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Inside the Market’s roundup of some of today’s key analyst actions

Citi analyst Stephen Trent thinks Bombardier Inc. (BBD.B-T) is “not as risky as it was,” believing it has made “significant” improvements over the past year, “including stronger EBITDA generation, successful debt refinancings and the launch of a new jet program.”

Reaffirming “a constructive view on the company’s prospects for higher jet sales, especially considering the continued lack of premium commercial airline capacity in the market,” Mr. Trent sees Bombardier is “well on its way” to reaching its 2021 operational targets. That led him to remove the “high risk” qualifier from his “buy” recommendation for Bombardier shares on Tuesday.

“The Canadian business jet manufacturer has also successfully increased the tenor of its debt and has launched a new aircraft program in recent months,” he said. “These achievements, along with meaningfully better price action/trading liquidity over the past year, suggest that a High Risk qualifier on the shares is no longer justified. This improved profile is also part of the impetus behind our justification for a higher fair value range on the shares — form 9-9.5 times 2023 estimated EBITDA to a new range of 9.5-10 times. As we continue to use the upper end of the range, it is worth noting that this adjustment contributes 20 cents per b-share to Citi’s target price. Although the revised target multiple now reflects a 17-per-cent premium to the stock’s long-term historical average, we would also now argue that Bombardier has a better operational profile versus its past.”

After modest reductions to his earnings projections through 2023, Mr. Trent trimmed his target for Bombardier shares to $2.10 from $2.20. The average on the Street is $2.32.

“Forecast adjustments for Bombardier include the incorporation of modestly higher, expected EBITDA, continued growth of the services segment, higher forecasted interest expense and 3Q’21 results into our model,” he said. “The latter adjustment includes a meaningful, sequential increase in net debt. Therefore, even as Citi’s EBITDA estimates increase mildly, the leverage bump-up shaves 10 cents per b-share off of our target price.”

He added: “On the back of successive, significant corporate re-shufflings and production adjustments, the company’s business model is more simplified. Although aerospace EBITDA generation is still recovering and the debt load remains high, the company’s efforts to boost its operational metrics and de-risk the balance sheet are trending stronger than we had anticipated.”


Touting it as “an attractive long idea for investors who want exposure to the global recovery in drilling activity but have a lower risk tolerance,” Stifel analyst Cole Pereira raised his rating for Pason Systems Inc. (PSI-T) to “buy” from “hold” on Tuesday.

Emphasizing the Calgary-based company has no debt, approximately $100-milliion in cash and its flagship electronic drilling recorder is on the majority of North American drilling rigs, he also noted Pason has “less exposure to headwinds around supply chains, cost inflation, labour shortages and market share fluctuations.”

“We also view Pason as having less exposure to many of the prevalent current headwinds in the OFS sector,” he said. “The company’s business is largely hardware and software driven, and is less labour and equipment intensive than many of its peers. While all companies have exposure to supply chain and cost inflation risks, we view Pason as having considerably less that could interrupt its business than other OFS sub-sectors. Moreover, PSI’s business is also less labour intensive and as such should be less vulnerable to the lack of labour availability; however, this factor will indirectly impact the company to the extent it impacts broader rig count growth. Additionally, we estimate that the company’s EDR is on 65 per cent of drilling rigs in the U.S. and 95 per cent in Canada, and its market share has typically been fairly stable. As such, we view the company as less vulnerable to market share fluctuations as activity recovers.”

The analyst thinks Pason’s “very strong” return on capital employed (ROCE) can only improve further, noting:
“Pason’s business is also capital light and as a result, the company generated an average ROCE of 11 per cent from 2014-2020, ranging from negative 13 per cent (2016) to 37 per cent (2014). We currently forecast PSI to generate a ROCE of 19 per cent in 2022, below its prior cycle peak of 24 per cent in 2018 but still up from 3 per cent in 2020 and 13 per cent in 2021. However, we estimate that if North American drilling activity ends up 5-15 per cent higher than our current forecasts, that Pason could generate a ROCE of 21-25 per cent in 2022.”

Expecting the stock to re-rate as the market becomes “more comfortable with its software business growth and improving ROCE,” he raised his target to $14 from $12. The average target on the Street is $13.79.


Vermilion Energy Inc.’s (VET-T) deal to raise its stake in the Corrib natural gas project off the coast of Ireland is “magically delicious,” according to Desjardins Securities analyst Chris MacCulloch.

Shares of the Calgary-based company jumped 10 per cent on Monday with the premarket announcement it will pay Equinor ASA $556-million for Equinor Energy Ireland Ltd., which owns a 36.5-per-cent stake in Corrib. Vermilion’s interest in the project will rise to 56.5 per cent.

“Every now and then, a transaction comes along that checks all the right boxes: financial accretion, strengthening the balance sheet, consolidating a core operating area and improving the corporate ESG profile,” said Mr. MacCulloch. “From our perspective, VET’s acquisition of an additional 36.5-per-cent interest in Corrib (which increased its stake to 56.5 per cent) met all of those conditions (and then some), given it also enhanced commodity price diversification through increased exposure to skyrocketing European natural gas prices. Moreover, VET has already been operating Corrib for several years now, which results in zero asset integration risk and minimal (if any) incremental G&A. For all those reasons, we view the transaction as a major strategic win for the story, ultimately supporting the resumption of the quarterly dividend payment.”

The analyst sees Vemilion “well-positioned to continue accelerating shareholder returns after meeting its corporate debt target for a D/CF [debt-to-cash flow] of 1.5 times based on mid-cycle commodity prices.”

Expecting the deal to be a potential catalyst for a dividend hike, share buybacks and/or a special dividend, which “should help attract more investors back to the story,” he raised his target for its shares by $1 to $19, maintaining a “buy” rating. The average on the Street is $15.90.

Elsewhere, National Bank Financial analyst Travis Wood upgraded Vermilion to “outperform” from “sector perform” with a $19 target, up from $18.

Others making target changes include:

* Stifel’s Cody Kwong to $18.50 from $15.50 with a “hold” rating.

“While this is generally seen as an asset in blow-down mode with limited upside potential, the financial aspect of this deal does meaningfully improve Vermilion’s forward outlook,” said Mr. Kwong.

* Raymond James’ Jeremy McCrea to $20 from $18 with an “outperform” rating.

“The consolidation of working interest in Corrib likely signals the start of a new era for VET. Not only is the transaction greatly accretive to free cash flow and leverage, but it allows the company to restart its dividend plan and ultimately, improve perception with investors as a company that is playing offense vs. defense,” he said.

* ATB Capital Markets’ Patrick O’Rourke to $14.50 from $13.50 with a “sector perform” rating.


Desjardins Securities analyst Justin Bouchard applauded MEG Energy Corp.’s (MEG-T) plan to continue to focus on debt reduction following Monday’s release of its $375-million capital budget for next year.

“The 2022 capital budget was right in line with expectations, as MEG has been transparent with its plans for 2022,” he said. “To be clear, those plans are focused on continuing to pay down debt. That said, given strong commodity prices, MEG noted that it will begin allocating about 25 per cent of free cash flow to share buybacks once it reaches an interim net debt target of US$1.7-billion (we estimate that should occur by the midpoint of 2022). The company will continue to pay down debt until it reaches a net debt target of US$1.2-billion. After that point, MEG expects to increase the percentage of free cash flow allocated to shareholders (how much is unclear) while continuing to strengthen its balance sheet.

“Net debt of US$1.2-billion corresponds to a D/CF multiple of 1.9 times at US$55/bbl WTI. Our sense is that companies will need to target D/CF below 1 times at US$55/bbl WTI to provide resiliency in the face of commodity price volatility. Based on our estimates, this equates to net debt of US$640-million. At current strip prices, MEG will not reach this level until at least 2024. But importantly, MEG holds an extremely long-lived asset base. While it may be painful to watch MEG pay down debt (some would argue that such a low level of debt flies in the face of finance theory), we view it as prudent positioning. Because let’s face it, the pressure to lower GHG emissions is increasing and access to capital for the oil & gas industry is going to be more and more difficult as a result.”

Citing its “continued focus on debt repayment and a disciplined capex program,” Mr. Bouchard raised his target for MEG shares to $13 from $12, keeping a “buy” recommendation. The average is $14.80.


The margin concerns that caused Mullen Group Ltd. (MTL-T) stock to decline following the late October release of its third-quarter financial results are “likely overdone,” said iA Capital Markets analyst Matthew Weekes upon assuming coverage of the Alberta-based trucking and logistics services company.

“When we dissect the reasons for the margin decrease, we are not overly concerned with MTL’s outlook,” he said. “These reasons include acquisitions (which we believe will improve as MTL integrates new businesses), fuel surcharge on rising fuel costs (which are OIBDA neutral), and the loss of CEWS. The addition of HAUListic will likely structurally lower OIBDA margins, but this should be offset by a higher cash conversion rate as HAUListic is asset-light. Consensus 2022 estimates remain unchanged post-Q3.”

Mr. Weekes increased the firm’s operating income before depreciation and amortization (OIBDA) for 2022 to $269-million from $260-million, citing “a greater assumed recovery in margins (outside of HAUListic.”

“We expect MTL to provide a 2022 OIDBA guidance range of $260-280-million,” he said. “Given MTL’s growth and resilience through COVID-19 and its low AFFO payout ratio (iA estimate 35 per cent in 2022), we expect a dividend increase. Finally, we expect an update on MTL’s NCIB.”

Now seeing Mullen shares “offering growth at a compelling valuation, particularly as it has declined more than 15 per cent from its recent highs,” Mr. Weekes reaffirmed a “strong buy” rating and $17.50 target ahead of a December update to its business plan. The average on the Street is $15.73.

“Based on historical EV/OIBDA NTM, we see MTL’s stock trading at a 1.5-times discount to its five-year historical average,” he said. “Additionally, we see the stock trading at a wide discount of 5.5 times relative to trucking and logistics competitor TFI International (TFII-T, Not Rated). While a quick comparison between the two indicates that a valuation discount for MTL will likely persist relative to TFII, we believe that there is room for some of the gap to narrow.”


In a separate research report, Mr. Weekes assumed coverage of Shawcor Ltd. (SCL-T), expecting near-term weakness but emphasizing a “positive” overall outlook.

Keeping the firm’s “speculative buy” recommendation for the Toronto-based global energy services company, he said Shawcor’s three business segments are “underpinned by different fundamentals.

“SCL’s [Pipeline & Pipe Services] (PL&PS) segment is characterized by late-cycle E&P CAPEX torque, exposure to large offshore projects, and a high fixed cost base,” he said. “Following a deep restructuring, we believe the segment is positioned for improved profitability going forward, but revenues remain naturally subject to variability. SCL’s [Composite Systems] (CS) segment includes the composite tanks business, which we view as having stable, maintenance-like characteristics, while demand for other CS products and services is primarily driven by North American drilling and completions activity. SCL’s [Automotive & Industrial] (A&I) segment is typically stable and has historically grown at a mid-single-digit rate, which we believe can continue going forward based on positive secular growth trend.”

“Looking past the transitory supply chain issues, we believe the positive outlook for SCL’s non-oil and gas businesses remains intact, and we estimate that these businesses will account for 60 per cent of the Company’s Adj. EBITDA in 2022. Additionally, although investors have reason to be skeptical, we believe that offshore oil and gas investment will improve beginning later in 2022 and beyond. The recent positive FID for the long-awaited Scarborough LNG project represents a tangible step in the right direction.”

Mr. Weekes said there’s valuation upside in Shawcor’s diversified operations, and now sees it " at an inflection point as it moves forward with a leaner pipe coating business and a new management team.”

He cut the firm’s target for its shares to $7.50 from $7.75 after valuation methodology changes. The average on the Street is $7.82.


In other analyst actions:

* Canaccord Genuity analyst Doug Taylor lowered his Carebook Technologies Inc. (CRBK-X) target to 40 cents, below the 70-cent average, from 90 cents with a “hold” rating.

“Carebook reported Q3 results which were below our expectations and with deeper cash burn following its InfoTech and CoreHealth acquisitions,” he said. “The company has seen heightened recent customer churn and a constrained balance sheet. Under new CEO Michael Peters, Carebook is streamlining its focus onto the employer health vertical and is undertaking significant cost-cutting efforts. We await further updates on the balance sheet as the most immediate near-term concern and recommend investors wait for the liquidity picture to improve before considering the potential of the new sales strategy. Our estimates have been lowered following the Q3 print and recent contract losses.”

* Mr. Taylor also reduced his target for Kraken Robotics Inc. (PNG-X) to 70 cents from 90 cents with a “buy” rating. The average is 85 cents.

“Kraken reported Q3 results [Monday] morning that were slightly below our model, however, maintained its annual guidance suggesting a substantial step-up in Q4,” he said. “The company also confirmed that it expects to deliver ‘solid growth’ in 2022 based on existing backlog and capturing expected order flow that had been delayed in recent years due to COVID-19. We see the outlook as largely consistent with our current model and have made only modest revisions, calling for $40.3M-million in 2022 revenue following the $28–30-million guided for 2021.”

* After completion of its US$46.2-million bought deal financing, National Bank Financial analyst Don DeMarco resumed coverage of MAG Silver Corp. (MAG-T) with an “outperform” rating and $32 target, exceeding the $28.52 average, while Raymond James’ Brian MacArthur cut his target to $28 from $28.50 with an “outperform” rating.

“We believe that MAG is one of the better options for investors looking for exposure to silver, given its 44-per-cent interest in the world-class Juanicipio joint venture (JV), which is a district scale, lowcost, high-grade silver development project with a strong partner and meaningful exploration potential,” said Mr. MacArthur. “Given the high quality of the asset, a strong partner, its near-term startup which could lead to a market re-rating, MAG’s financial position, and excellent exploration potential, we rate the shares Outperform.”

* Scotia Capital analyst Orest Wowkodaw lowered his target for Nevada Copper Corp. (NCU-T) shares to 85 cents from $1.25, keeping a “sector perform” rating, after coming off research restriction.

“We have updated our estimates to reflect (1) NCU’s recently completed $201-million equity financing and(2) further delayed ramp-up expectations at the 5,000tpd underground Cu project at Pumpkin Hollow,” he said. “Although near-term liquidity concerns have abated, we have materially reduced our NAVPS valuation. Overall, we view the update as mixed for the shares.

“Despite an attractive valuation (10% P/NAV of only 0.42 times), we rate NCU shares Sector Perform based on heightened operating and balance sheet risks.”

* Jefferies analyst Owen Bennett lowered his target for Organigram Holdings Inc. (OGI-T) to $3.49 from $3.83 with a “buy” rating. The average is $3.52.

* Mr. Bennett also cut his Terrascend Corp. (TER-CN) target to $16 from $20, remaining above the $15.04 average, with a “buy” rating.

* Following its acquisition of the assets of Ingram Funeral Home & Crematory in Georgia, CIBC World Markets analyst Scott Fromson raised his Park Lawn Corp. (PLC-T) target by $1 to $45, maintaining an “outperformer” rating, while Scotia’s George Doumet increased his target to $46 from $45.50 with a “sector perform” recommendation. The average is $46.36.

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