Inside the Market’s roundup of some of today’s key analyst actions
In response to Turquoise Hill Resources Ltd.’s (TRQ-T) deal with the Government of Mongolia to proceed with the development of the Oyu Tolgoi (OT) Phase II project, Canaccord Genuity analyst Dalton Baretto upgraded its shares to “buy” from a “hold” recommendation on Tuesday.
“This is the moment we have been waiting for; the two major overhangs on the project - the GoM demands and the financing approach - have now been answered, allowing stakeholders to re-focus on the steps required to bring this world-class project to completion,” he said in a research note. “The agreement with the GoM (outlined below) is largely in line with what we expected based on Resolution 103 passed on December 30th, 2021; in addition, an agreement on power supply addressing short- and long-term needs has also been put in place. The revised Heads of Agreement is also directionally in line with the past agreement and addresses both the funding needs and the Resolution 103 requirements.
“We understand that following these agreements, the undercut is scheduled to be initiated imminently (over the next 48 hours), and project manager (and TRQ majority shareholder) RIO has maintained guidance of first production in H1 2023 (we assume April). RIO has also maintained project capex guidance of $6.925 billion (including COVID-related costs) for now; that said, given myriad challenges and delays since that estimate, a re-forecast is underway and is expected sometime in H1 2022. We remind investors that the current capex estimate has a 15-per-cent tolerance, and our forecast currently reflects the top end of the range ($7.75 billion).”
With the removal of the political and financing overhangs on the project, Mr. Baretto hiked his target for Montreal-based company’s shares to $28 from $21. The average on the Street is $20.33, according to Refinitiv data.
Elsewhere, Scotia Capital’s Orest Wowkodaw raised his target to $26 from $22 with a “sector perform” rating.
“Overall, given the significant de-risking, we view the update as very positive for TRQ shares,” said Mr. Wowkodaw.
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Separately, Mr. Baretto lowered Trevali Mining Corp. (TV-T) to “sell” from “hold” following Monday’s release of “weak” fourth-quarter 2021 results and 2022 outlook.
“Negative across the board,” he concluded. “Q4/21 production of all three primary metals (Zn, Pb and Ag) was below our estimates; we note Zn production in particular which was 12 per cent below our forecast, with Perkoa and Caribou producing 10 per cent and 37 per cent less than we had anticipated, respectively. On a full-year basis, TV missed its Zn and Pb production guidance.
“2022 guidance offers little to compensate. Zn production guidance for the year is 22 per cent below our forecast, with guidance at all three assets coming in below our expectations. Pb and Ag production guidance is also below our expectations. We see no offset on the cost side; consolidated C1 and AISC guidance is 8 per cent and 17 per cent above our forecasts, respectively.”
Mr. Baretto cut his target for the Vancouver-based miner’s shares to $1.65 target from $1.75. The average is $2.79.
“Given the negative implied return to our revised target, our forecast for a near-term decline in the zinc price and our longer-term questions around the company’s future, we are downgrading TV,” he said.
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Nexus Real Estate Investment Trust (NXR.UN-T) is “becoming the next industrial pure play,” according to Echelon Capital analyst David Chrystal, who sees “exceptional” industry fundamentals supporting its growth.
He initiated coverage of the Oakville, Ont.-based REIT with a “buy” rating on Tuesday.
“Nexus REIT underwent a transformative 2021, acquiring nearly $700-million of industrial assets and advancing management’s strategy of becoming an industrial pure play,” he said in a research report “An aggressive acquisition strategy, which we expect to continue through 2022, has significantly increased the REIT’s exposure to the exceptionally strong industrial market, which should support organic growth going forward. Despite an impressive unit price performance in 2021, the REIT continues to trade at a discount to the industrial peer group, and in our view, this gap should narrow over time as it increases its industrial weighting through acquisitions and dispositions of non-industrial assets.”
Mr. Chrystal called Nexus’ acquisition push “significant,” noting it has announced $1.1-billion in deals, doubling its portfolio in 2021 with $400-million under contract to close in 2022 and 2023.
“Rapidly increasing demand for industrial space in an already tight market supports management’s strategic shift to focus entirely on industrial assets, in our view,” he said. “National industrial availability has hit a historic low, dipping below 2 per cent after an exceptional year of leasing in 2021, while industrial rents increased more than 10 per cent year-over-year. Demand for industrial assets remains elevated, driving cap rate compression, which combined with higher rents, drove a 28-per-cent year-over-year increase in asking prices for industrial properties in 2021. New supply is not likely to provide any relief, as more than two-thirds of space currently under construction is either build-to-suit or speculative development that is already pre-leased.
“Despite intense competition for industrial assets, we believe that management has demonstrated its ability to source and complete off-market transactions. We expect the REIT will continue to leverage its management team and board to source deals, and complete its industrial transformation. Though we do not include any speculative acquisitions in our forecast, we believe there could be meaningful upside to our 2023 estimated FFO [funds from operations] per unit (7-12 per cent) should management complete incremental acquisitions in line with the volumes seen in 2021.”
Mr. Chrystal set a target of $14.50 per unit. The average on the Street is currently $14.45.
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Scotia Capital analyst Michael Doumet thinks Boyd Group Services Inc. (BYD-T) is “on the road to recovery,” seeing industry margin pressure as “unsustainable” and believing its shares will follow auto insurance companies higher.
“We think this is a golden buy-the-dip opportunity for BYD shares (although we appreciate that may be the case for several names, given the market’s recent decline),” he said. “While 4Q21 may not provide an immediate catalyst for the name, we see increasing evidence that the industry is taking corrective measures that will alleviate margin pressure in the coming quarters. We expect Boyd’s margin normalization to progress through 2022 (as margins are expected normalize for the auto insurers). Consequently, we expect the negative sentiment to reverse in the near-term, as it already has for the auto insurers (who share the same profit pool), and for BYD to outperform in the NTM [next 12 months].”
Pointing to inflation headwinds and related margin pressures in the industry, Mr. Doumet thinks “the fate of the auto insurers and auto repairers are closely linked” and anticipates an attractive opportunity for investors moving forward.
“In 2020, at the onset of the pandemic, auto insurers reduced premiums (and offered discounts) as customers drove less. Even still, they netted wider margins,” he said. “In 2021, costs rose as frequency and severity ramped (the latter due in part to higher used vehicle and parts prices) and led to margin compression for the auto insurers. Since 2H21, the auto insurers in the U.S. have announced several price hikes, which are expected to exceed repair/loss costs and enable them to recapture margins as well as (we think) accelerate higher pass-throughs to auto repairers. With that in mind, we note the shares of the insurance companies with high exposure to autos, including ALL-US (not rated) and PGR (not rated), have already seen a shift in sentiment with their shares rallying in anticipation of such a margin recovery. Boyd’s shares will soon too, in our view.”
Cutting his target for Boyd shares to $240, below the $244.77 average on the Street, from $260 with a “sector outperform” recommendation, Mr. Doumet acknowledged a lack of near-term catalysts. However, he thinks the company offers “significant long-term upside” and called it his “top pick for 2022.”
“While 4Q21 may not provide an immediate catalyst for the name, we see increasing evidence that the industry is taking corrective measures that will alleviate margin pressure. We expect margins to normalize in the coming quarters as auto insurers raise prices, lifting their margins and, presumably, the margins of their auto repairer suppliers,” he said.
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Enerflex Ltd.’s (EFX-T) US$725-million deal for competitor Exterran Corp. has “significant” benefits, including increased scale and " improvements in geographic reach and earnings quality,” according to Stifel analyst Cole Pereira.
However, seeing positive free cash flow “pushed out to 2023,” he lowered his recommendation for the Calgary-based company to “hold” from “buy.”
“While the combination of the two companies is attractive, the near-term capital requirements of the business increase significantly as a result of the deal,” he said. “On a pro-forma basis the two companies expect to invest US$440-490-million (approximately $550-620-million Canadian) in 2022 for growth capex ($250-280-million), maintenance capex ($50-60-million) and WIP investments ($250-280-million). However, the WIP investment should largely reverse in 2023E. We now forecast FCF to be negative in 2022 ($9-million) but this metric should improve significantly in 2023 ($258-million). While our 2023 FCF [free cash flow] yield increases to 31 per cent from 20 per cent prior, our 2023 EV/FCF [enterprise value to FCF] multiple increases to 8.9 times from 6.9 times, highlighting that the majority will be diverted to paying down debt vs. increasing shareholder returns.”
Mr. Periera thinks most oilfield service investors are primarily focused on the next year. Given the timeline for gains from this deal, he lowered his rating and reduced his target to $8 from $11. The average is $10.47.
Elsewhere, CIBC’s Jamie Kubik cut his target by $1 to $9 with a “neutral” rating.
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Scotia Capital analyst George Doumet sees “substantial strategic merits” in Colliers International Group Inc.’s (CIGI-Q, CIGI-T) acquisition of a 75-per-cent stake in infrastructure investment management firm Basalt Infrastructure Partners LLP.
“[We] highlight Basalt’s very strong margins (above those of Harrison Street), impressive growth profile and substantial synergy opportunities on the CIGI platform,” he said. “They mainly include (in order of importance): (i) cross-selling opportunities between CIGI IM and Basalt’s investor bases, (ii) increased debt financing activities through Colliers Mortgage and (iii) a boost in services provided through Colliers Engineering.”
Shares of Toronto-based Colliers rose 1.7 per cent on Monday following the premarket announcement of the deal, which it anticipates will contribute annual run rate of management fee revenue of between US$65-million and US$70-million, adjusted EBITDA of US$35-million to US$40-million and expects operating results to be “significantly accretive.”
“With a presence in Europe and North America, Basalt specializes in mid-market infrastructure equity investments across the utility, transportation, energy/renewables, and communications sectors,” said Mr. Doumet. “Similar to Harrison Street, Basalt has delivered strong returns across its closed-end funds and invests on behalf of pension plans, sovereign wealth funds, endowments, insurance firms and family offices.”
“We highlight that Basalt has experienced substantial revenue growth in the last few years, especially with the recent closing of a $2.7B fund; we expect bigger fundraising activity over the NTM.”
Mr. Doumet raised his target for Colliers shares to US$173 from US$170, keeping a “sector outperform” recommendation. The average is US$161.17.
“CIGI shares have enjoyed a strong rally and valuation has finally caught back up to a (justified) premium vis-à-vis its U.S. peers. That said, we continue to see upside from accelerated (and potentially larger-scale) M&A as the company puts to work its under-levered balance sheet,” he said.
Others making target changes include:
* Raymond James’ Frederic Bastien to US$185 from US$180 with a “strong buy” rating.
“We took our rating on Colliers International up a notch yesterday because we feel the stock is offering investors solid growth potential at a reasonable price,” he said. “Also underpinning our upgrade to Strong Buy was the expectation that CIGI will harness the power of its unique partnership model to further expand its engineering services and Investment Management (IM) platforms this year. Lo and behold, the company announced within minutes an agreement to buy 75 per cent of Basalt Infrastructure Partners, which manages more than $8.5-billion of equity investments in Europe and North America. Although the deal isn’t expected to contribute to results until 4Q22, it is more material than the acquisition we had already built into our model.”
* BMO’s Stephen MacLeod to US$177 from US$162 with an “outperform” rating.
“We view Colliers’s investment in Basalt Infrastructure Partners positively, as it: 1) complements the investment management business (more than $8.5 billion in acquired AUM vs. $46 billion existing); 2) provides opportunities for future growth through cross-selling and leveraging Colliers’s global knowledge base; 3) is 7-per-cent PF accretive to EPS; and 4) is consistent with management’s strategy to increase recurring revenue,” said Mr. MacLeod. “We continue to believe that the successful execution of Enterprise ‘25 will lead to shareholder value creation, building upon management’s long-term track record of success.
* CIBC’s Scott Fromson to US$185 from US$180 with an “outperformer” rating.
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Despite an improved outlook for the oil sands, CIBC World Markets analyst Jacob Bout sees North American Construction Group Ltd. (NOA-T) as “fairly valued,” leading him to initiate coverage with a “neutral” rating.
“At the current share price, NOA’s valuation is in line with (or at a slight premium to) its historical valuation/energy services peers and at only a slight discount to infrastructure-focused Canadian construction comps,” he said. “We believe that NOA’s diversification efforts are nearly complete. While we expect reasonable organic growth in the next couple of years, we anticipate that oil sands-related work will constitute approximately 50 per cent of EBITDA (hampering multiple expansion and ESG scores).
“NOA is trading at 4.2 times and 4.0 times our 2022 and 2023 estimates on an EV/EBITDA basis, respectively, in line with its historical averages and energy services peers (4 times). While NOA is trading at a slight discount to Canadian construction comps (ARE and BDT trade at 4.5 times and 4.7 times 2023E EV/EBITDA, respectively), we think it is warranted (given ARE/BDT’s relatively higher exposure to pure-play infrastructure and Eastern Canada).”
Mr. Bout set a $22 target, below the $25.30 average.
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Calian Group Ltd. (CGY-T) is a “resilient business with very healthy growth prospects provides shelter from volatile trading environment,” said Desjardins Securities analyst Benoit Poirier.
Ahead of its Feb. 16 Investor Day event, Mr. Poirier reaffirmed his investment thesis for the Ottawa-based company, believing its ”resilient four-piston engine has been forgotten” with its shares down 13 per cent year-to-date versus a 3-per-cent decline for the TSX.
“During the event, we expect to hear more about management’s vision for its four businesses (Health, Advanced Technologies, Learning and IT, and Cyber Security), as well as the expected launch of the virtual healthcare platform,” he said. “Notably, Calian is currently looking to leverage the recent acquisition of Dapasoft, a provider of digital transformation products and services for the healthcare industry, and launch a virtual healthcare platform to improve its go-to-market strategy while potentially increasing its exposure to recurring revenue. Over the years, CGY’s Health segment has grown considerably from revenue of $88-million in FY17 to $195-million in FY21, while its EBITDA margin has expanded by 510 basis points to 17.8 per cent. Ultimately, while the division benefited in FY21 by approximately $30-million from some COVID-19-related work, we estimate that the resurgence of the pandemic in early CY22 should support the segment (we remain conservative and forecast no revenue growth in FY22).”
Mr. Poirier said he sees the Investor Day as a “key catalyst for the story,” expecting it will “help investors better appreciate the company’s healthy pipeline of organic growth opportunities (13-per-cent organic growth on average over the past three fiscal years).”
“We also believe management is ideally positioned to continue to deploy capital toward M&A, thanks to the company’s pristine balance sheet (net cash of $79-million as of 4Q FY21),” he added. “Assuming CGY leverages its balance sheet to 2.5 times net debt to EBITDA (in line with management’s comfort range) today, management would have access to $300-million of dry powder, based on our calculation (assuming it paid 8–9 times EBITDA for M&A, above historical multiples of 5.5 times).
“We therefore encourage investors to revisit the story and buy the shares to shelter from market volatility while benefiting from the dividend yield of 2.1 per cent. CGY offers investors an attractive opportunity to invest in a diversified, resilient and growing business at an attractive valuation, especially vs Canadian healthcare peers (trading at 0.9 times EV/2022 revenue vs peers at an average of 2.1 times or 8.7 times EV/2022 EBITDA vs peers at an average of 10.7 times).”
Calling Calian one of his favourite stocks for 2022, he maintained a “buy” recommendation and $78 target. The current average on the Street is $78.13.
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Bernstein’s David Vernon cut his financial expectations for Canadian National Railway Co. (CNR-T) on Tuesday, pointing to a series of near-term challenges, including Western Canadian weather and the lingering effects of summer drought on volumes.
The analyst now expects fourth-quarter 2021 revenue and earnings results, scheduled to be released after the bell on Tuesday, to fall below the Street’s expectations.
“The primary open question at this stage is who is going to be in the CEO seat,” he added.
Mr. Vernon lowered his target for CN shares to $167 from $168 with an “outperform” rating. The average is $159.29.
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After performing “very well” in 2021 on the back of record industry-wide flows and assets under management levels, Scotia Capital analyst Phil Hardie said he’s remaining “largely on the sidelines for TSX-listed asset managers, pointing to “mid-cycle conditions and more limited risk-reward potential for investors.”
“The asset managers are experiencing a challenging start of the year facing a broad market sell-off, the return of market volatility, and rising interest rates,” he said. “In that context, we believe that the ability to 1) sustain positive net flows in an operating environment that is likely to experience a softening of mutual funds net sales following a record year, 2) manage expenses in an inflationary environment that is coupled with lower levels of AUM, 3) effectively deploy excess capital towards value creation opportunities, and 4) capitalize on liquid alternatives, will be key trends to watch for 2022.”
In a note released Tuesday, Mr. Hardie trimmed his financial estimates for companies in his coverage universe to reflect “year-to-date broad market performance.”
That led to him to lower his target prices for these stocks:
- AGF Management Ltd. (AGF.B-T, “sector perform”) to $9.50 from $10.50. The average on the Street is $9.18.
- CI Financial Corp. (CIX-T, “sector perform”) to $29 from $32. Average: $34.
- Fiera Capital Corp. (FSZ-T, “sector perform”) to $12 from $12.50. Average: $11.79.
- IGM Financial Inc. (IGM-T, “sector perform”) to $55 from $57. Average: $56.74.
Conversely, Mr. Hardie raised his Guardian Capital Group Ltd. (GCG.A-T, “sector outperform”) target to $49 from $48, exceeding the $47 average.
“Return of market volatility is likely to weigh on retail funds sales and lead to multiple compression across the sector. Volatile market conditions and steep sell-off to start 2022 are likely to weigh on retail investor confidence and ultimately lead to a softening of retail funds sales and multiple compression across the asset managers. Since the beginning of the year, we estimate that valuation multiples have already compressed across North America. That said, we estimate that the valuation disparity between U.S. and Canadian asset managers has now reverted to historical mean with Canadian fundcos trading at a 42-per-cent discount to U.S. peers.”
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In other analyst actions:
* Coming off research restriction, CIBC World Markets analyst Robert Bek upgraded Rogers Communications Inc. (RCI.B-T) to “outperformer” from “neutral” with a $68 target, rising from $64 but below the $70.27 average.
“Many forward elements of the Rogers thesis hinge on the regulator’s verdict on the proposed acquisition of Shaw Communications, however, we view the deal as a material positive for Rogers, and expect approvals (albeit with manageable mitigation) to provide Rogers with opportunity to exhibit strong execution on synergies and on forward growth potential, even with the forced sale of some assets,” he said. “At current price levels, we view the shares as undervalued, even after capturing higher near-term capex requirements and increased competition in the cable segment. Our Outperformer upgrade stems from this conclusion, and appears unlikely to be undermined by any regulator approval requirements.”
* Mr. Bek hiked his Shaw Communications Inc. (SJR.B-T) target to $40.50 from $27, keeping an “outperformer” recommendation. The average is $40.36.
* CIBC’s Scott Fletcher lowered his Well Health Technologies Corp. (WELL-T) target to $8 from $11. The average is $11.17.
“With transformational M&A now in the rear-view, we expect that the upcoming year will provide additional clarity on the organic growth profile of WELL’s portfolio of assets,” he said. “We continue to appreciate the combination of stable free cash flow provided by CRH/MyHealth and the higher growth and cross-sell potential offered by the virtual services. With this note, we update our sumof-the-parts methodology to value WELL’s omnichannel clinical assets on an EV/EBITDA basis and reduce our EV/sales multiple on the virtual services business to reflect sector-wide multiple contraction.”
* Expressing “increased confidence” in the its outlook, RBC Dominion Securities analyst Greg Pardy increased his MEG Energy Corp. (MEG-T) target to $18 from $15 with an “outperform” rating. The average is $16.27.
“: Our bullish stance towards MEG reflects its capable leadership team, top-quartile oilsands operations at Christina Lake, diversified market access to the U.S. Gulf Coast, balance sheet deleveraging and shareholder returns (share buybacks) which should arrive in 2022,” he said.
* In a preview of fourth-quarter 2021 earnings season for base metals producers, Stifel’s Alex Terentiew raised his targets for Freeport-McMoRan Inc. (FCX-N, “buy”) to US$49 from US$48 and Teck Resources Ltd. (TECK.B-T, “buy”) to $53 from $50. The averages on the Street are US$44.25 and $46.71, respectively.
* Canaccord Genuity analyst Joseph Vafi cut his Nuvei Corp. (NVEI-Q, NVEI-T) target to US$110 from US$140 with a “buy” recommendation. The average is US$112.29.
“While we believe Nuvei has been on a roll for a while now, still we cannot but be encouraged by impressive business development activity early this year: first with Wix and second with approval by the New York State Gaming Commission to process payments with recently licensed online sports betting platforms (OSB),” he said. “Canaccord’s online gaming equity research team estimates that total betting handle from online sports betting in NY could exceed $20-billion in a few years. Also, we believe that Wix powers 1.6 per cent of global websites.
“While this news flow is in and of itself encouraging, another important takeaway here is that these deals were inked after a character-attack short report was issued last December. The result, in our view, is that the Nuvei value proposition remains quite intact in the marketplace and that the short report has not achieved its goal of creating growth headwinds. This has created an ever-greater disconnect between financial performance and NVEI share price, as the stock remains at similar levels to when the short report was issued. With Q4 earnings de-risked by management’s reaffirmation of its short- and medium-term outlooks, we see attractive risk/reward in NVEI shares despite market conditions.”
* Scotia Capital analyst Patricia Baker resumed coverage of Dentalcorp Holdings Ltd. (DNTL-T) following its $115-million bought deal with a “sector outperform” rating and $19 target, down from $20 and below the $20.36 average.
“DNTL has an established reputation as an acquirer of choice in the Canadian dental practice market and provides a compelling value proposition to selling dentists,” she said. “Selling dentists are freed from administrative burdens, maintain clinical autonomy, gain access to DNTL’s technology and expertise, and participate in any potential upside through performance-based compensation. Growing the practice is supported by DNTL’s technology platform and operating capabilities. Additionally, partner dentists, as shareholders, can benefit from growth across the network through share ownership. DNTL has a solid track record of completing successful mergers and acquisitions (M&A), and with each acquisition, DNTL leverages its scale and centralized operating and purchasing efficiencies to increase cost and revenue synergies. The pipeline for ongoing M&A activity is robust and in fact DNTL is accelerating the pace of growth. We believe DNTL’s heightened profile as a public company as well as the challenges faced by dental practices throughout the pandemic have both contributed to a higher level of activity.”
* Ahead of Friday’s release of its first-quarter results, Scotia Capital analyst Paul Steep cut his target for Real Matters Inc. (REAL-T) shares to $10 from $13 with a “sector perform” rating. The average is $11.22.
“We remain cautious on Real Matters shares given the impact of repositioning the firm’s U.S. title business and cyclicality in the U.S. mortgage refinancing market,” he said. “We would take a cautious approach to the stock and watch for stabilization of the firm’s Title operations and uptake by new Tier 1 and 2 clients in this segment. Factors we are monitoring in revisiting our view on the shares include the ramp-up of volumes in U.S. Title, given the new Tier 1 client launched during 2021 and additional new client wins.”
David Leeder