated utility footprint.”
2. California Resources Corp. (CRC-N)
“CRC provides a unique value opportunity trading at a deep discount when considering PDP value, other hard assets, and its ability to economically participate in energy transition,” said Scott Hanold. “Its conventional low-risk, low-decline assets drive peer leading FCF over the next few years. This provides an attractive platform to reduce debt to 0 times by mid-2022 and/or grow shareholder returns at a faster pace than SMid cap peers.”
3. Cenovus Energy Inc. (CVE-T)
“We believe potential non-core asset dispositions could act as a near-term catalyst for shares — and accelerate the pace at which Cenovus achieves its $10 billion net debt target,” said Greg Pardy. “The end result is increased flexibility to pursue shareholder returns, including share buybacks (and potentially COP-owned shares). The company also stands to benefit from an improving crude oil market, with a US$5 change in WTI prices impacting Cenovus’ 2021 cash flow by about 17 per cent ($1.3 billion), which is considerable.”
RBC removed these stocks:
1. CenterPoint Energy Inc. (CNP-N)
“The stock has had a 20-per-cent runup since January 8 and is now much closer to our price target of $28,” said Shelby Tucker. “We continue to see strong momentum coming from an above-average rate base growth, favorable valuations from the recent sale of Arkansas and Oklahoma gas assets, and a management team that is delivering on promises. However, with 12-per-cent implied upside, we believe other stocks in our coverage universe may offer more attractive opportunities.”
2. Enerflex Ltd. (EFX-T)
“we see limited catalysts to drive the stock higher over the next month,” said Keith Mackey. “We maintain our Outperform rating and generally favourable view of the stock given its improved revenue stability and margin profile remains disconnected from its valuation, balance sheet remains strong, and believe there is continued potential for improved Engineered Systems bookings in the second half of 2021.”
3. Parex Resources Inc. (PXT-T)
“Cash-rich Parex represented a safer haven for investors seeking to retain some oil sector exposure. Higher oil prices are a boon for the business, but a keenly anticipated inorganic growth spurt now looks more expensive, and management change in Q1/21 and unrest in Colombia in Q2/21 seem to have kept potential investors on the sideline. Like them, we have taken a ‘show-me’ approach to the stock,” said Al Stanton.
4. Suncor Energy Inc. (SU-T)
“We see superior near-term catalysts elsewhere in our coverage group. We maintain our Outperform rating and constructive stance towards Suncor,” said Mr. Pardy.
Other TSX-listed stocks on the list are: ARC Resources Ltd. (ARX-T); Canadian Natural Resources Ltd. (CNQ-T); Freehold Royalties Ltd. (FRU-T); Pembina Pipeline Corp. (PPL-T); Shawcor Ltd. (SCL-T) and Tourmaline Oil Corp. (TOU-T).
=====
BMO Nesbitt Burns analyst Ben Pham thinks 2021 is “shaping out to be the year where Canadian energy infrastructure sector fundamentals are being overshadowed by broader macro trends.”
In a research report released Tuesday, Mr. Pham reduced his target prices for almost half of the companies in his coverage universe, emphasizing the potential headwinds faced by a rise in interest rates and depreciation of the U.S. dollar.
“If 2020 was the year of fundamental stock picking analysis for Cdn. energy infrastructure investors, 2021 is looking to be the year of macroeconomic analysis,” he said. “We have observed periods like this in the past when sector and company fundamentals are overshadowed by broader macro trends – think the 2007–2008 financial crisis, the dramatic 2013 bond sell-off on the back of Fed tapering worries, the 2015 commodity downturn, and the 2018 above-trend growth and inflation concerns. As we have noted in past research, interest rates and commodity prices have been the most powerful drivers of Cdn. energy infrastructure shares over the last 20 years. But of course we cannot ignore more recent top-down trends such as foreign exchange translation risk and U.S. tax reform impacts. We are putting back on our macro hat and revisiting those top-down drivers: our analysis looks at all these factors in isolation, but of course they are linked – higher commodity prices leads to higher inflation. This in turns leads to higher interest rates, driving currency fluctuations.”
Mr. Pham upgraded TransAlta Corp. (TA-T) to an “outperform” recommendation from “market perform,” citing a quartet of factors: the expectation for continued strong Alberta power prices; growth momentum; its “under-appreciated” Alberta hydro assets and an “attractive” valuation.
He raised his target to $14.50 from $12. The average on the Street is $14.15, according to Refintiv data.
“TA shares have performed well from the depths of March 2020′s pandemic given the surge in Alberta power prices, positive 2021 guidance, and a new goal to be carbon neutral by 2050,” said Mr. Pham. Yet, the shares remain in deep value territory (8.5 times EV/EBITDA vs. coverage average of 12 times and AFFO yield of 14 per cent vs. coverage of 7.5 per cent), this year’s inflection point in the crown jewel Alberta hydro assets are under-appreciated, and growth is gaining momentum (i.e., Garden Plain). Combined with a ~34% potential total return to our new target of $14.50 (vs. $12).”
Conversely, the analyst downgraded Fortis Inc. (FTS-T) to “market perform” from “outperform” with a $57 target, falling from $60 and below the $59.42 average.
“While we continue to like the low-risk business profile and see modest growth upside, we believe the current P/E of 20 times (historical range of 15-22 times) now largely reflects these positive trends,” he said.
Mr. Pham’s target changes are:
- Enbridge Inc. (ENB-T, “outperform”) to $52 from $53. Average: $52.13.
- TC Energy Corp. (TRP-T, “outperform”) to $68 from $70. Average: $69.57.
- Algonquin Power & Utilities Corp. (AQN-T, “market perform”) to $16 from $16.50. Average: US$17.69.
- Boralex Inc. (BLX-T, “outperform”) to $45 from $48. Average: $51.50.
- Brookfield Renewable Partners LP (BEP-N, “market perform”) to US$40 from US$42. Average: US$43.28.
- Emera Inc. (EMA-T, “outperform”) to $59.50 from $60. Average: $59.86.
- Innergex Renewable Energy Inc. (INE-T, “outperform”) to $23 from $25. Average: $24.50.
“Since the beginning of the year we have gradually repositioned to companies with a modest level of commodity exposure vs. March 2020 where our Top Recommendations were resilient utility companies with limited commodity price exposure and strong counterparties,” he said. “Today, as we look to the post COVID-19 set-up, we are further adding beta with the upgrade of TransAlta to Outperform while still retaining a slight overweight in utility over pipeline within Cdn. Energy Infrastructure. In short, we have swapped EMA (still OP) for TA. Our Top Five Best Ideas are now ALA, TA, ENB, BLX, and GEI (vs. ALA, EMA, ENB, BLX, and GEI).”
=====
Following a “very strong” performance over the past year, including 86-per-cent share price appreciation thus far in 2021, BMO Nesbitt Burns analyst Fadi Chamoun thinks the risk-reward proposition for TFI International Inc. (TFII-T) has “become more balanced.”
That led him to lower his rating to “market perform” from “outperform,” believing “much of the cyclical opportunity as well as M&A-related earnings and cash flow accretion are already discounted at current valuation level.”
“Industrial demand indicators continue to firm up and consumer end markets remain strong with the retail inventory-to-sales ratio at depressed levels, supporting continued strong demand,” said Mr. Chamoun. “We believe that this demand backdrop and constraints to grow trucking supply support the possibility of higher-for-longer freight rates. But while peak market conditions may be sustained for some time, we see limited upside to valuation multiples. In fact, vulnerability to contraction in valuation multiples is our main concern. Trucking stock performance is typically underwhelming 6 months and 12 months after truck rates have peaked as multiples tend to moderate.”
“Earnings are likely a source of positive surprises, but we sense much of it is already discounted in valuation. We incorporate more generous than historical organic growth assumptions and a strong pipeline of recently completed accretive M&A into our forecast, including a modestly faster pace to double-digit EBIT margin contribution from UPS Freight than the three-year plan currently contemplated by TFII. We project that earnings could more than double to $7.19 in F2023 versus the $3.30 earned in F2020. We think our projections are realistic given the strong demand environment, but visibility into further upside is limited, particularly given integration related risks.”
He raised his target for TFI shares to $100 from $95 with his higher earnings expectations. The average is $109.79.
=====
Desjardins Securities analyst Frederic Tremblay thinks the recent, “significant” share price underperformance of GDI Integrated Facility Services Inc. (GDI-T), Goodfood Market Corp. (FOOD-T) and H2O Innovation Inc. (HEO-X) is unwarranted in the wake of “solid” first-quarter results and outlooks.
“While 1Q misses resulted in share price declines for a few companies under coverage and a solid beat/outlook fuelled SIS’s upward move (as expected), other share price movements have been more perplexing,” he said. “Based on our analysis and investment theses, we believe that recent share price underperformance is unjustified for GDI, FOOD and HEO.”
“In our opinion, these stocks are compelling both from an opportunistic standpoint (given the lagging share prices recently) and a long-term investment perspective (given attractive business opportunities and strategies).”
He maintained his ratings and target prices for all three stocks, calling them “compelling investment opportunities based on divergences between recent stock performance and the actual results/outlook of our companies under coverage.
For GDI, he kept a “buy” rating and $64 target. The average on the Street is $65.14.
“GDI’s share price is down 10.1 per cent since the company posted a beat on May 6; the S&P/TSX and the small-cap index are up 2.9 per cent and 2.4 per cent, respectively, over the same period,” said Mr. Tremblay. “Our positive view on GDI is premised on: (1) market-leading scale and breadth of services, (2) strong track record of profitable growth, (3) expected positive impact of reopenings on cleaning standards (vs pre-COVID-19) and on the release of pent-up demand for technical services, (4) strong balance sheet and cash flow provide ample ammunition to continue a highly successful M&A strategy, and (5) valuation.”
He reiterated a “buy” rating and $13 target for Goodfood shares. The average is $12.44.
“FOOD’s share price is down 7.9 per cent since the company posted a beat on April 7; the S&P/TSX and the small-cap index are up 3.9 per cent and 4.9 per cent, respectively, over the same period,” the analyst said. “Our positive view on FOOD is premised on: (1) its strong position in meal kits, which represents a very solid foundation, (2) early progress and future large opportunities associated with the company’s expansion into the eGrocery market, (3) balanced approach between growth and profitability, and (4) valuation.”
Mr. Tremblay reaffirmed a “buy” rating and $3.50 target for H2O, falling 14 cents below the consensus.
“HEO’s share price is down 2.0 per cent since the company posted a beat on May 13; the S&P/TSX and the small-cap index are up 3.9 per cent and 4.5 per cent, respectively, over the same period,” he said. “Our positive view on HEO is premised on: (1) water pure play with three complementary segments covering a wide range of opportunities and offering cross-selling potential, (2) upcoming massive spending cycle in the water sector fuelled by infrastructure spending plans along with subsequent opportunities in specialty products and O&M services, (3) strong start to management’s three-year strategic plan both for revenue and margins, (4) accretive M&A strategy supported by a strong financial position, and (5) valuation.”
=====
In response to Monday’s announcement of a privatization offer from a group of investors, led by its management team, a group of analysts raised their target prices for shares of Canadian software company Dye & Durham Ltd. (DND-T).
Those making changes include:
* BMO Nesbitt Burns’ Thanos Moschopoulos to $55 from $53 with an “outperform” rating. The average target on the Street is $58.90.
“We continue to see upside to the stock,” he said. “While the ‘indication of interest’ from the management-led group appears to be non-binding, we think it’s credible. A $50.50 share price would equate to 17.7 times DND’s proforma adj. EBITDA run-rate and 15.9 times our CY2022E estimate. This is hardly an aggressive multiple, in our view, in the context of the current valuation environment and given the characteristics of DND’s business. We consequently think it’s possible that a higher offer could materialize, and view the stock’s current risk/reward as attractive.”
* Scotia Capital’s Paul Steep to $61 from $59 with a “sector outperform” rating.
“Our expectation is that the special committee will evaluate a wide range of strategic alternatives in relation to DND’s future as a public company,” said Mr. Steep.
* CIBC World Markets’ Stephanie Price to $50.50 from $47.50 with a “neutral” rating.
“This offer values D&D at 20 times unadjusted EBITDA, in line with our valuation methodology and we see the offer as fair,” said Ms. Price. “With the indication of interest, the board has put in place a strategic process. We see private equity as the most likely counter bidder, with our LBO analysis suggesting a buyer could pay $52 per share. That said, we expect that discussions with private equity have been ongoing as the company looked to fund some of its larger opportunities, so we see the possibility of a counter offer as somewhat unlikely.”
=====
A group of analysts raised their targets for Dream Industrial Real Estate Investment Trust (DIR.UN-T) after resuming coverage following its recent $288-million equity offering.
They include:
* TD Securities’ Sam Damiani to $16 from $15.50 with a “buy” rating. The average is $15.50.
“DIR’s narrowed focus on Canada and Europe offers investors the opportunity to access an industrial/logistics portfolio that is harder to replicate in the public markets, given the relatively short list of alternatives in these two regions,” he said. “Additionally, the expanded development pipeline (to 3mmsf or 8 per cent of existing GLA), and accelerated NAV growth that it can create, offers increasing potential for DIR to trade at higher relative valuations over time, in our view. We believe this is of particular significance in Europe, where developable land is in short supply and incumbent pure-play European REITs trade at 60 per cent-plus premiums to NAV.”
* CIBC’s Dean Wilkinson to $15.50 from $15 with an “outperformer” rating.
* National Bank Financial’s Matt Kornack to $15.50 from $15 with an“outperform” rating.
=====
With crypto currencies “now institutionalized and ingrained,” H.C. Wainwright analyst Kevin Dede sees many North American miners “poised to pounce.”
In a research report released Tuesday, he initiated coverage of several companies, including Vancouver’s HIVE Blockchain Technologies Ltd. (HIVE-X), pointing to “massive” investments being made across the sector.
“While not clear on the exact figures, but fairly measured on a cumulative basis of between $1-2-billion in capital has been raised by publicly-traded North American based crypto mining operators, or to support N.A. mining operations, over the past 18 months,” said Mr. Dede. “The figure is staggering as compared to the minimal investment over the 2018-2019 crypto-winter period, and represents, as we see it, the transformation of an industry that has come to the widespread belief that crypto, and bitcoin in particular, functions at the very least as a store of value. Further, a paper authored by Fidelity’s digital asset team last October made the bitcoin zero correlation point, inviting higher thinking from institutional investors andtreasury managers, à la Michael Saylor, CEO MicroStrategy, regarding bitcoin’s use as a portfolio diversification tool. With the surge in bitcoin’s importance, comes a surge in sourcing it, and crypto mining has moved to mainstream industrialization.”
Reiterating his position as a “staunch” bitcoin bull, Mr. Dede initiated coverage of these companies with “buy” recommendations:
- Digihost Technology Inc. (DGHI-X) with a $3.50 target
- HIVE Blockchain Technologies Ltd. (HIVE-X) with a $4 target.
He gave Toronto-based CryptoStar Corp. (CSTR-X) a “neutral” recommendation without a specified target.
“We introduce a handful of newly emerging cryptocurrency miners some may have run across in the exploration of the space, but not spent much time with on account of lesser market cap, fear, or just lack of time and interest,” the analyst said. “We see the industry evolving so quickly and the economics so attractive, that what may have been small at one point, such as Riot Blockchain or Marathon Digital, some short time ago, might evolve to become a meaningful industry participant. While HIVE Blockchain is not among that group, as we see it, given the company has been an active Ethereum miner since late 2017, and we have followed it casually since 2018, HIVE has made an active investment in bitcoin, buying two data center facilities over the past 12 months. Also of interest, we think, is Mawson that while based in Sydney, is mining mostly in the U.S. Interesting too, we think is CryptoStar, mining mostly in Canada, but run by a Sydney-based CEO.”
=====
Though United Parcel Service Inc. (UPS-N) has delivered a “strong” performance following its “robust” first-quarter results, Citi analyst Christian Wetherbee continues to see its June 9 Investor Day event as another positive catalyst, reiterating his bullish view on the 90-day catalysts watch he opened on April 15.
“We think estimates in the out years remain too low and would expect that as the messaging around long-term Domestic margins crystalize we’ll see numbers move higher,” the analyst said. “In addition, we think investor positioning can be a catalyst as the rotation back to parcel after many years of avoidance has begun, but has room to run, particularly if the company’s outlook and supporting presentations are good. Collectively, we think parcel is the most compelling sector in Transports and UPS’s investor day should help frame the upside case.”
Mr. Wetherbee raised his 2022 and 20223 earnings per share projections to US$12.20 and US$13.35, respectively, from US$11.90 and US$12.70, pointing to increased confidence in UPS’ Domestic margin trajectory.
“1Q results suggest Domestic is operating at a solid DD margin run rate, with new pricing, cost savings and operational efficiency initiatives available for further expansion,” he said. “Our new estimates sit 8 per cent and 16 per cent above consensus, but still fall below our more constructive bull case.”
“In our initial 1Q and investor day preview we highlighted a ‘lucky 13s’ scenario in which Domestic margins returned to 13 per cnet by 2023, which drove $13 in EPS. We still think 13-per-cent margins are a likely target, but given better pricing and economic activity we think resulting EPS could be more than $14. This bull case outcome would support shares in the $275-$325 range.”
Maintaining a “neutral” rating for its shares, he hiked his target to US$235 from US$220, exceeding the US$213.87 average on the Street.
“We’ve previously been critical of management’s lack of detail in investor presentations,” said Mr. Wetherbee. “This year, we expect solid 2023 targets supported by good underlying detail. We’ll likely get margin targets by segment, along with detailed walks to the higher targets. We’ll also get capital deployment targets and insight on continuous margin and earnings improvement.”
=====
After an upgrade to China’s new energy vehicle (NEV) sector, seeing an acceleration in orders and the presence of several potential upcoming catalysts, including the launch of its Pilot advanced driver assistance system‚ Citi analyst Jeff Chung raised his rating for Nio Inc. (NIO-N) to “buy” from “neutral.”
In a research note released Tuesday, he hiked his China NEV sales forecast for 2021 to 2.52 million units (from 1.79 million) with his 2025 projection jumping to 7.84 million (from 6.86 million).
“For NIO, we expect acceleration in 2Q order backlogs to substantially increase its 2H21 revenue visibility and market share, followed by 2022 new model cycle,” the analyst said.
Mr. Chung called the Shanghai-based vehicle maker the “NEV sector’s Beta proxy,” adding: “We sense a strong demand recovery from late Apr-21 in China NEV after SH auto shows, and expect NIO’s monthly new order volumes in May-Jun to be 20-30 per cent higher than the average monthly level in 4Q20 peak season. After the recent stock price correction from the peak in 4Q20, we believe this is a good re-entry point for the long-term investors, given the ongoing re-rating catalysts. For context, see our downgrade note. We raise our 2021/22/23 sales volume to 90k/155k/225k – following China white goods and smartphone evolutionary trend. We expect NIO to further gain market share from other JV brands with slower than expected ramp-up pace in China.”
His target for Nio shares increased to US$58.30 from US$57.60. The average on the Street is US$52.65.
“We expect NIO to further gain market share from JV brands with the sector bottoming out,” he said.
In a separate note, Mr. Chung “materially” cut his financial forecasts for Li Auto Inc. (LI-Q), pointing to a “recent raw material cost hike and expectations that long term cost decline will likely be more gradual than prior expectations.”
That led him to trim his target for the Beijing-based company to US$43.60 from US$45.60, keeping a “buy” rating. The average target is US$34.69.
“We have a positive outlook on the EREV [extended range electric vehicle] sector and Li Auto given that: 1) Li Auto is the first mover in EREV technology in China and we expect sharply rising adoption of EREV in the region as the vehicle type poses as an attractive alternative to conventional NEVs and ICEs given its longer driving range and lower BOM cost than BEVs and lower operating cost than ICEs; 2) we expect Li Auto to gain market share in the higher-end SUV segment thanks its competitive products with Level 2.5 ADAS solution and superior functionality; and 3) we expect margin improvement enabled by continuous battery cost reduction, technological improvements and growing economies of scale,” he said.
=====
In other analyst actions:
* In reaction to its proposed deal to acquire Redecan, Canaccord Genuity analyst Matt Bottomley trimmed his Hexo Corp. (HEXO-T) target to $9 from $9.50 with a “hold” rating. The average is $9.47.
“We note that this deal represents the company’s third announced acquisition of a Canadian Licensed Producer of late, including Zenabis (in February) and 48 North (earlier this month), as HEXO continues to aggressively target operators that it believes will add to its product offerings and overall Canadian market penetration,” he said. “Although we believe the ability to secure lasting long-term adult-use market share will eventually separate the winners and losers in the space, with a flurry of recent M&A announced by HEXO we believe investors should keep a watchful eye on integration efforts subsequent to closing and the company’s ability to maintain and grow its historical penetration levels throughout Canada.”
* RBC Dominion Securities analyst Nelson Ng upgraded Methanex Corp. (MEOH-Q, MX-T) to “outperform” from “sector perform” with a US$50 target, up from US$45. The average is US$43.42.
* CIBC World Markets analyst Cosmos Chiu cut his Dundee Precious Metals Inc. (DPM-T) target to $12 from $12.50, reiterating an “outperformer” rating. The average is $12.93.
* Raymond James analyst Craig Stanley lowered INV Metals Inc. (INV-T) to “market perform” from “outperform” with an 80-cent target, down from $1.50. The average is $1.53.
David Leeder