Inside the Market’s roundup of some of today’s key analyst actions
Scotia Capital analyst Orest Wowkodaw thinks the risk-reward proposition for mining equities remains “extremely attractive,” pointing to “compelling” valuations and strong free cash flow.
“Although macroeconomic risks remain elevated, we anticipate a strong stimulus-driven recovery in ex-China markets to more than compensate for decelerating Chinese growth, Delta concerns, and higher interest rates,” he said in a research note released Tuesday. “In the medium to long term, we anticipate the emergence of a new commodities super cycle driven by growing demand from global decarbonization efforts to address climate change amplified by the impact of severe underinvestment in new production capacity. Heightened LatAm geo-political risks are likely to compound the supply crisis.”
“Among the base metals, we continue to prefer copper exposure given very low inventories and our near-term forecast of a market largely in balance driven by ex-China demand recovery, before transitioning to a large medium-term structural deficit due to supply erosion. We also anticipate copper to be among the biggest beneficiaries of growing global decarbonization efforts. We forecast near-term over-supply risks in both zinc and nickel markets, albeit to a lesser extent than previously. Although we see material downside pricing risks for HCC from extremely elevated spot levels as supply inevitably recovers, but now only modest downside risks for iron given the acute recent correction, we continue to like the outlook for the premium segment of bulk commodities. U3O8 fundamentals are improving on supply constraints, aggressive inventory stockpiling, and the increasing role for nuclear in green energy.”
Though he maintained his copper price forecast through 2025, Mr. Wowkodaw made “modest” updates to the rest of his commodity price deck, including increases to his nickel, uranium and zinc projections and a decline to his iron estimates. That led to an increase in his 2021 EBITDA forecasts by an average of 1 per cent with his 2022 expectation rising 2 per cent.
“With different fundamentals, each commodity appears to be at a somewhat different stage of its own respective cycle stage (i.e., peak and trough),” said Mr. Wowkodaw. “Our analysis suggests that copper fundamentals are tightening while nickel and zinc appear to have moved into multi-year surplus positions. Of the three base metals, the recovery in copper appears the most advanced by far. We anticipate the recovery in both zinc and nickel to emerge by middecade. HCC is now the closest to its peak-cycle levels given the perfect storm of Chinese supply constraints and strong ex-China steel production. On the other hand, iron ore is now closer to mid-cycle levels given the severe recent pullback. After a ten-year bear market, the uranium market appears to be finally turning a corner driven by ongoing supplier discipline and nuclear power’s increasing role in green energy.”
“Despite surprisingly strong metal prices, we believe the massive underinvestment by the capital-constrained mining sector is likely to continue for some time, which is likely to produce another strong commodity cycle in the future as demand once again overtakes waning supply. In our view, mining companies remain under intense pressure from shareholders to remain disciplined in the current environment and not repeat the mistakes of the last cycle by chasing excessive growth.”
With his updated forecast, Mr. Wowkodaw made a series of target price changes to stocks in his coverage universe, including:
- First Quantum Minerals Ltd. (FM-T, “sector outperform”) to $35 from $40. The average on the Street is $32.83.
- Teck Resources Ltd. (TECK.B-T, “sector outperform”) to $44 from $43. Average: $38.42.
- Capstone Mining Corp. (CS-T, “sector outperform”) to $7.50 from $8. Average: $6.98.
- Champion Iron Ltd. (CIA-T, “sector outperform”) to $6.50 from $9. Average: $7.70.
- Ero Copper Corp. (ERO-T, “sector perform”) to $28 from $30. Average: $30.59.
- Hudbay Minerals Inc. (HBM-T, “sector outperform”) to $11.50 from $12. Average: $13.03.
- Lundin Mining Corp. (LUN-T, “sector perform”) to $11.50 from $12.50. Average: $13.05.
- Copper Mountain Mining Corp. (CMMC-T, “sector outperform”) to $4 from $4.75. Average: $5.10.
- Taseko Mines Ltd. (TKO-T, “sector perform”) to $2.60 from $2.75. Average: $3.09.
- Ivanhoe Mines Ltd. (IVN-T, “sector outperform”) to $12 from $11. Average: $11.35.
- Nevada Copper Corp. (NCU-T, “sector perform”) to $1.25 from $1.50. Average: $1.75.
- Turquoise Hill Resources Ltd. (TRQ-T, “sector outperform”) to $28 from $30. Average: $25.
- Cameco Corp. (CCO-T, “sector outperform”) to $35 from $27. Average: $31.34.
“We recommend 12 of 23 equities under our coverage. Our top picks are CS-T, FM-T, TECK.B-T, and VALE-N. We also recommend CCO-T, CIA-T, CMMC-T, FCX-N, HBM-T, IVN-T, LIF-T, and TRQ-T. The average implied return for our preferred equities is now a very robust 41 per cent (vs. 35 per cent last quarter),” said Mr. Wowkodaw.
“With average 2021-2023 estimated EV/EBITDA multiples of 4.2 times, 3.9 times, and 3.9 times for the large/mid-cap base metal producers (or 4.2 times, 3.7 times, and 3.3 times at spot) vs. 3-year and 10-year average multiples of 5.5 times and 6.0 times, valuations are now significantly more attractive. Moreover, the equities are now pricing in a substantial discount to spot commodity prices (average implied Cu price of $3.46 per pound is 16 per cent below spot). Given the impressive FCF generation for most miners, we anticipate improved shareholder returns to continue, led by FCX-N, LIF-T, LUN-T, and VALE-N.”
=====
Though he’s not ruling out the potential for a bidding war, IA Capital Markets analyst Puneet Singh lowered his rating for Neo Lithium Corp. (NLC-X) in response to Zijin Mining Group Co. Ltd.’s all-cash takeover bid worth $918.7-million.
Late Friday, the Chinese company announced a deal to acquire Toronto-based Neo Lithium at a price of $6.50 per share, which is an 18-per-cent premium to its $5.49 closing price on Friday.
The deal comes after China’s Contemporary Amperex Technology Co Ltd (CATL) agreed to acquire Canada’s Millennial Lithium Corp in all-stock cash deal worth $376.8-million.
“Our thinking was if CATL was going after ML, surely it would also go after NLC,” said Mr. Singh. “CATL was initially going unnamed when it made its bid for ML, which may have been designed to throw others off the trail. But the rumour of CATL making a bid for ML, then it being confirmed, and the following run-up in NLC shares after the confirmation could’ve pushed Zijin to make this premium offer.”
The analyst thinks the size of the offer is meant to defer CATL from making a bid, adding: “Given the frenetic run in lithium prices this year, signalling a tight market already in what we feel is just the onset of electric vehicle sales really growing, the race for lithium supply is speeding up and thus we don’t rule out another bidder especially considering 3Q is one of the best projects in the world.”
Moving Neo Lithium, which is focused on its 3Q project in Argentina, to “hold” from a “buy” recommendation, Mr. Singh kept a $6.50 target. The average on the Street is $6.43.
=====
Citing its relative valuation and recent share price appreciation “that caps near-term upside,” RBC Dominion Securities analyst Irene Nattel lowered her rating for Aritzia Inc. (ATZ-T) to “sector perform” from “outperform” on Tuesday.
“With ATZ share price up more than 60 per cent year-to-date and within reach of our revised fundamental target $43 (up $3), we are moderating our rating to Sector Perform,” she said. “We reiterate our thesis that ATZ is uniquely positioned to sustain sector-leading growth, underpinned by strong brand appeal and accelerating penetration of the US market and online channel. While the post-pandemic earnings recovery appears well entrenched — including a strong setup for FQ2 to be reported October 13 — in our view, current valuation appropriately reflects near-term upside, particularly against the backdrop of global supply chain disruptions and input cost inflation.”
After confirming her “conviction around ATZ’s long-term growth outlook,” Ms. Nattel bumped her target to $43 from $40. The average is $43.25.
“ATZ share price is up approximately 4 t[imes from the pandemic-driven trough in March 2020 and enterprise value is up over 55 per cent relative to pre-pandemic, with valuation underpinned by solid and consistent financial performance even as it navigated significant retail restrictions,” she said. “Moreover, with a strong inventory position as at the end of Q1, in our view, ATZ is well positioned to meet near-term, pent-up consumer demand as the reopening accelerates.
“Nonetheless,relative valuation is stretched, in our view, particularly against the backdrop of global supply chain issues, input cost inflation, and potential production disruptions, notably out of Vietnam, an important production hub for ATZ. ATZ currently trades at 16 times calendar 2022 estimated EBITDA, a premium to DOL (14 times), PET (15 times), and the average multiple of SMID-cap M&A growth-oriented names.”
=====
Following its announcement of the end of its a strategic review process and the securing of a new loan agreement, Canaccord Genuity analyst Robert Young thinks shares of Dye & Durham Ltd. (DND-T) should be “bought on weakness.”
“Dye & Durham will continue as a public company but with a larger and modestly higher risk balance sheet after negotiating a new debt facility worth $1.8-billion in total,” the analyst said. “Going forward, Dye & Durham management expects to carry a higher level of financial leverage to act quickly on a healthy M&A pipeline. Higher debt service cost and potentially reduced flexibility will be areas of concern. We expect a higher level of noise given the abrupt change in course and some investor dissatisfaction on CEO share option grants.”
Mr. Young said he remains positive on the Toronto-based legal software company, seeing the strategic review as an overhang for the stock. He also pointed to the upside potential from deployment of its capital on M&A moves.
“Assuming incremental EBITDA $310-million based on 5 times post synergies, we see a clearer path toward $500-million in EBITDA,” he said. “The company did not provide updated guidance for F2022 but notes it is on track to achieve prior guidance with the business is performing well.”
After reducing his fiscal 2021 and 2022 expectations due to higher interest costs on the new credit facility, Mr. Young cut his target for the company’s shares to $55 from $60, reaffirming a “buy” rating. The average on the Street is $55.90.
“We believe DND’s strong organic revenue and EBITDA growth coupled with strong M&A pipeline are support for a valuation in line with consolidator peers, he said. “Given the high likelihood of M&A and the absence of unannounced M&A in our forecast, we reflect the probability of higher estimates in our valuation multiple. Dye & Durham now has ample liquidity, we estimate $1.56-billion including the $200-million DDTL and assuming paydown of the previous term loan, to continue its aggressive plan and has suggested it can move quickly.
“We expect that near-term noise around the abrupt change in course and higher debt level will drive near-term investor turn-over. While we expect that executive compensation to retain Matt Proud will be a source of near-term dissatisfaction, we expect this will give way to optimism on potential to add $310-milion in incremental EBITDA with the current balance sheet.”
Elsewhere, BMO Nesbitt Burns analyst Thanos Moschopoulos cut his target to $50 from $55 with an “outperform” rating.
“We’ve also trimmed our fiscal 2022 estimates (which were previously above consensus) to reflect the delayed integration of TM Group. We believe the noise around the failed privatization might weigh on the stock’s multiple in the near term; however, in our view, the large term loan suggests that DND continues to see a large M&A pipeline, and intends to be very active in executing on this,” said Mr. Moschopoulos.
=====
Credit Suisse Fahad Tariq trimmed his targets for a group of gold equities in his coverage universe on Tuesday.
His changes include:
- Agnico Eagle Mines Ltd. (AEM-N/AEM-T, “outperform”) to US$70 from US$74. The average on the Street is US$76.99.
- Barrick Gold Corp. (GOLD-N/ABX-T, “outperform”) to US$24 from US$27. Average: US$28.46.
- Eldorado Gold Corp. (EGO-N/ELD-T, “underperform”) to US$8.75 from US$10. Average: US$16.19.
- Iamgold Corp. (IAG-N/IMG-T, “neutral”) to US$2.50 from US$2.75. Average: US$3.25.
- Kinross Gold Corp. (KGC-N/K-T, “outperform”) to US$7.50 from US$8. Average: US$9.78.
- New Gold Inc. (NGD-N/NGD-T, “neutral”) to US$1.30 from US$1.70. Average: US$1.80.
- Triple Flag Precious Metals Corp. (TFPM-T, “neutral”) to $16 from $17.50. Average: US$20.58.
- Wheaton Precious Metals Corp. (WPM-T, “neutral”) to $54 from $58. Average: $74.19.
Mr. Tariq raised his target for Kirkland Lake Gold Ltd. (KL-N, KL-T) to US$44 from US$43, keeping a “neutral” rating. The average is US$45.50.
=====
Desjardins Securities analyst Chris Li thinks three things must occur for Freshlocal Solutions Inc.’s (LOCL-T) stock to “reverse its downward course.”
In a research note released Tuesday, he said the Vancouver-based company pointed to these factors:
1. The need to remove balance sheet “uncertainty,” expecting the announcement of debt covenant amendments by the end of the month with further financing in November and December. He also pointed to the possibility of the sale of non-core Blush Lane Organic Market chain in Alberta.
2. Attracting new FoodX customers. He said: “The removal of the balance sheet overhang is critical. Encouragingly, LOCL is on track with the development of its Carrefour facility in a second undisclosed European country (we believe it is Spain) powered by FoodX eGMS to go live in 1Q CY22. Since we estimate eGrocery sales volumes in Spain are significantly larger than in Belgium, a successful launch in Spain will serve as an important validation of the FoodX solution, resulting in new partnerships, in our view.”
3. Maintaining eGrocery “momentum.” He said: “Despite a slowdown in eGrocery sales near-term as consumer behaviour normalizes, we expect solid high-single-digit long-term sales growth driven by accelerating eGrocery adoption.”
After lowering his revenue forecast for FoodX and his valuation for online business, Mr. Li cut his target for Freshlocal shares to $5 from $6, keeping a “buy” rating. The average is $6.58.
“At the current share price, we estimate the market is likely attributing zero value to FoodX,” he said. “We believe this is understandable considering balance sheet uncertainty and the high probability that LOCL will not meet its goal of announcing four new FoodX partnerships by the end of CY21.”
=====
In reaction to the Monday announcement of its agreement to sell Dorel Sports, its bicycle segment, to Pon Holdings B.V. for US$810-million, TD Securities analyst Derek Lessard upgraded Dorel Industries Inc. (DII.B-T) to “buy” from “hold.”
“Given the strong demand for bikes due to the pandemic, partially offset by uncertainties caused by the ongoing supply-chain and labour challenges, we believe that the valuation is fair,” he said.
Mr. Lessard lowered his sales forecast for Dorel due to the segment’s sale as well as increased supply-chain pressure it Juvenile and Home segments., but he hiked his target for its shares to $46 from $15.50. The average is $31.
“We believe that it will take some time to pinpoint the appropriate valuation multiple, but we are upgrading the shares to BUY, given: 1) a management team that now appears more willing to sell businesses to unlock value; 2) receding supply-chain challenges in the long term; 3) a clean balance sheet; 4) renewed focus on growth opportunities; 5) returning capital to shareholders again; and 6) an overly depressed share price,” he said.
=====
Ahead of third-quarter earnings season for Canadian energy services companies, ATB Capital Markets analyst Tim Monachello lowered Shawcor Ltd. (SCL-T) to “sector perform” from “outperform” and cut his target by $1 to $7.50. The average is $8.29.
“SCL shares are up roughly 20 per cent since we upgraded the stock to Outperform in April, meanwhile we believe supply chain issues are likely to impact SCL’s global operations, and particularly its composite tank business given constrained resin availability,” he said. “In addition, we believe SCL could be exposed to fourth wave COVID impacts and lower demand from the Asian automotive sector which is a primary market for its automotive and industrials products which is also being impacted by a global shortage of microchips. Meanwhile, we understand that project throughput in SCL’s pipe coating business is likely to slow over the coming quarters until likely H2/22 when we believe high visibility larger projects should begin to ramp up.
“While we are increasing our EBITDAS estimates slightly in 2022 and 2023 given higher North American field activity assumptions, we are decreasing our price target to $7.50 from $8.50 based on a higher discount rate assumption (13 per cent vs 12 per cent previously) reflecting mounting near-term risks to results. Longer-term, we continue to believe SCL is well positioned for rising demand across its platform, though the timing of this uplift is not likely to materialize over the near-term.”
Mr. Monachello also made these target changes:
- CES Energy Solutions Corp. (CEU-T, “outperform”) to $3.75 from $3.50. Average: $2.96.
- North American Construction Group Ltd. (NOA-T, “outperform”) to $26.50 from $26. Average: $23.40.
- PHX Energy Services Corp. (PHX-T, “outperform”) to $8.50 from $8. Average: $6.15.
- Questor Technology Inc. (QST-T, “sector perform”) to $2 from $1.75. Average: $1.83.
- Total Energy Services Inc. (TOT-T, “outperform”) to $8.25 from $8. Average: $6.63.
- Akita Drilling Ltd. (AKT.A-T, “outperform”) to $1.85 from $2. Average: $1.60.
“Our top picks are aligned with two major themes 1) North American cyclically exposed companies that have high free cash generation, attractive valuations and that prioritize returns to shareholders either through dividends or share repurchase programs; and 2) late-cycle cyclical companies that are just now seeing increasing demand, and have differential exposure to rising gas prices and investment in gas infrastructure. Our top picks are CEU, EFX, PHX and TOT,” said the analyst.
=====
Citing stronger-than-expected methanol pricing and “sustained confidence in the broader macro/energy outlook, Raymond James analyst Steve Hansen raised his financial expectations for Methanex Corp. (MEOH-Q/MX-T).
Global methanol markets remain extraordinarily tight, with key spot benchmarks recently breaching 7-14 year highs depending on region,” he said. “Underpinning this strength, we continue to highlight several key macro drivers, including: 1) the robust rally in global energy prices (natural gas, LNG, coal); 2) a string of unexpected production outages (both planned & unplanned); and 3) a steady recovery in the global economy.”
Mr. Hansen’s earnings per share projections for 2021 and 2022 are now US$5.80 and US$4.18, respectively, rising from US$5.01 and US$3.07.
Maintaining an “outperform” rating for Methanex shares, he increased his target to US$62 from US$57. The average is currently US$49.58
Elsewhere, in a third-quarter preview for North American commodity chemicals companies, Citi analyst P.J. Juvekar raised his Methanex Corp. to US$60 from US$43 and cut his Ballard Power Systems Inc. (BLDP-Q/BLDP-T, “buy/high risk”) to US$19 from US$21. The average target for Ballard is US$22.76.
“The 3Q21 is shaping to be the perfect storm driven by (1) higher oil & especially NG prices in Europe that have created arbitrage opportunities for US and margin compression in Europe. Specialty companies like paints and Ecolab tend to get hurt, while USGC commodity players should benefit. That said, overall commodity margins are slightly down from 2Q21 due to higher energy complex, (2) China’s dual-control policy has resulted in shutdowns of coal-based capacity in methanol, CTO, PVC, and ammonia creating shortages, benefitting WLK, OLN, MEOH & fertilizers (3) Dow kicked off the race to decarbonize with zero-carbon cracker announcement by 2030. Lithium benefits from EVs as spot prices surpass last peak. We like PLUG’s strategy of building the ecosystem in the hydrogen value chain. Top pick OLN, DD, NTR,” said Mr. Juvekar.
=====
In other analyst actions:
* In reaction to a Saturday’s Globe and Mail article on an internal power struggle, BMO Nesbitt Burns analyst Tim Casey lowered his Rogers Communications Inc. (RCI.B-T) target to $68 from $72 with an “outperform” rating. The average on the Street is $71.87.
“The awkward and abrupt departure of CFO, Tony Staffieri, on September 29th apparently reflects disagreements within the Rogers family regarding senior leadership of the company. We continue to believe the Shaw transaction will close in Q2/22. However, the information most certainly complicates the integration process and the long-term management of the company,” he said.
* Following the announcement of its $346-million acquisition of Alcanna Inc. (CLIQ-T), Canaccord Genuity analyst Shaan Mir raised his target for Calgary-based Sundial Growers Inc. (SNDL-Q) to 80 US cents from 75 US cents with a “hold” recommendation. The average on the Street is 71 US cents.
“In our view, this transaction is a step in the right direction for Sundial as it provides the company with an established alcohol retail chain, with free cash flow of $16.4-million on a TTM [trailing 12-month] basis, while simultaneously creating the largest cannabis retailer in the country at 170 locations active today,” he said. “Specifically, we see a lot of opportunity for the company to leverage consumer insights data from the combined retail platform that can then be relayed into R&D efforts for Sundial’s branded products. Further, SNDL can now increase budtender education on its in-house brands while also introducing its product to the Nova retail chain, ultimately contributing to higher end-user sales for its products. Lastly, we see opportunity for Sundial to leverage Alcanna’s retail operational know-how in its Spiritleaf and Value Buds’ banners.”
* Seeing its quarterly results as “solid,” Acumen Capital analyst Nick Corcoran raised his MTY Food Group Inc. (MTY-T) target to $77.50 from $75 with a “buy” rating. The average is $72.38.
“We view the Q3/FY21 results as positive. MTY posted record Adj. EBITDA and FCF despite continued headwinds from the pandemic, labour shortages, and supply chain challenges. We will look for momentum to continue into 2022,” he said.
Others making changes include: Raymond James’ Michael Glen to $73 from $64 with a “market perform” rating; Scotia Capital’s George Doumet to $71 from $65 with a “sector perform” rating and TD Securities’ Derek Lessard to $70 from $65 with a “hold” rating.
* In a research note titled The Numbers Keep Ratcheting Higher - Expect More of the Same, Raymond James analyst Andrew Bradford increased his target for Trican Well Service Ltd. (TCW-T) to $4.15 from $3.70 with a “strong buy” rating. The average is $3.68.
“Trican possesses key attributes that have traditionally been attractive for investors in the oilfield space: torque to energy prices and ‘growth’ - this time via its virtual corner-on-the-market for Tier IV natural gas spreads in Canada. Trican also has characteristics that make it differentially attractive within energy investing: cost control, zero net debt, and free cash flow,” he said.
“Unsurprising then that Trican has been the best performing mainstream North American fracturing stock year-to-date, validating the notion that despite protestations to the contrary, the above attributes are still valued by investors.”
* Following its first investor call, Raymond James analyst Michael Glen cut his target for Exro Technologies Inc. (EXRO-T) to $7 from $9 with a “strong buy” rating. The current average on the Street is $8.33.
“Overall, in listening to management describe the pace of activity, it is clear that Exro is seeing a high level of engagement with momentum clearly building through 2022.
* Citing “increased confidence in the company’s Clearwater play,” RBC Dominion Securities analyst Greg Pardy raised his Baytex Energy Corp. (BTE-T, “sector perform”) to $3.50 from $2.50. The average is $3.79.
Mr. Pardy also raised his Vermilion Energy Inc. (VET-T, “sector perform”) target to $12.50 from $11 “on the back of quicker than expected deleveraging, fueled in part by strength in benchmark European gas prices.” The average is $13.63.
* After approval for its acquisition by Blackstone, TD Securities analyst Lorne Kalmar lowered WPT Industrial Real Estate Investment Trust (WIR.U-T) to “tender” from “hold” with a US$22 target.
“We view this outcome as a positive for both WPT unitholders and the broader Industrial real-estate sector. We believe that the pricing represents another vote of confidence in the industrial asset class as fundamentals continue to strengthen on the back of growing logistics demand, while new supply remains constrained. We expect the sector to continue to re-rate higher and asset values to continue to climb,” said Mr. Kalmar.
* Deutsche Bank analyst Brian Bedell reduced his TMX Group Ltd. (X-T) target to $155 from $162, keeping a “buy” rating. The average is $154.29.
* Mr. Bedell raised his target for Brookfield Asset Management Inc. (BAM-N, BAM.A-T) to US$54 from US$53, keeping a “hold” rating. The average is now US$63.71.
* CIBC World Markets analyst Hamir Patel raised his Richelieu Hardware Ltd. (RCH-T) target to $48 from $45 with a “sector perform” rating. The average on the Street is $48.67.
* National Bank Financial analyst Michael Robertson increased his Mullen Group Ltd. (MTL-T) target by $1 to $16.50, keeping an “outperform” recommendation. The average is $15.68.
* Raymond James analyst Savanthi Syth reduced his Air Canada (AC-T) target to $30 from $35 with an “outperform” rating. The average is $29.53.
* Goldman Sachs analyst Brian Maguire hiked his target for GFL Environmental Inc. (GFL-T) to $56 from $50 with a “buy” recommendation. The average is $45.04.
* Cowen and Co. analyst Cai von Rumohr raised his Bombardier Inc. (BBD.B-T) target to $2.18, exceeding the $1.97 average, from $1.70 with a “market perform” rating.
David Leeder