Inside the Market’s roundup of some of today’s key analyst actions
Heading into fourth-quarter earnings season, Scotia Capital analyst Meny Grauman remains “very bullish” on a Canadian banking sector, seeing it “trading only modestly above an average historical multiple despite still being in the early stages of an expansionary cycle.”
“The group’s underperformance versus the U.S. money centre banks has effectively been eliminated, but is still quite wide compared to the broader U.S. bank index,” he said. “As we look ahead to F2022 and F2023, we continue to not only see the prospect of further multiple expansion for the group, but also higher EPS estimates as the post-pandemic economic recovery accelerates. Yet as we continue to bang the table on the Canadian banks, we are certainly not blind to the risks to our optimistic outlook, including COVID, unexpected rate increases, and lingering supply chain issues”
For the quarter, Mr. Grauman is forecast the sector will generate core cash earnings per share of $2.50, down 1 per cent from the third quarter but up 32 per cent year-over-year.
“It should come as no surprise that the key topics of interest this quarter will be the pace of the economic recovery and the potential risk that this momentum can be derailed,” he said. “Apart from key operational considerations, return of capital will also be front and center this quarter. After months of anticipation OSFI has given banks the green light to raise dividends and buy back shares, and we expect a wave of dividend and buyback announcements to come concurrently with Q4 results, with some room for upside surprises.”
In a research note released Tuesday, he lowered his rating for National Bank of Canada (NA-T) to “sector perform” from a “sector outperform” recommendation “after delivering peer-leading returns for another year.
“Although its operational results will continue to be strong, the bar is set high for this name given that it is trading at a material premium to the group based on forward consensus earnings. While we expect the bank’s strong financial performance to continue, we see the recent CEO transition as limiting multiple expansion in the short run. In addition, while the bank has been able to grow risk-weighted assets well above the peer-group for several quarters now, that gap is likely to close in F2022 especially as commercial loan growth accelerates at some of the other banks,” he said.
Mr. Grauman’s target for National Bank shares rose to $114 from $109. The average on the Street is $106.77.
He also made these target adjustments:
- Bank of Montreal (BMO-T, “sector outperform”) to $161 from $147. Average: $148.56.
- Canadian Western Bank (CWB-T, “sector outperform”) to $48 from $43. Average: $42.92.
- Equitable Group Inc. (EQB-T, “sector perform”) to $94 from $90. Average: $94.07.
- Laurentian Bank of Canada (LB-T, “sector perform”) to $48 from $46. Average: $46.73.
- Royal Bank of Canada (RY-T, “sector outperform”) to $149 from $148. Average: $145.55.
- Toronto-Dominion Bank (TD-T, “sector perform”) to $104 from $94. Average: $97.09.
His target for Canadian Imperial Bank of Commerce (CM-T, “sector outperform”) remains $168, exceeding the $162.20.
“From a positioning perspective, we continue to believe that the entire sector is a Buy,” he said.
“Our Top Pick in the space remains BMO as its relative valuation continues to lag its peer-leading financial performance. We also like CIBC, which has seen significant underperformance since Q3 reporting. This has largely been driven by the view that this name will see less return of capital than any of its large peers. While this is true, we still expect a solid quarter, and believe that the recent sell-off has been unjustified given fundamentals. We also highlight RY, which has seen improving operational performance in its flagship Canadian Banking segment in particular and remains our favored defensive name in the face of the small but rising risks that we have highlighted above. TD has been the best-performing bank over the past month despite the weakest results of the group in Q3. This has been fueled by its large excess capital position and peer-leading earnings sensitivity to rising rates. Both of these drivers are very relevant, but with the stock now trading back at a 5-per-cent premium to the group based on F2022 consensus earnings, we believe this good news is largely priced in and therefore reiterate our Sector Perform rating.”
Following Monday’s release of its production guidance for the next three years, Canaccord Genuity analyst Dalton Baretto lowered his recommendation for Lundin Mining Corp. (LUN-T) to “hold” from “buy,” pointing to a limited potential return for investors.
“This update is universally negative relative to our estimates, and we believe will not inspire a lot of confidence in the company despite the change at the top,” said Mr. Baretto in a research note. “Production guidance for each of the four major commodities was below our expectations in each year, and 2022 costs at all assets except Candelaria (which was in line) were above our forecasts. 2022 capex guidance was a fitting 22 per cent above our estimate.
“At Candelaria, where most investors will be focused, 2022 was actually in line with our forecasts on both production and costs. That said, production guidance for 2023 and 2024 was below expectations for both copper and gold, which will no doubt increase the clamour around the longer-term prospects for the mine. At Neves-Corvo, zinc production expectations from the ZEP project are below our estimates every year, and given the delays and increase in capex, the project now appears to us to have a marginal IRR. Even the old stalwart Eagle is guiding to nickel production below our estimates in each year. Chapada was largely in line, although we expect cost guidance to raise some eyebrows. Only Zinkgruvan modestly exceeded our estimates.”
Updating his financial estimates to account for a moderation of his longer-term outlook for Candelaria, the ZEP project and higher costs at Chapada, Mr. Baretto reduced his 2022 and 2023 EBITDA estimates by 8 per cent and 19 per cent, respectively.
That led him to cut his target for Lundin shares to $10.50 from $12.50. The average target on the Street is $12.85, according to Refinitiv data.
Elsewhere, BMO Nesbitt Burns analyst Jackie Przybylowski cut her target to $15 from $16.50, reaffirming a “market perform” recommendation, while Scotia’s Orest Wowkodaw lowered his target to $11 from $11.50 with a “sector perform” rating.
“Lundin Mining has a diversified asset base and a strong balance sheet. However, disappointing production at the Candelaria mine, delays to ZEP at Neves-Corvo, and longer-than-expected timeline for delivery of expansion plans at Chapada have prompted us to take a more cautious approach,” Ms. Przybylowski said.
In response to Monday’s sudden departure of chief executive officer Mick Dilger, CIBC World Markets analyst Robert Catellier lowered Pembina Pipeline Corp. (PPL-T) to “neutral” from “outperformer,” suggesting a significant “difference of opinion with the board with respect to strategy.”
“The issue at stake would have to have been important to not be able to bridge the gap,” he said. “We believe Mick was less aggressive in wanting to pursue basin diversification, but differing views on energy transition are also a possibility, not to mention the recent attempt at acquiring IPL. Mick is 58 years old, and was still intensively engaged with the company’s various stakeholders. We did not expect him to step down for a few years, and even then with the view of retiring as opposed to pursuing other opportunities.”
Mr. Catellier said he’s more comfortable remaining on the sidelines until the release of 2022 guidance or further clarification on its strategy is provided.
“The two most significant recent events are the failed attempt to acquire IPL and the release of the company’s ESG goals. As a result, we think these areas could be the most likely to be the source of any possible disagreement with the board, conceivably with the board wanting a more rapid transition to low-carbon projects, in our opinion. We will only know in the fullness of time, but prefer some clarification before becoming more aggressive on the stock,” he added.
He maintained a $44 target. The average target on the Street is $44.14.
Canaccord Genuity analyst Yuri Lynk sees an improved risk-reward proposition for Badger Infrastructure Solutions Ltd. (BDGI-T).
Accordingly, he raised his rating for the Calgary-based provider of non-destructive excavating services to “buy” from “hold” following a recent non-deal roadshow.
“Over the last five years, management’s focus has been on preparing Badger to handle significantly higher future revenue,” he said. “Instead, revenue declined this year and Badger’s operating leverage, combined with management’s decision to rehire operators too early, crushed margins. As such, the stock is down 16 per cent year-to-date, underperforming the 24-per-cent increase in the S&P/TSX Index, but the revenue outlook is much improved.”
Mr. Lynk thinks a continued revenue recovery is likely to help Badger’s profitability, noting: ”The macro, as measured by U.S. non-residential construction spending, is getting better as the contractions in 2020 and 2021 give way to growth in 2022 and 2023.”
He also thinks the Biden Administration’s US$1-trillion infrastructure package could lead to increase demand for impact hydrovac as early as second half of next year.
“There are certainly risks to this upgrade,” he warned. “For one, the market for CDL drivers is very tight, to the detriment of margins. Inflationary pressures could increase the cost to manufacture a hydrovac, eroding truck economics.”
“Looking longer-term, management reiterated its 2020 to 2025 goals that include doubling the US business from 2020 levels and achieving a consolidated EBITDA margin of 28-29 per cent. Our work suggests that achieving these goals by 2025 would drive EPS of $3.50. In our view, Badger would not require equity to fund the truck build necessary to double its U.S. business.”
Mr. Lynk maintained a target of $38 per share. The average on the Street is $38.94.
Though there are several sources of volatility currently present in the energy sector, ATB Capital Markets analyst Patrick O’Rourke sees beneficial conditions for investors.
“Overall the bottom line is that we continue to view the medium-term fundamentals and valuation of the sector as a whole constructively, but transitory issues in the near-term, by way of noise surrounding an SPR release, winter COVID resurgence, and the TMX outage have the potential to further enhance the opportunity set, by adding to near-term commodity and equity volatility - investors should be well prepared to take advantage of these opportunities,” he said.
In a research report released on Tuesday, Mr. O’Rourke raised his raised his 2021 WTI forecast to US$68.50 per barrel from US$66.25 with his 2022 projection jumping to US$72.75 from US$65.00, pointing to “much-improved strip commodity prices.”
After also increases his 2022 natural gas forecast, Mr. O’Rourke made positive near-term cash flow revisions to the companies in his coverage universe, leading to higher target prices for their shares.
“Our revised commodity forecasts see directionally positive CF revisions to our equities (especially in the near-term), with 2022 CFPS [cash flow per share] estimates increasing from prior estimates by an average of 16 per cent, 13 per cent, 12 per cent and 15 per cent for our oil sands, large cap, medium cap, and small cap peer groups, respectively. Our price targets and NAVs are directionally positive as well, with upward revisions to the majority of our names, with near-term windfall cash flows assumed to reduce debt in our NAV modelling, while our longer-term pricing assumptions remain backwardated (and unchanged) at this time, leaving the potential for further significant NAV upside should we choose to improve our longer-term views at a later date.”
Mr. O’Rourke focused on five equities that he sees having “unique” investment thesis, raising their target prices:
* Whitecap Resources Inc. (WCP-T, “outperform”) to $11.25 from $10.75. Average: $10.59.
“WCP offers the highest return, across our E&P coverage, to our intrinsic NAV based target, at 60 per cent,” he said. “WCP’s CF generation is supported throughout the commodity cycle, by its peer leading corporate decline of 20 per cent (excluding the oil sands group), which it expects to maintain in 2022. WCP currently offers a 3.8-per-cent dividend yield, with a 2022e total payout of 45 per cent vs the peer group average of 47 per cent.”
* Cenovus Energy Inc. (CVE-T, “outperform”) to $22 from $19.50. Average: $19.69.
“CVE currently offers the second highest upside, of the oil sands group, to our intrinsic NAV based price target, at 44 per cent, while we see an average upside of 31 per cent for the group, a key driver of our outperform rating. The focus on Cenovus’ merger with Husky was on improving market access and integrating its operations from the wellhead to the refinery. Cenovus is now focused on the $1.2-billion in identified cost structure savings and the project high gradings that were laid out in the merger announcement, and given the confidence and execution that CVE has been conveying, we believe there is further potential upside, though broader economic inflationary pressures may limit that.” In addition, we continue to believe there is plenty of opportunity to improve upon the prior existing and Husky acquired assets (most visibly through the margin enhancing integration of Foster Creek/Christina with Husky’s Lloydminster upgrader). Finally, we believe that CVE is also best positioned for asset rationalization that accelerates debt repayment and the path to shareholder returns relative to peers, with the obvious focus being the Deep Basin and retail assets (while the Company clearly alluded to the potential for other asset sales on recent investor calls.”
* MEG Energy Corp. (MEG-T, “outperform”) to $17 from $14.75. Average: $14.58.
“MEG’s Christina lake project has the second lowest cumulative steam-oil-ratio of any SAGD project, while MEG plans to grow to its 100 mbbls/d capacity at the project in H2/22, which should further improve operating efficiencies,” he said. “MEG offers the highest oil price torque of the oil sands group, providing it the greatest rate of change in both leverage ratios and potential enterprise value, in a rising oil price environment. MEG holds the largest return, of the oil sands group, to our intrinsic NAV based targets, under our current modelling and assumptions, which consider a longer term US$55 per barrel WTI assumption that is modestly conservative (and thus less risky) than current strip considers. Finally, we have included $2.00 per share in tax pool value relative to Company guidance of $4.35 per share in immediately recognizable value; given the strong commodity outlook and increasing taxability of peers, we believe that more investors will begin to recognize the strategic value of defined tax pools assets in underlying upstream business models and their corresponding share prices. "
* Crew Energy Inc. (CR-T, “strong buy”) to $4.25 from $3.50. Average: $4.
“Crew is amongst the largest holders in the BC Montney with over 264,000 net acres of land and 409 mmboe of 2P reserves, and strong market access with connections to all three major egress systems,” he said. “With CNQ’s recently announced acquisition of Storm Resources (SRX-T), CR is uniquely positioned as one of the last remaining acquisition targets, while its asset base is positioned a short geographic distance to the Coastal Gaslink pipeline, which will transport gas to LNG Canada. Furthermore, CR’s recent heavy oil disposition (see our analysis here) has further simplified the story for a potential corporate sale and potential premium for investors.”
* Paramount Resources Ltd. (POU-T, “outperform”) to $31 from $21.25. Average: $27.83.
“Paramount has seen strong recent performance from its Karr and Wapiti Montney assets, which are now in the free cash flow generation stage, while initial results from its two recent Willesden Green Duvernay wells have been impressive; with Q3 reporting, POU provided strong average peak 30-day rates, despite facility constraints, of 1,498 boe/d (948 bbls/d liquids) on the two Willesden Green Duvernay wells,” he said. “Furthermore, POU has been delivering on our key theme of actionable returns to shareholders, having tripled its monthly dividend with Q3 reporting. POU sees the largest positive target price revision with this update, at $9.75 per share, related to three main factors: 1) we had been conservatively been modelling operating costs at Karr/ Wapiti, but have now partially improved our assumptions towards recent costs, given the continued strong performance on these assets; 2) given the strong initial results in the Willesden Green Duvernay, we have increased our land value for the assets (while remaining conservative and not modelling any development upside on the assets at this time); and 3) we have marked-to-market POU’s investment portfolio, which has significantly increase in value over the past quarter, including POU’s holdings in NV.”
Mr. O’Rourke’s other changes included:
- Arc Resources Ltd. (ARX-T, “outperform”) to $16.75 from $15.75. The average on the Street is $18.07.
- Baytex Energy Corp. (BTE-T, “sector perform”) to $4.75 from $3.50. Average: $4.77.
- Birchcliff Energy Ltd. (BIR-T, “outperform”) to $8.75 from $7.50. Average: $9.55.
- Canadian Natural Resources Ltd. (CNQ-T, “outperform”) to $65 from $58. Average: $62.39.
- Crescent Point Energy Corp. (CPG-T, “outperform”) to $9.25 from $8.50. Average: $9.13.
- Enerplus Corp. (ERF-T, “outperform”) to $15 from $12.25. Average: $15.25.
- Imperial Oil Ltd. (IMO-T, “sector perform”) to $48 from $45. Average: $47.84.
- Suncor Energy Inc. (SU-T, “sector perform”) to $37 from $33. Average: $38.96.
- Tourmaline Oil Corp. (TOU-T, “outperform”) to $60 from $55. Average: $27.83.
- Vermilion Energy Inc. (VET-T, “sector perform”) to $13.50 from $12.25. Average: $15.30.
Desjardins Securities analyst Michael Markidis expects the earnings trajectory of Nexus Real Estate Investment Trust (NXR.UN-T) to be “lumpy” in the next few quarters, citing “the portfolio transformation underway and the continued focus on scaling the industrial offering.”
“However, we expect it to further benefit from a multiple re-rating as it becomes a pure-play industrial REIT,” he said.
Mr. Markidis resumed coverage of the Oakville, Ont.-based REIT following its recent $163-million equity offering.
“The net proceeds from the equity offering are slated to partially fund the REIT’s current seven-property acquisition pipeline, which comprises approximately 1.7 million square feet with an expected purchase price of $315-million (4.7-per-cent going-in cap rate),” he said. “Two assets ($40.5-million) are subject to conditional purchase agreements. We believe NXR is at various stages of negotiation on the remaining properties and would expect staggered completion dates through early to mid-2023. Assuming execution of the pipeline, NXR’s pro forma industrial exposure will be 83 per cent.”
After incorporating its third-quarter results and the impact of both the equity offering and acquisition pipeline, Mr. Markidis cut his funds from operations projections through 2023.
He maintained a “buy” recommendation and $14.50 average for Nexus units. The average is currently $14.45.
Elsewhere, BMO’s Joanne Chen raised her target to $13.80 from $13.25 with an “outperform” rating.
“Our outlook on Nexus remains unchanged after Q3/21 earnings and today’s equity raise. Our positive thesis continues to be supported by NXR.UN’s steady transformation towards a pure-play industrial REIT. We also believe NXR.UN is well-positioned to capture the tailwinds from the next Canadian Industrial growth markets,” she said.
In a research note titled 3 Reasons to Buy Heading into YE, Raymond James analyst Jeremy McCrea said Topaz Energy Corp.’s (TPZ-T) share price “should finally catch up with fundamentals,” expecting the Calgary-based company to be added to the TSX Composite this quarter.
“Despite over $1.1-billion in accretive acquisitions and a strong management team that continues to structure/find A&D opportunities, Topaz’s share price is up only 29 per cent (XEG: 77 per cent),” he said. “Momentum has clearly been with ‘risk-on’ E&P names this year but as the recent pull-back has shown, it seems investors are getting a quick reminder of the sector’s volatility.”
Mr. McCrea pointed to three themes that he thinks “investors may not fully appreciate with Topaz” and why he expects Topaz’s share price to “perform quite strong,” adding: “Overall, there is meaningfully less risk vs. traditional E&Ps, especially when considering the top plays the company has royalty interest in. Combine this with stable infrastructure cashflow and spending commitments that remain off balance sheet and there is much more value to the name than what current trading metrics suggest.”
* The quality of the asset base.
“For TPZ, we believe its royalty assets belong in the top plays within Canada. Overall, TPZ has royalty agreements in 3 of the top 6 plays and most remaining royalty activity within the top quartile. If we were to see commodity prices drop, it is likely that drilling activity would be more durable in these plays versus the comparable universe,” he said.
* A valuation “mismatch”
“There is a lot of noise and assumptions used in valuing E&P companies and a good first step is to remove these distortions. What is generally missed with royalty operators is the consistency in their profitability and the ‘multiple’ that should be applied to these businesses given the lower risk,” he said.
* Interest from institutional investors is “still low (but quickly changing)”
“The name is well held by Energy focus funds with TPZ also seeing existing shareholders adding to positions more heavily than peers. Unfortunately, low interest by new shareholders has likely contributed to the small share price increase this year (and low valuation still). We think when(if) TPZ is added to the TSX Composite Index this quarter, it likely is put on the radar screen with many more institutional investors,” he said.
Keeping a “strong buy” rating for Topaz shares, he raised his target to $25 from $24.50. The average is $22.92.
BMO Nesbitt Burns analyst Thanos Moschopoulos thinks D2L Corp.’s (DTOL-T) valuation is “potentially attractive relative to its expected growth.”
However, he said he’d like “better comfort” on the “sustainability” of the Kitchener Ont.-based online learning software provider’s recent competitive traction, leading him to initiate coverage with a “market perform” rating.
“At its current valuation, we certainly see more upside than downside to the share price,” he said. “However, on a relative basis, we currently prefer some of our other names. There’s a macro element to this call, as we believe D2L would likely outperform, relatively speaking, if the overall SaaS universe were to experience substantial multiple compression. This isn’t something that we’re currently anticipating, but in our view, this would likely impact other stocks in our universe to a greater extent than D2L.”
He set a target for DRL shares, which began trading on the TSX on Nov. 3, of $19 per share.
Other firms beginning coverage include: TD Securities with a “buy” rating and $24 target and Eight Capital with a “buy” rating and $22 target.
In other analyst actions:
* JP Morgan analyst John Royall raised his Alimentation Couche-Tard Inc. (ATD.B-T) target to $59 from $54, keeping an “overweight” recommendation. The average target is $58.54.
* Canaccord Genuity analyst Matt Bottomley cut his Ayr Wellness Inc. (AYR.A-CN) target to $62 from $70 with a “buy” rating. The average is $68.67.
“Although we have trimmed our forward valuation, we note that AYR.A still trades at 5.6 times our 2022E EV/EBITDA- a significant discount to its MSO peers at 8.5 times, making it one of the better value propositions in the space (in our view),” he said.
* National Bank Financial analyst Cameron Doerksen cut his BRP Inc. (DOO-T) target to $131 from $135, below the $136.36 average, with an “outperform” rating.
* TD Securities analyst Mario Mendonca raised his Canadian Western Bank (CWB-T) target to $44 from $42, maintaining a “buy” rating. The average on the Street is $42.33.
* Mr. Mendonca cut his target for Laurentian Bank of Canada (LB-T) to $47 from $48, exceeding the $46.55 average, with a “hold” rating.
* Stifel analyst Stephen Soock trimmed his MAG Silver Corp. (MAG-T) target to $29.75 from $30.50 with a “buy” rating. The average is $29.43.
“We see the need for an additional $80-million in available liquidity as a warning sign that 1) there may be further escalation in the initial capital spend and 2) that the strong cash generated at the JV level may be notably delayed in making it to MAG’s balance sheet,” he said. “Despite this, our larger thesis remains intact with Juanicipio expected to mint $222-million per year over the next 5 years to MAG’s account at spot prices (or a spot FCF yield of 13 per cent) - even if it takes some extra time for the cash flow mechanics to get sorted.”
* National Bank’s Michael Parkin cut his Newmont Corp. (NGT-T) target to $92 from $95, reiterating an “outperform” recommendation. The average is currently $99.
* RBC Dominion Securities analyst Pammi Bir raised his NorthWest Healthcare Properties REIT (NWH.UN-T) target to $14.50 from $14 with a “sector perform” rating. The average is $14.77.
“On the back of an in line Q3 and strategic advances, our outlook for NWH continues to improve. Our view on fundamentals remains sound, supported by its defensive, long-duration healthcare real estate portfolio. As well, we’re particularly encouraged by progress in the UK, which sets the stage for the formation of its JV next year, while the de-leveraging program also appears to be on track. Net-net, we see its premium valuation as well-supported,” said Mr. Bir.
* National Bank’s Endri Leno raised his Rogers Sugar Inc. (RSI-T) target to $5.25 from $5. The average is currently $5.65.
* National Bank initiated coverage of Sabina Gold & Silver Corp. (SBB-T) with an “outperform” rating and $3.25 target. The average is $3.66.