Inside the Market’s roundup of some of today’s key analyst actions
Though he acknowledges valuations for Canadian lifecos have become “somewhat more interesting” after ”significantly” underperforming both other financials and the broader Canadian market over the last three months, CIBC World Markets analyst Paul Holden does not expect second-quarter earnings season to be a positive catalyst for the sector.
“Macro factors that will have an impact on Q2 results include rising equity markets, higher bond yields, a divergence in COVID trends between North America and Asia, and USD weakness,” he said in a research report released Tuesday. “We are modeling a sequential decline in adjusted EPS of roughly 1 per cent on average with IAG being the only name with higher earnings versus last quarter. In addition, we are below consensus on three of the four names, again with IAG being the only name where we are above consensus.
“The probability of upward revisions to 2022 is low in our opinion. Our 2022 adjusted EPS estimates are close to consensus across all four lifecos. There is always room for company-specific surprises, but we think the macro outlook is well captured.”
Pointing to valuation concerns with it trading at the highest price-to-earnings multiple in the group, Mr. Holden downgraded Great-West Lifeco Inc. (GWO-T) to “neutral” from “outperformer.”
“We are also making the rating change now as our Q2 base EPS estimate is below consensus by nearly 4 per cent,” he said. “Potential upside to 2022 consensus is not as likely as it was previously (consensus has moved higher). We continue to like business momentum with Empower and Capital Risk Solutions and also see potential upside related to a Putnam transaction.”
He maintained a $40 target for Great-West shares, which implies a potential return of approximately 10 per cent to its current share price. The current average target on the Street is $38.11, according to Refinitiv data.
“Combined with a dividend yield of 4.8 per cent, there is still good return potential on the table, but we do see more compelling upside with other financial stocks,” he said.
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Following the release of better-than-anticipated second-quarter financial results after the bell on Monday, iA Capital Markets analyst Elias Foscolos raised his rating for PrairieSky Royalty Ltd. (PSK-T), citing a recent pullback in its share price and a “strengthened” outlook.
The Calgary-based royalty company reported revenue of $70-million, exceeding Mr. Foscolos’s forecast by almost 12 per cent due largely to higher-than-projected realized prices. Earnings before interest, taxes, depreciation and amortization (EBITDA) of $63-million and adjusted funds from operations of 26 cents per share also topped estimates ($55-million and 22 cents).
Concurrently, PrairieSky reported a 38-per-cent increase to its quarterly dividend (to 9 cents from 6.5 cents) and the acquisition of a 5-per-cent gross overriding royalty on over 76,000 acres of Clearwater lands in the core Marten Hills area.
“In our view, the strong quarter and acquisition resulted in a 38-per-cent boost to its quarterly dividend,” he said.
“We adjusted our production estimates slightly upwards to account for the just-announced $155-million Clearwater acquisition and also slightly increased our forward commodity prices to better reflect the Company’s realized prices.”
After increasing both his financial and production estimates, Mr. Foscolos moved his recommendation to “buy” from “hold,” pointing to a revised 30-per-cent return to his new target for PrairieSky shares ($17 from $15.50 previously). The average target is $16.78.
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With travel restrictions starting to ease and booking levels continuing to improve, BMO Nesbitt Burns analyst Fadi Chamoun recommends investors add to their Air Canada (AC-T) positions in response to recent share price depreciation.
“Judging by the pace of the recovery in travel demand in the U.S. and the strong pent-up demand following nearly 18 months of significant travel and border restrictions, we anticipate the demand recovery in Canada to begin to re-accelerate this fall and into 2022 as barriers to travel ease,” he said. “[Monday], the Canadian federal government announced that, beginning August 9, fully vaccinated U.S. citizens and permanent residents can visit Canada without having to quarantine for two weeks. The government plans to open Canada’s borders to fully vaccinated travelers from all other countries on September 7.
“Bookings for travel in Q3/21 and Q4/21 have increased meaningfully with further gains as travel restrictions ease. AC is seeing bookings improve significantly for travel within the North American and Atlantic markets for the current quarter and into the late fall/early winter. Capacity plans from FlightGlobal corroborate this trend as data show ASM deployment ramping up rapidly in Q3/21 and Q4/21 to meet the rising demand.”
In a research report released Tuesday, Mr. Chamoun called Porter Airlines’ expansion plans a “credible challenge” to Air Canada, however he emphasized it sits “well-positioned to remain the industry leader.”
“While Porter has a strong brand in Eastern Canada and solid following, we believe that as the length of haul is extended to new destinations, the advantages that Porter might enjoy on shorter-haul routes become less of a threat,” he said. “AC is a leaner airline with a modern fleet and unmatched infrastructure from the scale of its network to its robust loyalty program that will continue to differentiate the company from its peers.”
He raised his revenue and earnings projections for 2021 and 2022 after moving “domestic and transborder travel demand forecasts slightly higher given the faster-than-expected recovery in travel demand.”
That led Mr. Chamoun to bump up his target for Air Canada shares by $1 to $34, keeping an “outperform” rating. The average is currently $28.63.
“While the pace of the recovery in travel demand will undoubtably face speed bumps and likely cause volatility in AC’s share price, we believe the recovery is under way with bookings for travel in Q3/21 and Q4/21 soaring since late May. Porter Airlines’ recently announced major expansion is a challenge against which AC can still thrive as a more efficient, more customer-focused airline post-pandemic,” he said.
Conversely, TD Securities analyst Tim James reduced his target to $32 from $34, maintaining a “buy” recommendation.
Mr. James also cut his Transat AT Inc. (TRZ-T) target to $3 from $3.25 with a “reduce” rating. The average is $4.05.
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CIBC World Markets analyst Hamir Patel expects record second-quarter results for forestry, building product and packaging stocks in his coverage universe.
However, he warns investor focus will remain largely on the decline in wood prices.
In a research report previewing earnings season in the sector, Mr. Patel reduced his Western spruce, pine, and fir (SPF) forecast for the second half of 2021 to $580 per thousand feet from $675. His southern yellow pine (SYP) estimate slid to $490/mfbm from $700.
“While wood product equities are likely to remain under pressure in the coming weeks until lumber/OSB prices find signs of a floor, valuations remain attractive and we expect these stocks could start to work again in the fall once the commodity pricing correction has played out,” he said. “Although a marked slowdown in DIY demand in recent weeks is concerning, the outlook for housing (including R&R) remains attractive over the next few years given tight new home supply, the rise in home equity levels and an ageing U.S. housing stock. In forestry/building products, our top pick remains West Fraser given its low-cost position and OSB exposure (better S/D fundamentals than lumber). Our other Outperformer wood/building names (by pecking order) include Hardwoods, Western FP, Stella-Jones, Doman, Interfor, Resolute and Canfor. This pecking order reflects a preference for specialty producers in a correcting commodity market and the cost headwinds facing Canfor in H2 given its heavier weighting to the B.C. Interior [NA’s high-cost lumber region (14 per cent of output)].
“On the paper and packaging side, we continue to favor Intertape given strong e-commerce/housing tailwinds (collectively 37 per cent of its end markets) and attractive valuation. Our other Outperformer names here include Cascades (containerboard pricing momentum), CCL (high quality with significant M&A potential when targets become more accessible for due diligence), and Mercer (attractive growth pipeline). We remain on the sidelines on Winpak given limited catalysts and resin inflation.”
With the changes to his price deck, Mr. Patel made a series of target price adjustments to stocks in the sector, including:
- Canfor Corp. (CFP-T, “outperformer”) to $32 from $41. The average target on the Street is $43.33.
- Canfor Pulp Products Inc. (CFX-T, “neutral”) to $9 from $11. Average: $11.50.
- Cascades Inc. (CAS-T, “outperformer”) to $20 from $17. Average: $19.57.
- Conifex Timber Inc. (CFF-T, “neutral”) to $2.50 from $3.25. Average: $3.70.
- Doman Building Materials Group Ltd. (DBM-T, “outperformer”) to $10 from $13. Average: $13.07.
- Interfor Corp. (IFP-T, “outperformer”) to $40 from $54. Average: $49.42.
- Mercer International Inc. (MERC-Q, “outperformer”) to US$16 from US$19, Average: US$20.10.
- Stella-Jones Inc. (SJ-T, “outperformer”) to $56 from $60. Average: $59.38.
- West Fraser Timber Co. Ltd. (WFG-T, “outperformer”) to $118 from $141. Average: $143.63.
- Western Forest Products Inc. (WEF-T, “outperformer”) to $2.60 from $2.90. Average: $2.88.
- Winpak Ltd. (WPK-T, “neutral”) to $42 from $46. Average: $49.50.
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After a “busy” week, RBC Dominion Securities analyst Michael Siperco raised his rating for Gatos Silver Inc. (GATO-N, GATO-T) to “outperform” from a “sector perform” recommendation, seeing “increased flexibility to accelerate exploration and expansion plans” following a recent equity financing and expected debt retirement.
On July 12, Gatos, a small Colorado-based precious metals company that began trading on the Toronto Stock Exchange in late October of 2020, announced a US$125-million financing from the sale of 8.93 million common shares. It also revealed a new US$50-million credit facility and a definitive agreement with partner Dowa Metals & Mining Co. Ltd. to retire the outstanding Los Gatos Joint Venture Term Loan.
“Net of those transactions, and the eliminated loan payments ($80-million), excess cash sweep ($75-million) and additional reserve account contributions ($39-million), we estimate that Gatos has unlocked more than $100-million ($123-million versus $18-million) in forecast available cash through year-end 2022, or more than $200-million through YE24 ($280-million versus $59-million),” said the analyst.
Mr. Siperco now thinks expansion of its Cerro Los Gatos plant and exploration of the Los Gatos district is on “the front burner,” and he sees longer-term potential for further upside.
“Our prior estimates and price target (which assumed reserve life only, and no expansion) were in part predicated on limited availability of capital given the debt terms, colouring our view of the timing of potential material reserve growth as well as constraints on size and timing of expansion,” he said.
The analyst raised his target for Gatos shares to US$18 from US$15. The average on the Street is US$18.63.
“The stock has pulled back sharply on the offering (completed at a 28-per-cent discount to the 12 July close of $19.45 per share) and the recent silver decline (down 4 per cent since the announcement); we see strong potential for GATO to rebound on continued operational strength at CLG, and visibility into growth catalysts over the next 6-12 months,” he said.
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A group of equity analysts raised their target prices for shares of Tricon Residential Inc. (TCN-T) following Monday’s announcement of a US$5-billion joint venture arrangement (SFR JV-2) with three institutional investors to acquire over 18,0000 single-family rental homes targeting the middle-market demographic in the U.S. Sun Belt.
BMO Nesbitt Burns’ Stephen MacLeod said the Toronto-based company “remains well positioned for growth.”
“The announcement of Tricon’s SFR JV-2 at 2.5 times the size of SFR JV-1 demonstrates robust institutional demand for investing in SFR homes in the U.S. Sun Belt; a larger deal size enhances the scale and efficiency of Tricon’s SFR operating platform,” he said.
Maintaining an “outperform” rating, Mr. MacLeod raised his target to $16 from $15.50. The current average is $16.06.
Others making changes include:
* Canaccord Genuity’s Mark Rothschild to $15.75 from $14.25 with a “buy” rating.
“Considering the company’s significant near-term opportunities to grow cash flow, particularly from investing additional third-party capital, we believe the current valuation is attractive. As management continues to successfully execute on its business plan, the relative valuation should improve,” said Mr. Rothschild.
* Stifel’s Cihan Tuncay to $18 from $16.30 with a “buy” rating.
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Scotia Capital analyst Phil Hardie sees operating conditions for Canadian asset managers remaining “favourable” with assets under management sitting at record levels, benefiting from “exceptionally strong retail flows and broad market appreciation.”
“We expect a solid second quarter from the group, as AUM growth should lead to solid year-over-year operating earnings growth across all the names with the exception of FSZ, which has made a number of dispositions over the last 12-months,” he said in a note. “We also expect all the asset managers under our coverage to post positive flows in Q2/21.
Ahead of earnings season, he raised his financial estimates for the sector to reflect both increased AUM and net sales expectations.
That led him to bumped up his targets for stocks in his coverage universe. Those changes are:
- CI Financial Corp. (CIX-T, “sector perform”) to $26 from $24. The average on the Street is $22.50.
- IGM Financial Inc. (IGM-T, “sector perform”) to $51 from $48. Average: $49.22.
- Guardian Capital Group Ltd. (GCG.A-T, “sector outperform”) to $42 from $40. Average: $40.
- Fiera Capital Corp. (FSZ-T, “sector perform”) to $12.50 from $12. Average: $12.17.
“The asset managers have rallied 22 per cent year-to-date, outperforming the S&P/TSX Financial Index at 18 per cent and the broader S&P/TSX Composite at 13 per cent.,” he said. “Most notably, the three publicly traded fundcos are up an average of 29 per cent year-to-date, benefiting from solid industry tailwind. That said, on an EV/EBITDA (NTM) basis, we estimate that the Canadian fundcos continue to trade at a wide discount of 51 per cent to its U.S. peers, roughly 1.3 times standard deviation wider than the 5-year average of 38 per cent. We estimate that CIX and IGM currently trade at 1.5 times standard deviations below their historical average.”
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Calling it a “promising technology enabler of ‘green’ hydrogen production and touting a “catalyst-rich near-term outlook,” TD Securities analyst Aaron MacNeil initiated coverage of Next Hydrogen Solutions Inc. (NXH-X) with a “speculative buy” rating.
“We believe that the global electrolyzer market is ripe for disruption as it largely consists of decades-old technology and significant decreases in the cost of ‘green’ hydrogen production are necessary for the hydrogen economy to be a practical and cost-effective solution to combat climate change,” he said. “In this context, we believe that Next Hydrogen has the potential to solve an important challenge for the industry, but this outcome is not certain ... The pedigree of the operational management team lends credibility to the company and its product, but an investment is speculative as it features a binary outcome with an elevated risk/ return profile. Our primary valuation methodology is a 10-year discounted cash flow analysis that contemplates the expectation of long-term hydrogen industry growth and the successful commercialization of its electrolyzer prototype.”
Mr. MacNeil set a target of $12 for shares of the Toronto-based company, which began trading on the TSX Venture Exchange on June 30.
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In other analyst actions:
* After it announced Future Global Resources has defaulted on its obligation to pay $15-million related to the sale of the Bogoso-Prestea mine, Scotia Capital analyst Ovais Habib lowered his rating for Golden Star Resources Ltd. (GSC-T) to “sector perform” from “sector outperform” with a US$5 target, down from US$5.50, while Canaccord Genuity analyst Carey MacRury cut his target to $5 (Canadian), which is below the $5.33 average on the Street, from $5.50 with a “buy” rating.
“While the Prestea payment is not overly material to our valuation, this represents another setback for the company following the recent paste backfill issues and guidance reduction at Wassa (see our note here). We continue to view the Wassa mine positively owing to its exploration and expansion potential; however, at this time we are revising our rating,” said Mr. Habib.
* National Bank Financial analyst Cameron Doerksen upgraded Bombardier Inc. (BBD.B-T) to “outperform” from “sector perform” with a $1.75 target, up from $1 and exceeding the $1.18 average.
* National Bank’s Jonathan Egilo increased his K92 Mining Inc. (KNT-T) target by $1 to $12.25, keeping an “outperform” rating. The average is $11.42.
* Calling its $250-million in acquistions in Montreal from Jesta Group “interesting” and reiterating he remains a buyer ahead of the release of its second-quarter results, Scotia Capital analyst Mario Saric raised his Allied Properties Real Estate Investment Trust (AP.UN-T) target to $51 from $48 with a “sector outperform” recommendation. The average is $47.98.
* Cowen and Co. analyst Gerald Pascarelli cut his target for Neptune Wellness Solutions Inc. (NEPT-T) to $1 from $2.50 with a “market perform” rating. The average is $2.03.
* Acumen Capital analyst Nick Corcoran cut his target for Cervus Equipment Corp. (CERV-T) to $19 from $22 with a “buy” rating. The average is $20.38.
“An early and light harvest poses a significant risk to CERV’s activity levels in Canadian AG through the remainder of the year,” he said.
* Barclays analyst Adrienne Yih initiated coverage of Pet Valu Holdings Ltd. (PET-T) with an “overweight” rating and $31 target.
David Leeder