Inside the Market’s roundup of some of today’s key analyst actions
Taking “a more cautious stance on the path toward reopening,” RBC Dominion Securities analyst Walter Spracklin thinks Air Canada (AC-T) is at risk of a “lower for longer” recovery due to the Delta variant, which is likely to weigh on investor sentiment.
Accordingly, seeing only modest near-term upside as “pent-up demand” appears to have peaked in both the United States and Canada, he lowered his rating for the airline’s shares to “sector perform” from “outperform” on Tuesday.
“We believe Air Canada has done a commendable job navigating the truly unprecedented impacts of COVID-19 on global air travel by raising significant amounts of liquidity, reshaping their fleet, streamlining the cost structure, and successfully pursuing new strategic initiatives (ie. cargo) all while maintaining the stringent health & safety standards required to fly. Now, with the stock up 99 per cent from its pandemic lows and the recovery outlook less certain following the impact of the Delta variant (and the lingering potential for new variants to emerge in the future), we see more modest upside potential in the near-term until recovery visibility improves,” said Mr. Spracklin.
He trimmed his target for Air Canada shares to $25 from $28. The current average on the Street is $29.84, according to Refinitiv data.
“While there were high degrees of optimism at the start of the year that ‘pent-up demand’ surges would catalyze the global air travel recovery once travel restrictions were lifted, we note that this view came prior to the emergence of the Delta variant,” he said. “Further, based off updates from the U.S. peers and recent commentary from IATA, we can see that the variant has undoubtedly impacted the pace of the recovery while also adding a layer of uncertainty regarding the timing of the industry’s ‘return to normal.’ In our view, this is likely to weigh on upside potential in the AC shares as investors realize that the recovery in air travel has the potential to be choppier than previously anticipated.”
Desjardins Securities’ Energy Research team thinks the stage is set for a “very constructive” winter gas market.
In a research report released Tuesday, the firm updated its commodity price to reflect “the fever pitch in overseas power, natural gas and coal markets, many of which are now setting fresh record highs on a near daily basis due to fears of an impending winter supply crisis.”
Also pointing to structural tightening in the North American natural gas market, Desjardins moved its fourth-quarter NYMEX and AECO price forecasts to US$5.75 per metric million British thermal units and $5.50 per thousand cubic feet, respectively, from previous projections of US$4.50 and $4.50 (Canadian). Its 2022 NYMEX and AECO projection jumped to US$5 and $4.75, respectively, from US$4 and $4 (Canadian).
“While we acknowledge that the bull market did not fall into place the way we predicted when we unveiled our US$4 per metric million British thermal unit price deck last October, natural gas prices have clearly found their groove, entering the winter heating season near a 13-year high dating back to the dawn of the shale revolution,” they said. “We also see considerable upside relative to the current strip, particularly in the event of a cold winter which could propel NYMEX prices to double digits for an extended stretch, potentially even breaching the 2005 record high of US$15 per metric million British thermal units.”
Concurrently, the firm did not change its oil prices, noting: “Although we believe oil prices will benefit from the explosion in overseas natural gas prices, which could support upwards of 1–2 million barrels per day of power feedstock substitution this winter, we are inclined to view this as a temporary demand stimulus which needs to be weighed against other factors. In particular, we note that most market forecasters, including OPEC, still see an oversupplied crude market in 2022 as the cartel continues bringing idled production back online. We are maintaining our US$70 per barrel WTI forecast for 2022, which we now believe has considerable upside risk. Moreover, unlike natural gas prices, which we expect to hit their cyclical peak in 2022, we believe that conditions are ripe for even stronger oil prices moving into 2023, including a potential return to US$100 per barrel WTI!”
With that view, Desjardins recommends investors should be buying producer equities “with reckless abandon.”
“The combination of US$5-plus per metric million British thermal unit NYMEX and US$70-plus per barrel WTI prices, paired with relatively tight differentials for Canadian producers as well as industry’s newfound zeal for capital discipline and shareholder returns, has resulted in one of the most compelling investment climates for Canadian oil & gas equities in recent memory,” the analysts said. “However, equity valuations continue scraping at, or near, record lows. Regardless, the free cash flow story is coming home to roost in 2022, when most producers will have completed their balance sheet cleanups, enabling them to accelerate returns to shareholders. We would be buying producer equities with reckless abandon; for the first time since initiating coverage of the sector in 2013, we have Buy ratings on every E&P under coverage.”
The analysts made a pair of rating changes in the note.
Justin Bouchard raised Athabasca Oil Corp. (ATH-T) to “buy” from “hold” with a $1.25 target, up from 85 cents. The current average on the Street is $1.06.
Chris MacCulloch upgraded Crew Energy Inc. (CR-T) to “buy” from “hold” with a $4 target, up from $2.25 and exceeding the $3.15 average.
The firm also raised its target price for the majority of producers in its coverage universe.
Among large-cap stocks, their changes were:
- ARC Resources Ltd. (ARX-T, “buy”) to $20 from $16. Average: $15.79.
- Canadian Natural Resources Ltd. (CNQ-T, “buy”) to $60 from $54. Average: $56.26.
- Cenovus Energy Inc. (CVE-T, “buy”) to $20 from $16. Average: $16.41.
- Imperial Oil Ltd. (IMO-T, “buy”) to $44 from $41. Average: $42.
- Suncor Energy Inc. (SU-T, “buy”) to $41 from $40. Average: $35.43.
- Tourmaline Oil Corp. (TOU-T, “buy”) to $70 from $52. Average: $56.25.
Analysts at Canaccord Genuity raised their price deck assumptions for natural gas and oil on Tuesday
“Since our last quarterly update, OPEC+ has remained firmly in the drivers’ seat from a global oil price perspective amidst a continued recovery in global demand and a muted non-OPEC supply response. As winter approaches in the northern hemisphere, Europe is facing ~US$25/mmbtu natural gas prices while China is vowing to shore up its domestic energy supply at all costs amidst rolling blackouts. In this context, the global hydrocarbon glut of 2020 is a distant memory as the world increasingly learns to grapple with energy security challenges,” the firm said.
Canaccord raised its WTI estimate to US$72.50 per barrel from US$70 through the remainder of 2021 and to US $70 for 2022 (versusUS $67.50/bbl previously). Its long-term price outlook remains US$60.00.
For natural gas, its NYMEX pricing assumption moved to US$5 per thousand cubic feet (from US$3.25) for the remainder of 2021 and to US$4.00 (from US$3) for 2022. Its long-term assumption rose to US$3 from US$2.75.
Its AECO forecast rose to price to $4.00 per thousand cubic feet from $3.25 for the fourth quarter, and to $3.50 from $2.75 for 2022. Their long-term price assumption jumped to $2.75 from $2.50.
“While global energy investors typically focus on oil, natural gas winter strip pricing is at a decade-high in North America while Europe currently faces US$25/mmbtu pricing,” the analysts said. “As with oil, global demand for natural gas continues to accelerate amidst a limited supply response driven by past underinvestment and ongoing operator austerity. Unlike oil, however, natural gas is also enjoying a tailwind from energy transition policies that are driving global electrification initiatives. We note surging global natural gas pricing is also driving increased demand for competing fuels such as oil, which we believe is placing further upward pressure on the entire hydrocarbon complex.”
With that view, analyst John Bereznicki upgraded Trican Well Service Ltd. (TCW-T) to “buy” from “hold,” seeing “the company is particularly well positioned to benefit from our increasingly bullish natural gas price outlook.” His target rose to $4 from $2.75, exceeding the $3.46 average.
Citi analyst Christian Wetherbee cut his third-quarter earnings per share estimates for North American railway companies by an average of 8.4 per cent on Tuesday, feeling volumes have “clearly disappointed” and are “likely to more than offset emerging pricing strength.”
“This move for the group broadly follows cuts we’ve already made to CN and Norfolk Southern over the past few weeks,” he said in a research note. “We are now 4 per cent below consensus for the quarter, but would expect estimates to fall further over the next two weeks. Overall, volume weakness is widespread across the group as carloads have decelerated consistently through 3Q and across multiple commodities. We see better relative performance for 3Q at the eastern rails, where strengthening yields from export coal will better offset weak volume. In 4Q, export coal yields should provide a bigger tailwind to CSX and NS, which could drive upside to estimates.”
Mr. Wetherbee’s biggest reduction was for Canadian Pacific Railway Ltd. (CP-N, CP-T), which he lowered by 16 per cent to 90 US cents, 7 US cents below the consensus forecast. That prompted him to cut his target for CP shares to US$80 from US$86, which also falls below the Street (US$82.60.), with a “buy” recommendation.
“We’d argue that with the pending merger between CP and KSU, estimates have been slower to react to near-term changes at KSU and we’d expect considerably less volatility in KSU shares in the event of a meaningful miss,” he said. “In reality, we’d also expect most investors to take a longer-term positive view on CP shares given the potential value creation of the deal, but in terms of merger accretion it’s become more clear that the starting point for both companies is likely lower.”
“We continue to see value in CN shares over the next few months as the proxy contest with TCI plays out,” said Mr. Wetherbee. “We’ve heard from CN and its plan is targeted at generating OR [operating ratio] improvement in 4Q, and the next step should be a rebuttal and competing plan from TCI. Our benchmarking analysis of CN highlights a growing lack of balance on its network (RTM/GTM ratio) that has not been adequately priced for. This, coupled with cost initiatives, should allow for meaningful OR improvement beyond 57 per cent and we’d expect TCI’s rebuttal to be more aggressive than management’s. With rail multiples potentially reflating on more realistic estimates and prospects for better yields, we think solid upside remains for CN.”
Credit Suisse analyst Mike Rizvanovic thinks Sun Life Financial Inc.’s (SLF-T) US$2.48-billion acquisition of oral health provider DentaQuest is “solid,” touting the addition of a “high-quality earnings stream” and seeing management’s expectations stemming from the deal as “conservative.”
“We see further potential upside to management’s targeted expense synergies of US$60-million given the large scale being added to SLF’s existing platform, while potential revenue synergies, which are not included in guidance, may provide even more upside from the acquisition,” he said. “Particularly compelling are the benefits that can potentially be extracted from SLF’s national distribution capabilities.”
“Dental insurance is a compelling business for SLF to grow in given its low capital requirements, its modest reserve levels, and its general lower volatility earnings stream, which can generate an ROE of more than 30 per cent. Also notable is DentaQuest’s strong growth in recent years (14-per-cent CAAGR since 2018 vs. a 6-per-cent industry average) that has been driven by program expansion and execution on winning new contracts (typically multi-year state contracts).”
Seeing the acquisition price as “reasonable, but certainly not cheap,” Mr. Rizvanovic is now projecting 2022 earnings per share of $6.62, up from $6.47. That led him to raise his target for Sun Life shares to $74 from $72 with an “outperform” recommendation (unchanged). The average is $72.50.
“The purchase price and targeted 2024 incremental earnings contribution on a fully synergized basis results in a PE multiple of 13.7 times on the transaction,” he said. “However, adjusting for the amortization of intangibles, which SLF includes in its definition of underlying earnings (10 cents per share), suggests a much higher PE multiple of 18.5 times. While not inexpensive, we do believe that the deal represents a strong use of excess capital at the holding company level, which even after the transaction closes will still have cash resources of more than $1.0-billion.”
Elsewhere, CIBC World Markets analyst Paul Holden raised his rating to “outperformer” from “neutral” with a $74 target, rising from $72.
“While we continue to value SLF at 11-times forward earnings, there are an increasing number of reasons to argue for a higher multiple over time,” said Mr. Holden. “The DentaQuest acquisition enhances these arguments as it is capital light, high return, has high cash flow conversion and strong growth tailwinds. With this acquisition, and in consideration of a lagging share price over the last six months, we are upgrading SLF.”
Other analysts making target changes include:
* BMO Nesbitt Burns’ Tom MacKinnon to $76 from $75 with an “outperform” rating.
“Its on strategy, immediately accretive, adds scale in U.S. employee benefits, diversifies revenue stream, and significantly adds capabilities in the capital-light dental business,” he said. “At 13.7-times earnings with cost synergies and an estimated 19 times without, it wasn’t cheap, but with attractive funding (60-per-cent debt/40-per-cent cash) it is immediately 3-per-cent accretive to underlying EPS. 2022 underlying EPS increases by $0.09 reflecting expected H1/22 close.”
* National Bank analyst Gabriel Dechaine to $73 from $71 with an “outperform” rating.
RBC Dominion Securities analyst Paul Treiber added Lifespeak Inc. (LSPK-T) to the firm’s “Canadian Small Cap Conviction List” on Tuesday.
The list now consists of 23 stocks which are expected to “deliver strong absolute returns.”
“We believe LifeSpeak is well positioned to complete several deals in 2H/FY21,” said Mr. Treiber. “Our forecast calls for LifeSpeak’s ARR to grow 64 per cent 2H/1H to $37.6-million FY21, as a result of successfully closing new customer wins and expansions with existing customers. Due to LifeSpeak’s small size, ARR is subject to some variability due to timing of wins. ARR increased 132 per cent year-over-year Q2, vs. 165 per cent Q1, due to some deals that moved from Q2 into Q3, which sets up for a strong 2H. Year-to-date, LifeSpeak has added enterprise clients including Magna International, FedEx Canada, Lego Group, Celestica International, Majorel Group, among others. In addition, LifeSpeak has signed Lime Global, 1:1 help.net, and T-Cup Studios to embedded agreements. The company is tracking to 80 customer wins in FY21 vs. ‘60+’ in FY20.”
Seeing its valuation as “attractive given the company’s growth and profitability,” Mr. Treiber has an “outperform” rating and $13 target for shares of the Toronto-based mental-health content creator. The average target is $12.67.
The other stocks on the list are: Alaris Equity Partners Income Trust (AD.UN-T); Argonaut Gold Inc. (AR-T); BSR Real Estate Investment Trust (HOM.U-T); Cargojet Inc. (CJT); Chemtrade Logistics Income Fund (CHE.UN-T); ECN Capital Corp (ECN-T); European Residential REIT (ERE.UN-T); Home Capital Group Inc. (HCG-T); Jamieson Wellness Inc. (JWEL-T); Interfor Corp. (IFP-T); Major Drilling Group International Inc. (MDI-T); Minto Apartment REIT (MI.UN-T); Osisko Mining Inc. (OSK-T); Park Lawn Corp. (PLC-T); Points International Ltd. (PCOM-T); Precision Drilling Corp. (PD-T); Storm Resources (SRX-T); Tamarack Valley Energy Ltd. (TVE-T); Transcontinental Inc. (TCL.A-T); Tidewater Midstream & Infrastructure Ltd. (TWM-T).
Canaccord Genuity analyst Derek Dley expects “another solid print” from Aritzia Inc. (ATZ-T) when it reports its second-quarter 2022 financial results on Sept. 13.
He’s projecting the Vancouver-based women’s apparel retailer to report revenue of $295-million for the quarter, in-line with management expectations and matching the consensus estimate. His earnings before interest, taxes, depreciation and amortization forecast of $47-million is slightly ahead of the Street ($46-million).
“Aritzia reported impressive results last quarter driven by increased activity at the company’s boutiques as well as continuing strength in e-commerce,” said Mr. Dley. “In particular, growth in the U.S. accelerated ahead of expectations, with revenue up 200 per cent year-over-year for the region, and is expected to drive revenue growth well above pre-pandemic levels for F2022. Notably, this resulted in the company updating its full-year guidance and increasing revenue expectations to $1.15-1.20-billion, up from $1.11-1.16 billion or a 35-40-per-cent year-over-year increase. Accordingly, we are forecasting year-over-year comparable sales growth of 38 per cent for the quarter.
“As well, Artizia reported impressive gross margins last quarter helped by favourable FX and lower markdowns, offset slightly by higher distributing and warehousing costs. Looking forward, we expect the strong retail environment to persist, resulting in lower markdowns and promotional activity. That said, we expect this to be modestly offset by the continuation of elevated warehousing and distribution costs as the company looks to ramp-up capacity to meet rising demand from e-commerce and U.S. channels, including the previously announced expansion of its Toronto distribution centre. As such, we are forecasting gross margins of 40.2 per cent, up 500 basis points year-over-year but down sequentially from 44.2 per cent seen last quarter
Mr. Dley increased his target for Aritzia shares to $43 from $41 with a “buy” rating. The average is $42.88.
“In our view, Aritzia has done a great job of navigating a changing retail landscape by offering an aspirational customer experience within its brick-and-mortar locations and an improved e-commerce platform,” he said. “With over 20 consecutive quarters of same-store sales growth prior to the onset of COVID-19, a robust pipeline of new store openings, healthy balance sheet to support growth and margin enhancement initiatives, and a well aligned management team, we believe Aritzia is deserving of a premium valuation.”
Seeing it well-positioned to take advantage of “buoyant” industry conditions, Canaccord Genuity analyst Aravinda Galappatthige initiated coverage of Toronto-based Boat Rocker Media Inc. (BRMI-T) with a “buy” rating on Tuesday.
“The arms race in the Media & Entertainment sector, as traditional media entities battle the SVOD platforms (ranging from Netflix to Apple TV+) for subs, continues to rage on and has driven an extended growth phase in programming spend,” he said. “In addition, the shift in focus of the major studios (Disney, Warner, Universal) toward supporting their own emergent direct-to-consumer platforms (Disney+, HBO Max, etc.) has further expanded the demand for independent studios. This, in turn, has triggered M&A within the space, most recently manifested in the proposed acquisition of MGM Studios by Amazon. With Entertainment One acquired by Hasbro, and Lions Gate very much focused on developing STARZ, we would say there are vacant seats in the industry to be occupied by the next cohort of top-tier independent studios. "
“We believe Boat Rocker’s purposeful development over the past decade and a half has made the company a genuine candidate for the slot. It is diversified across genres, more recently breaking into the high-budget scripted drama category with shows like Invasion (for Apple TV+) and American Rust (for Showtime), in addition to its broad range of unscripted shows and legacy kids & family strength. Its Representation group provides more direct access to talent, it has a solid track record of acquisitions (nine transactions since 2015), and a strong balance sheet with over $100-million in net cash. The company is also setting itself up for brand-driven revenues, with its new kids show Dino Ranch.”
Mr. Galappatthige set a target of $12 per share, matching the consensus on the Street.
“Our target price of $12 is derived from 11 times EV/EBITDA on fiscal 2023 estimates,” he noted. “The stock currently trades at 7.2 times F2022. We note that the comp group trades at 10.0 times EV/EBITDA 2022. However, we believe that Boat Rocker could command a premium due to steeper earnings upside, well built infrastructure that can support a step change in operational scale, and its stronger balance sheet with $100-million-plus in net cash, vs. several peers in the comp group that carry over-levered balance sheets.”
In other analyst actions:
* Acumen Capital analyst Trevor Reynolds trimmed his target for Badger Infrastructure Solutions Ltd. (BDGI-T) to $42.25 from $43 with a “speculative buy” rating. The current average is $38.69.
“.We hosted a call with BDGI management last week and continue to look to 2022 for more stability in revenue levels and a return to historical margins,” he said. “The remainder of 2021 is less clear as COVID-19 has continued to impact the consistency and predictability of demand. Although emergency work related to hurricane Ida has provided a tailwind in September, we are adjusting our estimates down slightly for Q3/21 out of caution. The longer-term outlook remains encouraging in our view as BDGI works to capitalize on significant market expansion opportunities to achieve their strategic 5-year targets.”
“In our view, Methanex is the #1 way to play North American basic- or intermediate chemical producers that are short natural gas. We estimate that only 1/3 of North American capacity has exposure to changes in prompt pricing vs. most other players that are fully exposed,” he said.
* Expecting a “bleak” third quarter for North American auto parts suppliers, Wells Fargo analyst Colin Langan cut his Magna International Inc. (MGA-N, MG-T) target to US$84 from US$88 with an “equal weight” recommendation. The current average is US$106.40.
“Q3 will likely be an important reset for auto suppliers,” he said. “We expect all suppliers to miss Q3 consensus and significantly lower full-year guidance. Our revised 2021 EPS outlook is on average 17 per cent below consensus EPS estimates today (13 per cent below at median). We believe our cautious outlook is priced-in following the large IHS production cut mid-September, and therefore, we see the outlook reset as a positive catalyst for the out of favor group. The automakers will likely hold up better as pricing continues to help offset the impact of volume declines.”
* JP Morgan analyst Michael Glick raised his Teck Resources Ltd. (TECK.B-T) target to $39 from $36, keeping an “overweight” recommendation. The average is $38.27.
* TD Securities analyst Daniel Chan resumed coverage of Altus Group Ltd. (AIF-T) with a “buy” recommendation and $70 target, up from $68. The average is $68.50.
* National Bank’s Dan Payne raised his Surge Energy Inc. (SGY-T) target to $9 from $8.50 with a “sector perform” rating. The average is $9.36.