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

After its shares plummeted 16.5 per cent on Monday following the release of its fourth-quarter 2021 financial results, National Bank Financial analyst Cameron Doerksen feels any further price weakness sustained by Cargojet Inc. (CJT-T) should be viewed as a potential buying opportunity, emphasizing its valuation is now “looking more reasonable” and pointing to potential 25-per-cent upside to his revised target.

“With its strong market position, most of its business locked into long-term contracts, no direct exposure to higher fuel prices (which are a pass-through to customers) and a still-tight air cargo market, Cargojet is better positioned than many transportation companies to manage the current market challenges,” he said in a research note. “In addition, with the selloff following Q4 results, the valuation has become more reasonable with Cargojet shares now trading at 9.5 times EV/EBITDA based on our updated 2022 estimates, which is only a modest premium to the 9.1 times historical average forward EV/EBITDA multiple for the stock and essentially in line with Package & Courier bellwether UPS.”

The Mississauga-based company reported quarterly revenue of $235.9-million, up 26 per cent year-over-year and exceeding the estimates of both Mr. Doerksen ($208-million) and the Street ($212-million) as both revenue from both domestic network and Aircraft, Crew, Maintenance and Insurance (ACMI) topped estimates (up 18.2 per cent and 26.6 per cent, respectively). Earnings per share excluding non-recurring items came in at $2.33, according to Mr. Doerksen, which also topped projections ($2.14 and $1.72, respectively).

While he sees Cargojet’s growth outlook remaining “solid,” the analyst warned capital expenditures are expected to increase “significantly,” which was a catalyst for the steep share price drop.

“Cargojet management is bullish on its growth prospects, and as a result, has accelerated its fleet expansion,” Mr. Doerksen said. “The company ended Q4/21 with a total fleet of 31 aircraft, but now expects to end 2022 with 39 planes and end 2023 with 43 planes, an increase from its prior plan for 34 planes at year-end 2022 and 37 at year-end 2023. With demand for air cargo still strong and the air cargo market still tight, we believe visibility for growth is good, and based on the accelerated fleet growth, we have increased our forecast accordingly.

“The caveat to this fleet expansion is capital expenditures are set to remain elevated through the next three years. Cargojet’s total capex in 2021 was $278 million, but 2022 guidance is for total capex to increase to $525-550 million, which is nearly double our prior estimate of $280 million. For 2023, management expects capex to come in at $300-350 million and to remain elevated in 2024. Management has a long track record of being conservative with its expansion plans, and over the long term, these investments will likely generate a solid return. However, this growth plan is a huge investment in a period of volatile markets, which likely has some investors nervous.”

Citing its new fleet plan, Mr. Doerksen raised his revenue and EBITDA estimates for 2022 and 2023, however he trimmed his target for Cargojet shares to $199 from $203 due to “significantly higher capex over the next two years relative to our prior forecast.” The average on the Street is $245.75.

He said: “We nevertheless keep our Sector Perform rating on Cargojet for now, noting the following: * While Cargojet’s strong market position on both the domestic overnight business as well as the ACMI segment is secure for at least the next several years, we believe that ultimately new dedicated freighter capacity entering the market over the next few years could present new competition for the company. * Cargojet has limited exposure to the international cargo market but we expect historically high cargo rates today to eventually fall as more passenger belly-freight capacity returns to the market and as supply chain bottlenecks ease. Furthermore, Cargojet aspires to grow its international exposure with the planned addition of larger 777 widebodies starting in late 2023. We note that many other cargo airlines are also making commitments to grow their dedicated freighter fleets, which could impact the industry-wide supply-demand balance 2-3 years down the road. * Our final concern is the broader economy where there is growing risk of a slowdown that could impact consumer spending. We believe the e-commerce macro tailwind will continue, even if the economy slows, but a recession would likely impact growth rates for Cargojet’s domestic overnight.”

Elsewhere, Scotia Capital analyst Konark Gupta downgraded Cargojet to “sector perform” from “sector outperform” with a $195 target, down from $240.

“While we continue to like the long-term growth story driven by structural changes brought by the pandemic, our FCF, ROIC and net debt forecasts have deteriorated substantially as the company significantly raised 2022 capex outlook and suggested that capital intensity will take longer to normalize,” said Mr. Gupta. “It plans to add six incremental aircraft through 2026, particularly four more B777s, which is the key driver behind capex guidance raise. We believe investors were already skeptical about future capacity growth plans amidst concerns that airline belly capacity is rebounding, airlines are entering the dedicated freighter market, and demand for consumer goods (particularly B2C) will soften post-pandemic. While such concerns could have been addressed by contract wins, which we still expect in due course, further increases in capacity and capex incrementally weigh on investor sentiment, as evidenced by stock’s 16.5-per-cent decline [Monday]. We have trimmed our EV/EBITDA multiple to 11.5 times (was 12.5 times) to reflect ROIC headwinds and expect the stock to be range-bound in the near term due to expected cash burn this year.”

Others making target changes include:

* ATB Capital Markets’ Chris Murray to $225 from $235 with an “outperform” rating.

“The strong results were driven by robust activity levels across CJT’s business lines, reflecting growing demand for ecommerce combined with supply chain disruptions,” he said. “The Company announced a significant CapEx expansion for 2022/2023 to meet an accelerating demand environment including a continuing shift towards e-commerce. With shares falling sharply, down 16.5 per cent on the day despite a strong print and solid outlook, we would look to accumulate shares at current levels as we see multiple years of growth ahead.”

* CIBC World Markets’ Kevin Chiang to $217 from $245 with an “outperformer” rating.

“CJT reported solid Q4 earnings, but the stock was down 16.5 per cent, which we attribute to the company raising its capex over the next three to four years as it expands its fleet, pushing out the company’s FCF story. However, we would argue that CJT has a proven track record and the long-term outlook for dedicated freight capacity demand is strong. We maintain our Outperformer rating and raise our estimates,” he said.

* RBC Dominion Securities’ Walter Spracklin to $311 from $295 with an “outperform” rating.


Now expecting a “protracted” war in the Ukraine, BMO Nesbitt Burns analyst Peter Sklar downgraded both Magna International Inc. (MGA-N, MG-T) and Linamar Corp. (LNR-T) to “market perform” from “outperform” on Tuesday.

He pointed to four potential headwinds facing both companies: “Lower industry vehicle production in Western Europe, rising oil and gas prices, commodity headwinds, and a potential supply disruption of neon and palladium.”

His Magna target fell to US$63 from US$89, below the US$93.04 average on the Street.

Mr. Sklar’s Linamar target is now $60, dropping from $96. The average is $90.60.


Vermilion Energy Inc.’s (VET-T) “blockbuster” fourth-quarter 2021 financial results should be “viewed as a wake-up for some investors that have abandoned the story in recent years for a host of reasons, including a disparate asset base,” said Desjardins Securities analyst Chris MacCulloch.

Shares of the Calgary-based company soared 12.9 per cent on Monday following the premarket release of better-than-anticipated earnings, including cash flow, driven in part to a “strong” contribution from the European natural gas assets.

The report led Mr. MacCulloch to emphasize “diversity is beautiful.”

“Don’t put all of your eggs in one basket. It is age-old wisdom from the Book of Proverbs which could be viewed as one of the earliest endorsements of diversifying risk exposure,” he said. “With respect to oil & gas producers, some of the most common challenges include managing exposure to different asset play types, commodity price benchmarks and regulatory systems. However, VET offers investors a portfolio approach to managing risk, including commodity price exposure, as once again demonstrated by the 4Q21 financial results. And this portfolio approach provides a certain degree of cash flow stability to support a sustainable dividend, particularly when debt levels are properly managed.

“Going forward, we believe that VET is well-positioned to significantly accelerate capital returns aer it hits its $1.2-billion corporate net debt target, most likely at some point in 2Q22. Using the net debt target as a balance sheet anchor, the company would have $1.3-billion of discretionary FCF to allocate to increased baseline dividends, share buybacks and/or special dividends through the balance of the year—and another $1.7-billion to boot in 2023. It is a staggering quantum of FCF for a company with a $4.5-billion market capital capitalization.”

Mr. MacCulloch thinks the key question for Vermilion moving forward is how it will start deploying its free cash flow “windfall” to shareholders, suggesting: “Share buybacks appear to be at the top of the pecking order, which is not surprising given the depressed valuation, with the stock now trading well below 2.0 times strip DACF [debt-adjusted cash flow. Needless to say, $3-billion of dry powder could go a long way to address the valuation discount.”

Maintaining a “buy” recommendation for its shares, he raised his target to $32.50 from $27.50. The average is currently $24.07.

“Our revised target implies 3.6 times EV/DACF (2023 estimates), which is significantly below the stock’s historical consensus multiple of 6.0 times,” he said.

Others making adjustments include:

* Raymond James’ Jeremy McCrea to $30 from $25 with an “outperform” rating.

“With the Company expected to generate $1.9-billion in FCF this year pro-forma the Corrib consolidation (and $2.8 FCF unhedged), we believe the deleveraging and cash return potential of VET shares sets up an attractive risk-reward, especially as European energy prices look to remain stronger over the coming years,” said Mr. McCrea.

* BMO’s Ray Kwan to $30 from $22 with a “market perform” rating.

“Vermilion continues to be a one of the few ways for investors to play the European natural gas price theme. As a reminder, 22 per cent of Vermilion production is exposed to European gas,” said Mr. Kwan.

* TD Securities’ Menno Hulshof to $29 from $23 with a “buy” rating.

* RBC’s Greg Pardy to $26 from $25 with a “sector perform” rating.


Believing it has “a strong growth potential accentuated by a solid management team,” Scotia Capital analyst Divya Goyal raised her rating for Softchoice Corp. (SFTC-T) to “sector outperform” from “sector perform” following a “solid” fourth quarter of 2021.

In its first fiscal earnings release since going public in June of 2021, the information technology services company reported profit of $86-million, adjusted EBITDA of $26.5-million and adjusted earnings per share of 27 cents, exceeding the Street’s forecasts by 13 per cent, 11 per cent and 17 per cent, respectively.

“Softchoice reported solid financial performance for Q4/21 and F2021 driven by strong growth across all solutions/sales channel,” said Ms. Goyal. “Management attributed the growth and strong performance to the company’s unique go-to-market approach and the significant investments made in sales and technical capabilities.

“Alongside the robust F2021 performance, management has provided updated F2022 outlook which primarily includes Gross Profit estimated at $320-million (approximately 11.5-per-cent growth over Fiscal 2021); Adjusted EBITDA as a percentage of GP estimated at 30-per-cent margin; Adjusted FCF Conversion of 90 per cent. As per our revised estimates, we expect the company to generate $2.1-billion in Gross Sales, netting down to $1-billion in Net Sales resulting in Gross Profit of $327-million, Adj. EBITDA of $97-million and Adj. EPS of $1.04 per share against fully diluted shares.”

Ms. Goyal said she was “highly satisfied with the company’s financial performance, management’s detailed business overview and the company’s continued focus on creating additional shareholder value.”

That led her to raise her target for its shares to $32 from $30. The average on the Street is $33.22.


With significant increases to their commodity price forecasts in response to the geopolitical environment, Scotia Capital analysts Cameron Bean and Jason Bouvier raised their target prices for North American energy stocks by an average of 19 per cent.

On Tuesday, the firm increased its WTI forecast for 2022 by 24 per cent to US$88 per barrel and 2023 by 7 per cent to US$77. Its NYMEX Henry Hub estimate for this year rose by 7 per cent to US$4 per million British Thermal Units.

“We are updating our oil price forecasts through 2023 following the outbreak of war between Russia and Ukraine. Oil prices have moved sharply higher in the recent weeks with Brent reaching over $115 per barrel after averaging just below $80 per barrel in 4Q21,” they said. “We expect the geopolitical risk premium to remain elevated this year and next. As well, the IEA’s recent revision lifting global oil demand in 2022 by 800 mbbl/d has added to the bullish sentiment. Thus, the supply/demand outlook is tighter than we had previously assumed.

“Regarding the sanctions on Russia and its energy sector, based on our analysis, unfortunately the world might not be able to afford the economic collateral damage from such supply disruptions in an already tight energy market. In December 2021, Russia exported 5 mmbbl/d of crude oil and condensate and another 2.85 mmbbl/d of refined products. Even in a best-case scenario, OPEC+ spare capacity will only add 4.8 mmbbl/d to the market. As for the natural gas market, Russia supplied 41 per cent of European natural gas consumption in 2019. In our view, a sudden stop in Russia’s natural gas supply will have a catastrophic impact on the already dire situation in the European energy market.”

Their largest target price increase was for shares of Baytex Inc. (BTE-T, “sector perform”), which rose 39 per cent to $6.25, exceeding the $5.86, from $4.25.

Their target for MEG Energy Corp. (MEG-T, “sector outperform”), which is their top small-to-mid-cap oil-weighted name, rose 38 per cent to $22 from $16. The average is $19.21.

For their other top picks, the changes were:

Large-cap, oil-weighted:

  • Imperial Oil Ltd. (IMO-T, “sector perform”) to $68 from $59. Average: $57.
  • Cenovus Energy Inc. (CVE-T, “sector outperform”) to $24 from $20. Average: $22.74.

Large-cap Montney/natural gas:

  • Tourmaline Oil Corp. (TOU-T, “sector outperform”) to $87 from $77. Average: $66.46.

Small-to-mid-cap Montney/natural gas:

  • Spartan Delta Corp. (SDE-T, “sector outperform”) to $17 from $14. Average: $12.59.

Royalty and income stream:

  • Topaz Energy Corp. (TPZ-T, “sector outperform”) to $30 from $27. Average: $24.39.

Other large-cap changes are:

  • ARC Resources Ltd. (ARX-T, “sector outperform”) to $26 from $23. Average: $19.73.
  • Canadian Natural Resources Ltd. (CNQ-T, “sector outperform”) to $80 from $64. Average: $75.27.
  • Ovintiv Inc. (OVV-N/OVV-T, “sector outperform”) to US$56 from US$46. Average: US$52.35.
  • Suncor Energy Inc. (SU-T, “sector outperform”) to $45 from $38. Average: $44.43.


Nexus Real Estate Investment Trust (NXR.UN-T) brings a “unique opportunity to own a portfolio of Canadian industrial properties in underappreciated markets,” according to National Bank Financial analyst Matt Kornack.

“Nexus provides investors access to a niche segment of the industrial market where supply/demand dynamics warrant higher rents,” he said. “Extremely tight urban markets are increasingly forcing tenants to search for space further afield as sub-1-per-cent availability rates limit choices while driving substantial rent escalation. The REIT is less likely to run into the same buyer base that is targeting in-demand urban assets, thus, cap rates/going in yields are more attractive.”

In a research report released Tuesday, Mr. Kornack initiated coverage of the Oakville, Ont.-based REIT with an “outperform” rating, touting its “niche industrial assets at an attractive” price” and seeing “reasonable structural attributes with a capacity for growth.”

“Nexus trades at an implied cap rate of approximately 5.3 per cent,” he said. “Purchase cap rates for 2021 came in at the mid-to-high 5-per-cent range with purchases after the end of the year trending into the lower 5-per-cent range. When combined with accommodative debt markets, given lenders preferential view on the asset class, Nexus can accretively expand its portfolio generating economies of scale along the way.

“Since Q2/21, Nexus has raised $326 million of equity to fund the purchase of $750 million of real estate, with an additional $170 million subject to a forward purchase agreement. The REIT has access to the capital markets and a dedicated investor base.”

Also touting its experienced management team “with a track record sourcing deals and nurturing a pipeline via vendor relationships,” he set a $14 target for Nexus units. The average is $14.41.

“:From a public company standpoint, the industrial landscape in Canada is small with only one pure-play domestic offering,” said Mr. Kornack. “Given investor appetite for exposure to this market and asset class, we see an opportunity for continued support and transformation of Nexus. Secondary market exposure also differentiates it from the other larger names as they tend to own portfolios in the GTA, Montreal and Calgary where growth has been inhibited by exceptionally low cap rates. As Nexus becomes more established, the likelihood of a multiple convergence with peers is probable, particularly, as fundamentals advance outside larger supply constrained markets. Furthermore, the name screens well in the current market where investors have been value focused as it owns a portfolio with improving operating performance but trades at a valuation consistent with the broader REIT universe.”


Emphasizing “electrification is here to stay,” Canaccord Genuity analyst Jed Dorsheimer concluded Lion Electric Co. (LEV-N, LEV-T) is “benefitting from strong demand in the EV school bus market in both Canada and the U.S..”

In a research report released Tuesday, he initiated coverage of the Saint-Jérôme, Que.-based company with a “buy” recommendation.

“Lion Electric has a first-mover advantage in the EV school bus market,” said Mr. Dorsheimer. “This niche segment’s transition to electrification is gaining momentum based on two key points: 1) favorable TCO compared to diesel buses and 2) government subsidies from local and regional school districts. School buses operate for short distances, stop frequently, and return to base daily, which gives ample time for charging. Fossil fuels and carbon emissions around school children also spur unique levels of activism and support for a swift conversion to CEVs. With an order book of 2000+ units, Lion Electric is well positioned to capitalize on electrification of this segment.”

“Lion is leveraging its success in the school bus market to fund the build-out of a wider portfolio of chassis to increase penetration in a range of CEV segments. In addition to EV school buses, Lion Electric offers mass transit buses, utility, and specialty trucks with 8 models scheduled to launch at the end of ‘22. Mass transit and utility/specialty vehicles are ripe for electrification given use cases similarities to school buses. Lion intends to scale its manufacturing platform across these other markets and utilize economies of scale to lower costs and improve gross margin.”

The analyst called Lion Electric’s total addressable market “attractive” and sees “long tails of adoption” across several segments.

“With nearly 600k units of Class 4-8 trucks sold annually in North America, we believe Lion Electric is positioned to be one of the first to market with a flexible manufacturing platform that can serve several commercial fleet applications,” he said. “Success in school buses provides a platform into other key CEV segments with large and growing TAMs. We estimate the total CEV market was $1.4-billion in 2021, and we expect it to reach $30-billion by 2030, representing 40-per-cent CAGR [compound annual growth rate].”

Also seeing its move to build its own battery pack manufacturing facility in Quebec alleviating supply constraints and reducing costs, Mr. Dorsheimer set a target of US$12 per share. The average is US$13.22.


In other analyst actions:

* Following Monday’s announcement of its deal with Choice Properties Real Estate Investment Trust (CHP.UN-T) to acquire six urban office properties for $794-million, CIBC World Markers analyst Scott Fromson raised his Allied Properties Real Estate Investment Trust (AP.UN-T) target to $54 from $53, exceeding the $52 average, with an “outperformer” rating, while Raymond James’ Brad Sturges bumped his target to $53 from $52 with an “outperform” rating.

“From a strategic perspective, the transaction increases exposure in Allied’s three key markets to tech and creative-class focus industries. In addition, Allied is effectively entering the biotech and life sciences markets in Toronto, as well as increasing exposure to education in Montreal,” said Mr. Fromson.

* National Bank Financial’s Rupert Merer raised his Altius Renewable Royalties Corp. (ARR-T) target to $14.50 from $13 with an “outperform” rating. The average is $14.71.

“With GBR’s growing pipeline of investment opportunities combined with its strong liquidity position, we increased our near-term (24-month) incremental capital deployment assumption to $250-million from $150-million (remains conservative). This results in a target of $14.50 per share,” he said.

* In response to inline fourth-quarter results, Desjardins Securities’ Michael Markidis raised his Artis Real Estate Investment Trust (AX.UN-T) target by $1 to $13.50, matching the average. He kept a “hold” recommendation.

“The disposition of the GTA industrial portfolio was a key driver of BVPU [book value per unit] growth last year,” he said. “The stock is trading at a material (25-per-cent) discount to this metric ($17.37); however, 50 per cent of portfolio value is attributable to office properties, most of which are in the U.S.. The disposition of certain office properties in the U.S. is a near-term focus; execution is a potential catalyst, in our view.”

* Bloom Burton’s David Martin cut his Aurinia Pharmaceuticals Inc. (AUPH-Q) target to US$19.50 from US$23, keeping a “buy” rating. The average is US$25.28.

* CIBC’s Sumayya Syed bumped up her Choice Properties Real Estate Investment Trust (CHP.UN-T) target to $16.50, above the $16.13 average, from $15.75 with a “neutral” rating.

* Jefferies’ Owen Bennett cut his Cronos Group Inc. (CRON-T) target to $3.70 from $4.08 with a “hold” rating. The average is $6.44.

* Mr. Bennett raised his Curaleaf Holdings Inc. (CURA-CN) target to $25 from $24 with a “buy” rating. The average is $20.98.

* Expecting a “gradual normalization” in lumber prices, National Bank’s Zachary Evershed trimmed his target for shares of Doman Building Materials Group Ltd. (DBM-T) by $1 to $11, remaining above the $10.07 average. He kept an “outperform” rating given the “strong setup” of its end markets.

“While we remain bullish on sustained end-market demand in both new residential construction and R&R markets, we believe the current elevated pricing environment is also driven by supply/logistics bottlenecks,” he said. “As these factors ease, we expect prices will once again normalize to US$500 per thousand board feet and incorporate this assumption as we roll our model forward to 2023.”

* Believing its fourth-quarter 2021 financial results showed its high growth is likely to continue, Paradigm Capital analyst Gordon Lawson raised his target for shares of Geodrill Ltd. (GEO-T) to $5 from $4, pointing to “its aggressive growth profile predominately with gold companies, as well as its growing client base located in West Africa, South America and Egypt.”

“Geodrill is recognized as one of the leading drilling companies that has grown organically, from one drill rig in 1998 to its current fleet of over 60,” said Mr. Lawson, maintaining a “buy” rating for . It remains one of the most profitable drilling companies. With the recent increase in the gold price and improved profitability of the gold industry, we see companies increasing exploration budgets, hence drilling demand remaining robust. With over 90% of its revenue derived from gold exploration and development, we expect Geodrill to be a significant beneficiary.”

* Credit Suisse’s Manav Gupta raised his Imperial Oil Ltd. (IMO-T) target to $56 from $51, maintaining a “neutral” recommendation. The average is $56.58.

“On March 10th, IMO will hold its analyst day,” he said. “We view this as a catalyst rich event and believe the focus will be on: 1) Higher shareholder return over the cycle; 2) IMO accelerating buybacks in the near term; 3) Efforts company is making to mitigate inflationary cost pressures; 4) Update on divestment process as it relates to IMO/ XOM Montney and Duvernay assets; 5) Further improving return on capital employed to 13-15 per cent by 2025, at Brent price of $60 per barrel; 6) Update on Strathcona renewable diesel project and possible FID in 2022, XOM has already said they would like to produce 200kb/d of bio-fuels by 2030, so we see very high probability this project moves ahead; 7) Progress that the alliance (IMO, SU, CNQ, CVE and MEG) is making towards achieving net zero greenhouse gas (GHG) emissions from oil sands operations by 2050.”

* Raymond James’ Jeremy McCrea initiated coverage of PetroShale Inc. (PSH-X) with an “outperform” rating and $1.15 target. The average is $1.05.

“Having an experienced management team with a track record of success, the company plans to grow and consolidate areas of the North Dakota Bakken/Three Forks formation,” he said. “As the company identifies assets, we calculate that the current highly profitable inventory should serve as a base to rapidly pay down debt given 4-6 month well payouts at current prices. As the company reduces leverage and embarks on a growth plan, we expect to see the valuation improve as new institutional investors become familiar with the name.”

* Raymond James’ Bryan Fast cut his Wajax Corp. (WJX-T) target by $1 to $29, below the average by 50 cents, with an “outperform” rating.

“Several meaningful events took place at Wajax over the last year,” he said. “The company acquired Tundra Process Solutions, delivered results exceeding pre-pandemic levels, and appointed a new CEO/ President. Further a more simplified direct relationship with key supplier Hitachi, will see Wajax align itself closer with the OEM, gain quicker and more efficient access to equipment and parts and assure competitive pricing.

“Looking ahead key end markets remain supported (forestry, energy and mining), while supply issues are expected to continue for much of the year. We expect Wajax will continue down the path of expanding the industrial parts/ERS verticals, benefiting from lower working capital needs and less cyclicality, while ultimately deriving a greater proportion of revenue from the higher margin segments. While a small acquisition was announced recently, we look for more meaningful M&A given the company’s cash flow generation and improved balance sheet. With that we maintain our Outperform rating.”

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