Inside the Market’s roundup of some of today’s key analyst actions
While its fourth-quarter 2021 results met his expectations, RBC Dominion Securities analyst Greg Pardy downgraded Suncor Energy Inc. (SU-T) on Tuesday, seeing higher relative returns elsewhere in his coverage universe.
“Ultimately, we believe Suncor’s operating performance — safety and reliability — will determine its path of relative market performance, but this will take time.” said Mr. Pardy, moving his rating to “sector perform” from “outperform.”
He made the change alongside the release of the firm’s Global Energy Research Commodity Price Update, which saw RBC raise its Brent price projection for this year by 27 per cent to US$101.11 per barrel (from US$79.50) and its WTI estimate by 28 per cent to US$98.30 per barrel (from US$76.75). Its 2023 forecasts rose by 13 per cent and 14 per cent, respectively, to US$86.50 and US$84.75.
“Energy market conditions — across much of the spectrum — have not experienced the degree of tightness seen today since the mid-2000s,” RBC Energy & Utilities Equity Team said. “In our minds, stern capital discipline — brought about by market preferences and ESG considerations — has structurally severed the traditional supply response chain. It has also unbottled a genie capable of supporting a multi-year bull market for energy prices and stocks which have begun to resemble ATM machines. Positioning wise, we favor energy companies with cash flow leverage towards the upstream + downstream segments. Free cash flow generation and still manageable cost inflation have supported accelerated balance sheet deleveraging, while limited appetite for organic investment continues to support abundant shareholder returns of all kinds. The pace and scale of consolidation activity, particularly in the upstream segment, remains the biggest wildcard in our eyes.”
With that view, Mr. Pardy increased his cash flow per share projections for Suncor to $12.60 in 2022 and $14.87 in 2023 from $9.08 and $12.05. His earnings per share estimates jumped to $7.97 and $9.30 from $4.79 and $6.01.
His target for Suncor shares rose to $42 from $37. The average on the Street is $43.65, according to Refinitiv data.
“Suncor is trading at a debt-adjusted cash flow multiple of 3.1 times (in line with our Canadian peer group avg. of 3.1 times), and at a free cash flow yield of 25 per cent (vs. our peer group at 24 per cent) in 2022,” said Mr. Pardy. “In our opinion, Suncor should trade at an average multiple vis-à-vis our global peer group given its physical integration, free cash flow generation and favorable shareholder returns, partly off-set by mixed upstream operating performance in recent years.”
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ATB Capital Markets’ Chris Murray thinks Mainstreet Equity Corp.’s (MEQ-T) growth profile is now “fairly reflected” in its valuation.
Accordingly, following Monday’s release of first-quarter results that narrowly missed his expectations, the equity analyst lowered his rating for its shares to “sector perform” from “outperform.”
The Calgary-based residential real estate company reported revenue of $43.3-million, up 12.4 per cent year-over-year narrowly lower than Mr. Murray’s $44.1-million estimate. Net operating income rose 12.3 per cent to $25.9-million, below his projection of $26.9-million.
“The Company reported an overall vacancy rate of 7.8 per cent in Q1/FY22, down 110 basis points sequentially which we expect will receive a further boost from normalizing levels of immigration and foreign students in 2022 as travel restrictions continue to ease,” Mr. Murray said. “We also see the constructive outlook for commodity prices supporting occupancy rates in MEQ’s core markets with management highlighting strengthening in-migration trends in Alberta and Saskatchewan as a recent tailwind for vacancy rates that it expects to continue.”
The analyst sees Mainstreet’s portfolio is a strong position for a rising rate environment moving forward.
“Given near-term expectations around rising rates, management noted that it has already refinanced its previous 2022 maturities and is in the process of extending out its 2023s, all of which are being refinanced with ten-year terms to minimize refinancing risk,” he said. “With an average term and rate of 6.7 years and 2.52 per cent respectively, we do not expect the prospect of moderately higher rates to have a significant impact on MEQ’s debt portfolio or growth strategy.”
Also seeing M&A remaining a growth driver, Mr. Murray raised his target for its shares to $140 from $135. The average is $138.33.
“The Company delivered a solid quarter despite facing a difficult operating environment and general inflationary pressure,” he said. “We continue to see pandemic-led uncertainty remaining a near-term catalyst for management’s contrarian, countercyclical M&A strategy with a strong commodity price environment and easing travel restrictions supporting a normalization in occupancy levels in several of the Company’s key markets. While we remain positive on the Company’s longer-term outlook, we are downgrading MEQ to Sector Perform as prevailing valuations adequately reflect our expectations for near-term growth and estimate of fair value.”
“With shares up over 75 per cent in the past year and 12.5 per cent year to date, valuations have retraced toward the peer group average, and now, for the first time in several years are now above the group, trading at a premium on both a price to book and price to FFO basis. While capitalization rates have remained quite low for multi-family residential and could modestly improve alongside the Alberta economy, we believe rising interest rates could offset any gains as spreads remain steady or wide”
Elsewhere, Acumen Capital’s Jim Byrne raised his target to $155 from $135 with a “buy” rating, while TD Securities analyst Lorne Kalmar bumped up his target to $140 from $130 with a “hold” rating.
“The supply/demand fundamentals for multi-family residential properties remain very strong and should drive MEQ higher over the next several years. Immigration, return of students to campus, and economic growth in the West should provide the company strong tailwinds for 2022 and beyond,” said Mr. Byrne. “The company has increased its presence into B.C. while still adding properties in Alberta at very attractive prices. We believe the shares are attractively valued at current levels despite the strong performance in the past twelve months.”
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After it agreed to several demands from an activist shareholder RCF Management on Monday, BMO Nesbitt Burns analyst Jackie Przybylowski raised her rating for Iamgold Corp. (IAG-N, IMG-T) “on expectations of improved execution and strategic vision for the company going forward.”
The Toronto-based miner’s changes include the appointment of three new directors, including Maryse Belanger,former president of Atlantic Gold Corp., as chair.
“IAMGOLD’s announcement [Monday] contrasts with its February 2 response to the RCF proposals, which the company then described as ‘overreaching demands,’” said Ms. Przybylowski. “In our view, the revised position shows a positive and open-minded approach by the company towards best practices, including board renewal and independence.”
“We expect the renewed board will take a fresh look at company management, including the likely appointment of an external candidate as permanent CEO. While we are supportive of CFO Daniella Dimitrov in the role on an interim basis, we believe that the addition of a known “turnaround” expert with experience in improving challenged Canadian mining operations would provide a boost of confidence in the improvement of challenged operations and in the successful execution of the Côté project, which currently has razor-thin margins of error on operations and financing. Appointment of a permanent CEO would also provide more opportunity for Ms Dimitrov to focus on optimizing the company’s balance sheet in her role as CFO.”
Believing the new board and management team will “improve operations and project execution, and will have the confidence of the market as they do so,” the analyst moved Iamgold shares to an “outperform” recommendation from “market perform” with a US$3.25 target, up from US$2.75 and above the US$3.05 average.
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Ahead of the release of its fourth-quarter 2021 results on Friday, Scotia Capital analyst Konark Gupta said he’s “grown more cautious” on Air Canada’s (AC-T) near-term outlook, pointing to the impact of the Omicron variant and rising fuel prices.
“While Q3 marked a turnaround in EBITDA and cash flows, our already low conviction in such positive trends this winter has weakened further,” he said.
“However, we remain positive on AC as Omicron fears have likely peaked and Canadian airlines are now waiting for relaxation in travel restrictions, which could be announced in the near term and should catalyze recovery later this year. In addition, AC’s upcoming investor day (March 30, Toronto) should provide investors with long-term visibility (through 2024), which could form the basis for stock’s valuation.”
Mr. Gupta expects both Omicron and cold weather in late December to hurt its quarterly results, projecting capacity will come in down 49 per cent from the same period in 2019, which is below the airline’s expectation of a 47-per-cent drop.
“Although capacity should be up sequentially (up 21 per cent quarter-over-quarter), we expect load factor to decline toward 65 per cent from 71 per cent in Q3, in line with seasonality, implying traffic recovery to 41 per cent of 2019 levels vs. 28 per cent in Q3. However, cargo revenue could grow further and remain 100 per cent above 2019 levels, aided by incremental demand in November and December due to B.C. floodings. AC received the first of its planned eight dedicated B767 freighters in Q4, deploying it initially on the Toronto-Vancouver route (amidst floodings) before putting it into service in international markets (Frankfurt, Miami, Quito, Lima, Mexico City and Guadalajara).
“We maintain our fuel price assumption of $0.83 per litre, which implies a material headwind both quarter-over-quarter and year-over-year. Overall, we expect $2.3-billion in revenue (-49 per cent vs. 2019), negative $125-million in EBITDA (excluding CEWS), and negative $457-million in FCF, suggesting reversal in positive Q3 trends (EBITDA was positive in August and September). Capex timing (delivery of 5 B737 MAX and 3 A220 jets) also contributes to our negative FCF expectation, while we are assuming a sequential decline in net bookings due to Omicron, which could prove conservative (similar to Q3). We are below consensus across most metrics.”
After reducing his full-year 2022 estimates, Mr. Gupta cut his target for Air Canada shares by $2 to $29, keeping a “sector outperform” recommendation. The average is currently $29.31.
“We have a positive view on Air Canada given air travel demand continues to recover, albeit with interim volatility due to new variants, and travel restrictions in Canada are poised to ease in the near term,” he said. “We believe AC is fundamentally well-positioned to not only recover from the deepest industry recession ever given its strong balance sheet and leading market position but to also generate stronger FCF in the post-pandemic world given its extended fleet renewal cycle will largely end in 2023 while its non-fuel unit costs have improved structurally.”
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TD Securities analyst Mario Mendonca raised his target prices for Canadian bank stocks on Tuesday. His changes include:
- Bank of Montreal (BMO-T, “buy”) to $170 from $160. The average on the Street is $159.78.
- Bank of Nova Scotia (BNS-T, “buy”) to $100 from $94. Average: $95.16.
- Canadian Imperial Bank of Commerce (CM-T, “buy”) to $180 from $165. Average: $167.81.
- Canadian Western Bank (CWB-T, “buy”) to $47 from $43. Average: $42.91.
- Laurentian Bank of Canada (LB-T, “hold”) to $47 from $43. Average: $46.50.
- National Bank of Canada (NA-T, “hold”) to $110 from $105. Average: $105.90.
- Royal Bank of Canada (RY-T, “buy”) to $165 from $150. Average: $145.31.
“The Big Bank stocks have approximately doubled since we upgraded the sector to OVERWEIGHT in March 2020 and have materially outperformed every financial services sectors in Canada and the U.S. as well as the S&P/TSX and S&P500 over the last 12 months. The Big Banks P/E (2023E) is also approaching 12.0 times, a level we very rarely see the group exceed more than just briefly. We believe consensus estimates can move higher, but we do not expect the move to be significant; almost certainly not as meaningful as what we saw in 2021. However, we believe the ;hedge value’ against rising interest rates that the group offers could cause valuations to overshoot in the near term. We continue to rate the group OVERWEIGHT, but we continue to favour MFC, IAG, and IFC over the banks,” said Mr. Mendonca.
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Though he saw Magna International Inc.’s (MGA-N, MG-T) fourth-quarter 2021 results as “strong,” Citi analyst Itay Michaeli warned of the presence of “many of the same headwinds that we’re seeing across the supplier space, namely higher inflationary and R&D costs.”
“These cost headwinds contributed to Magna guiding for a 6.0-6.4-per-cent 2022 operating margin, below our 6.8-per-cent estimate,” he said.
That led him to reduce his 2022 and 2023 earnings per share projections and dropping his target for Magna shares to US$94 from US$100, keeping a “buy” rating. The average target on the Street is US$97.
“We continue to like the risk/reward in the shares and reiterate our Buy rating. In terms of potential catalysts, we’d note the following: (1) Additional EV-related developments at Complete Vehicle Assembly; (2) Planned May investor event; (3) New business wins in key growth verticals (EV/ADAS),” Mr. Michaeli said.
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Seeing Petroshale Inc. (PSH-X) as “a key consolidator in the space” and looking for it to be “aggressive on the M&A front, especially in the U.S. North Dakota Williston Basin,” BMO Nesbitt Burns analyst Ray Kwan initiated coverage of the Calgary-based company with an “outperform” rating,
“PetroShale Inc. (soon to be renamed Lucero Energy Corp) is the fourth iteration of the TriStar/Result/TORC group of companies which has successfully assembled, developed, and subsequently sold over the past decade,” he said.” This round, the company has been able to establish a beachhead in the North Dakota Bakken, with the recapitalization and management change at PetroShale. The company is currently a 10,500-11,000 barrels of oil equivalent per dat (85 per cent oil & NGLs) producer, with a strong weighting to light oil.”
“[We] believe the company will be the next oil-weighted “roll-up” story, given management’s successful acquisition and development track record. Initially, we see the company focusing its acquisition efforts mainly in the North Dakota Williston Basin.”
His $1.25 target exceeds the 75-cent average.
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RBC Dominion Securities analysts Josh Wolfson, Michael Siperco and Wayne Lam expect fourth-quarter 2021 results from North American precious metals producers to reflect a “significantly improved” financial picture, feeling forward-looking expectations on the Street have been “tempered.”
“Year-end financials point to solid results, but guidance carries some lingering uncertainty and is the greater focus,” they said in a research note released Tuesday. “4Q financial results across the sector will include the concurrent release of 4Q financials/ production results, 2022 guidance, year-end reserves, and potential longer-term insights. In general, we expect forward-looking items to represent the largest focus, (i.e. guidance and project updates, and to a lesser extent reserves). Thus far, 22 of 29 producers and royalty companies under coverage have already released 4Q-production results, and our financial forecasts underscore that 4Q should be very good, with RBCe 4Q forecasts alone for producers now representing more than 50 per cent of annual FCF in 2021, due to seasonality tailwinds, plus an abatement of prior high working capital outflows in 1H. As compared to our prior operating preview released in early January, consensus EPS forecasts have declined in 2022 for more than 60 per cent of our companies under coverage, thereby reducing surprise risk associated with the impact of COVID-related inflationary effects and operating challenges. However, we continue to view greater relative risks associated with individual companies reporting updates, rather than potential upside opportunities.”
The firm now sees operating trends as “constructive” moving forward and expect recent gold price gains to act as a headwind.
“RBC forecasts outline an improvement in 2022 operating and financial results for gold producers under coverage, including production increasing 3 per cent year-over-year and fully loaded costs declining 4 per cent to $1,423 per ounce,” they said. “In our view, this operating upside, plus prior achievements of debt reduction and improved capital allocation, build upon the sector’s improved positioning over time. Recent macroeconomic and geopolitical uncertainties have been supportive of the gold price—we highlight that gold equities trade at undemanding valuation levels at RBC’s lower gold price assumptions, while the sector can be viewed as attractive at current elevated gold prices(2022 at spot: 5.3 per cent FCF/EV and 6.2 per cent EV/EBITDA vs. S&P500′s 3.7 times and 14.4 times, respectively). Our top picks for the sector include Agnico Eagle, Royal Gold, SSR Mining, and Endeavour Mining.”
The firm largely maintained its financial estimates, however Mr. Siperco lowered his target for shares of SSR Mining Inc. (SSRM-Q, SSRM-T) to US$26 from US$27 with an “outperform” rating. The average is US$24.20.
“We have rolled forward our estimates net of 4Q21 operating results and incorporated 3-year guidance,” he said. “Our target falls .. on lower forward three-year average sFCF estimates, no change to our Outperform rating.”
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In other analyst actions:
* After trimming his fourth-quarter 2021 and full-year 2022 earnings expectations to account for updated currency, rubber price, industry assumptions, TD Securities analyst Tim James reduced his AirBoss of America Corp. (BOS-T) target to $52 from $53 with a “buy” rating. The average is $55.50.
“We believe that AirBoss is in the process of demonstrating its ability to generate follow-on orders or other defense/healthcare-related contracts in order to show the sustainability of its significant jump in earnings in 2020/2021. We believe that potential contract awards could be positive catalysts that could push the share price towards our 12-month target price,” he said.
* Wells Fargo analyst Neil Kalton cut his Emera Inc. (EMA-T) target to $60 from $62, keeping an “equal weight” rating. The average is $62.37.
“Going forward, we see the potential for strong annual EPS [earnings per share] growth of 6 per cent through 2026 driven by robust regulated rate base growth,” he said. “We lower our 2022 and 2023 estimated EPS to/from $3.10/$3.15 and $3.25/$3.28, which largely reflects a lower assumed USD/CAD fx rate (1.27 vs 1.30 previously).
“On a P/E multiple basis, shares trade at a modest premium to U.S. Regulated Electric peers on our 22-24E EPS. We consider the relative valuation to be fair to full. While EMA’s growth prospects are comparable to peers and FL is an above-average jurisdiction, the comparatively weak balance sheet and EPS sensitivity to fx are drawbacks.”
* Raymond James analyst Michael Shaw raised his Enbridge Inc. (ENB-T) target to $54.50, below the $56.25 average, from $53 with a “market perform” rating.
* Canaccord Genuity analyst cut Yuri Lynk his target for H2O Innovation Inc. (HEO-X) to $3.25 from $3.75, keeping a “buy” rating. The average is $3.54.
“The quarter featured organic growth of 16 per cent that partially offset margin compression from COVID-related disruptions,” he said. “We maintain our favourable view on H2O as a water pure-play with several secular growth drivers and good balance sheet optionality.”
* National Bank Financial analyst Michael Parkin lowered his Kinross Gold Corp. (K-T) target to $12.50, below the $12.65 average, from $13.50 with an “outperform” rating.
* Mizuho analyst Christopher Parkinson hiked his Nutrien Ltd. (NTR-N, NTR-T) target to US$87, exceeding the US$81.25 average, from US$75 with a “neutral” rating, while TD Securities’ Michael Tupholme raised his target to US$88 from US$83 with a “buy” recommendation.
* Piper Sandler analyst Ian Macpherson raised his Precision Drilling Corp. (PDS-N, PD-T) target to US$85 from US$57 with an “outperform” rating. The average is $80.54 (Canadian).
* Scotia Capital analyst Mario Saric raised his target for RioCan Real Estate Investment Trust (REI.UN-T) to $27 from $25.50 with a “sector outperform” rating. The average is $26.31.
“Occupancy is holding up (actually growing!), Retail leasing at The Well is materializing and FV gains are improving (albeit nothing to write home about...yet), all of which support further relative multiple expansion in our view,” he said. “An active NCIB in Q4 was a nice touch and demonstrates management willingness and ability to surface value, in our view. REI is now up 7 per cent post our initiation vs. down 1.5 per cent for peers and up 1 per cent for sector. To be sure, the bar is now higher going into its February 23rd Investor Day, but we think valuation still has room to absorb positive information as the broader urban retail landscape recovers in conjunction with expected easing lockdown conditions through the spring.”
* JP Morgan analyst Arun Jayaram raised his Vermilion Energy Inc. (VET-T) target to $17 from $13 with an “underweight” rating. The average is $21.22.
* Stifel analyst Cody Kwong raised his Whitecap Resources Inc. (WCP-T) target to $13 from $11.25, keeping a “buy” rating. The average is $11.98.
“Whitecap came out with its 2021 year-end reserves which, in general, were slightly better than 3-year averages on an FD&A/recycle ratio front, thanks to opportunistic acquisitions and an improved netback through rebounding crude oil prices,” he said. “Also detailed in this update were 4Q21 volumes that were modestly ahead of consensus expectations while capital investment was inline. While no meaningful changes to our proforma view, refreshing our outlook on today’s strip pricing shows a compelling return of capital outlook that we expect to see tangibility following a busy 1Q22. As such, we are increasing our target price ... and urge investors take a second look at our FCF forecast that frames our BUY recommendation.”
David Leeder