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

Scotia Capital analyst Konark Gupta raised his near-term outlook for Air Canada (AC-T) on Tuesday, seeing a recent acceleration in traffic as it rebounds from the pandemic slowdown.

However, he “cautiously” reduced his long-term estimates, “assuming a recession scenario that is slightly worse than the 2003 and 2009 industry downturns but not as bad as COVID-19.”

“While it is hard to predict the timing or depth of a potential downturn, we think inflation (Canadian CPI was up 7.7 per cent year-over-year in May) and rate hikes (BoC has raised by 1.25 per cent year-to-date) warrant some caution about consumer and business discretionary spending (including air travel) in the future,” said Mr. Gupta in a research note “Elevated fuel prices, along with strong pent-up demand, are driving air fares higher, which could also trigger demand destruction at some point as inflation in pretty much everything reduces consumers’ spending power.”

The analyst does think air travel is “likely to be shielded for longer as consumer spending is shifting from goods to services coming out of the pandemic.”

“AC has certainly emerged from the trough but traffic is still recovering from the deepest recession (COVID-19) while delays in Canadian passport issuance and shortage of third-party airport staff are potentially creating a travel backlog, thereby extending the demand curve. In addition, immigration trends are accelerating in Canada (Canada saw its fastest Q1 population gain since 1990 this year), which bodes well for international VFR travel (leisure),” he added.

“Considering 2022 is a recovery year, we are modelling a downturn scenario in 2023 like 2003 or 2009 but taking 2019 as the base year instead of 2022 (i.e., assuming revenue and EBITDA decline vs. 2019). The only major difference we have embedded in our 2023 forecast is stronger fuel price inflation vs. 2019 as compared to that in 2003 or 2009, which causes us to materially reduce our 2023 margin outlook. We have also trimmed our 2024 estimates but our recession scenario is mostly centered on 2023. Overall, our revised forecast still suggests continued EBITDA and FCF recovery in 2023 with 2024 looking similar to 2019 (except for per share metrics, due to equity dilution during the pandemic). We are now slightly below AC’s 2024 guidance for EBITDA margin, FCF, ROIC and leverage ratio.”

Mr. Gupta raised his second-quarter and full-year estimates for traffic, revenue, EBITDA and free cash flow, projecting demand to recover faster than previously anticipated. He now sees the possibility of his near-term outlook looking “conservative.”

“We believe easing restrictions have not only been a key driver for traffic recovery in the near-term but also for future bookings as travellers are gaining more confidence and clarity,” he said. “Similar to recent quarters, we think AC has potential to positively surprise on Q2 FCF if bookings continue to increase and the booking curve reverts to the pre-pandemic normal. Although persistently elevated jet fuel prices, driven by extremely wide crack spreads, could push AC’s fuel cost guidance up again, we see a relatively low risk to our 8.0-per-cent EBITDA margin outlook for 2022, which matches the low end of guidance range and sits below consensus. Several U.S. airlines recently increased revenue and fuel cost guidance while slightly raising margin guidance as strong demand and pricing (including fuel pass-through) are more than offsetting cost inflation, lending support to our view on AC’s margin outlook.”

Though he sees Air Canada shares as “highly attractive” based on their current valuation, he cut his target to $26 from $31 based on his recession scenario, keeping a “sector outperform” rating. The average target on the Street is $28.86.

“AC is nearly back to 2020 lows (down 18 per cent year-to-date), still underperforming the comps,” he said. “Canadian airlines’ lagged recovery vs. U.S. peers, due to Canada’s prolonged restrictions, mostly explains the gap until recently. In addition, we believe investors are growing concerned about a potential recession. However, first, we think AC deserves to trade in line with comps as Canadian traffic recovery has recently accelerated to almost close the gap to the U.S.. Second, we think AC’s earnings are more likely to grow than decline in 2023, even in a downturn, given a delayed restart, pent-up demand, pending corporate travel rebound, and industry issues are extending the recovery cycle. All told, we are raising our near-term outlook while cautiously reducing our long-term estimates.”

Elsewhere, TD Securities’ Tim James trimmed his target to $25 from $26 with a “buy” recommendation.


Following “another set of disappointing results,” Canaccord Genuity analyst Tania Armstrong-Whitworth downgraded Burcon NutraScience Corp. (BU-T) to “speculative buy” from “buy” previously, citing “the longer-than-expected sales ramp, string of misses and growing uncertainty around when sales will inflect.”

After the bell on Monday, the Vancouver-based producer of plant-based proteins and ingredients for use in the global food and beverage industries reported royalty revenue for its fourth quarter of $77,000, below the analyst’s $84,000 estimate. Operating expenses grew 50 per cent year-over-year to $3.2-million, above the $2.8-million forecast.

“Given yet another Merit sales miss and management’s revised commentary that the facility will only reach full Phase 1 capacity in calendar 023, we are pushing out our sales forecast and facility expansion plan by one year,” said Ms Armstrong-Whitworth. “We now forecast Merit will generate $14.9-million in protein sales in F2023 (down from $31.1-million previously), complete the Phase 2 expansion in FQ2/25 (from FQ2/24 previously) and complete the Phase 3 expansion in FQ4/26 (from FQ4/25 previously). Given the one-year roll forward, we are also extending our DCF by one year to F2028, the first year we project Merit to reach full Phase 3 capacity production. Finally, we are increasing our WACC [weighted average cost of capital] from 10 per cent to 11 per cent given our uncertainty about when and if Merit will reach full production levels and whether it will successfully expand the facility to Phase 3.”

Following cuts to her sales and earnings projections, Ms. Armstrong-Whitworth reduced her target for Burcon shares to $3 from $3.50. The average is $3.25.

“This still implies potential upside of over 450 per cent from current levels,” she noted.


Premium Brands Holdings Corp.’s (PBH-T) recent $150-million convertible debt issuance is “indicative of telegraphing [of its] intention of pursuing future acquisitions,” said National Bank Financial analyst Vishal Shreedhar after coming off research restriction following the close of the deal.

“Recall last quarter that PBH highlighted a robust acquisition pipeline,” he said. “Specifically, management noted 18 files in advanced/active-stage discussions, representing $1,685-million in sales, as of May 2022. The convertible issuance reduces senior funded debt to adjusted EBITDA to 2.6 times from 3.0 times at the end of Q1/22 (this metric excludes convertible debt). Total funded debt is unchanged at 3.8 times (includes convertible debt).

“As an exploratory exercise, we calculate accretion potential of a deal in the $450-$600-million range (EV). Based on a range of parameters (EV/EBITDA of 6.5 times to 8.5 times, equity ranging from 0 per cent to 22 per cent of target EV, synergies at 10 per cent of acquired EBITDA), we estimate EPS accretion of 10-13 per cent. Our analysis assumes a 4.0-times threshold on total funded debt to EBITDA (at the high end of management’s long-term targeted range of 3.5 to 4.0 times).”

Mr. Shreedhar maintained his earnings before interest, taxes, depreciation and amortization estimates with the deal. However, he cut his 2022 and 2023 earnings per share estimates to $5.68 and $6.96, respectively, from $5.75 and $7.07 to reflect higher interest expenses.

He kept an “outperform” rating and $137 target for Premium Brands shares. The current average on the Street is $136.38.

“PBH’s 19-per-cent EV/EBITDA discount to the 5-year average represents the largest discount in our staples coverage (average discount is 4 per cent),” said Mr. Shreedhar. “Macro-economic uncertainty remains the key risk for investors.”

Elsewhere, Scotia Capital’s George Doumet cut his target to $137 from $145 with a “sector outperform” rating.

“PBH shares are down almost 26 per cent year-to-date on inflationary (stubbornly high input costs) and recessionary (demand destruction and trade-down) concerns,” he said. “We would take advantage of this weakness. Looking ahead, apart from M&A, we continue to look for share price upside from the recovery in PBH’s trading multiple as volumes remain healthy and margins normalize and eventually expand (once PBH holds price and input costs deflate).”


Citing a “recent outsized strength in refined product pricing (diesel/jet/gasoline), a dramatic associated surge in Vancouver crack margins, and healthy downstream trends in retail fuel margins,” Raymond James analyst Steve Hansen raised his estimates for Parkland Corp. (PKI-T) on Tuesday.

“While soaring gasoline prices and a weakening economy are likely to weigh on discretionary travel/fuel demand in future quarters, North American crack margins are expected to remain elevated through 2H22 given their structural underpinnings,” he said. “For Parkland, we expect the corresponding surge in EBITDA/FCF will not only support its short-term deleveraging objectives, but also help accelerate the firm’s broader ‘3D’ (Develop, Diversify, Decarbonize) strategy outlined last November.”

Mr. Hansen’s earnings per share estimate for 2022 rose to $4.14 from $2.78 and 2023 to $4.15 from $4.07.

He maintained a “strong buy” rating and $52 target. The average is $47.50.


Thomson Reuters Corp. (TRI-N, TRI-T) is “benefitting from structurally higher growth on revenue mix and new product,” said Credit Suisse analyst Kevin McVeigh.

In a research note titled Relatively more certain in uncertain times, he said he came away from meetings with a group of the company’s executives, including chief executive officer Steve Hasker, “positive” on its financial targets, including 5-6-per-cent organic growth in 2023.

“We see a continued cause for multiple expansion,” he said. “Despite the year-to-date outperformance amid overall market weakness — stock is 15 per cent off its 2021 high — we would use this level as an entry point. CY23 guidance includes solid 39-40-per-cent margins and $2-billion of free cash flow as benefits from the transformation program surface. The current stock price offers favorable risk/reward given lack of revenue pull-forward and more recession-resistant fundamentals amid labor shortages. We see runway to $145-150+ [CS Blue Sky] — on recurring revenue [90 per cent plus] + low leverage [1.0 times] coupled with 1.7-per-cent dividend yield + recession-resistant end markets.”

Mr. McVeigh kept an “outperform” rating and US$135 for Thomson Reuters shares. The average is US$118.01

“Secular data growth favors Thomson Reuters as it becomes a more nimble, higher growth — 5-6-per-cent organic revenue growth including 100 basis points headwind from noncore businesses — in 2023,” he said. “The company is also better poised for macro uncertainty given 80-per-cent recurring revenue with optionality as the targets include significant reinvestment of change program savings in 2023, which can be adjusted if needed. Thomson also has significant capacity $15-billion [30-per-cent market cap by 2025] including the value of its interest in the London Stock Exchange Group [$7-billion].”


Desjardins Securities analyst John Sclodnick said recent meetings with the management of Minera Alamos Inc. (MAI-X) resulted in “stronger conviction” for his “conservative” estimates.

He sees the Toronto-based miner possessing “the type of low-capital-intensity projects to achieve low-risk production growth in this inflationary environment, and at current levels, neither Cerro de Oro nor La Fortuna are being priced in.”

“We expect that with continued execution with project development, starting with ramping up Santana to commercial production levels, that the stock should begin to re-rate to more appropriately reflect the multiples of a junior gold producer with embedded low-risk growth,” said Mr. Sclodnick. “The low-capital-intensity projects in the company’s portfolio are the type that investors can gain comfort in with regard to achieving production growth without capex overruns; recent examples in Mexico include Las Chispas, Camino Rojo and, of course, Santana.”

Though he trimmed his financial estimates following its recent $4.37-million equity financing, the analyst maintained a “buy” rating and $1.30 target for Minera Alamos shares. The average on the Street is $1.07.

“The current market cap of $238-million is pricing in only Santana which we value at $233-million, so at current levels, investors are getting Cerro de Oro and La Fortuna for free,” Mr. Sclodnick said. “We expect there to be more institutional eyes on the story once commercial production and a resource estimate are declared at Santana and believe these will be significant catalysts to drive a re-rating, as will the successful permitting of Cerro de Oro.”


In other analyst actions:

* Atlantic Equities’ Oliver Holmes lowered his Canadian National Railway Co. (CNR-T) target to $169 from $173, maintaining a “neutral” rating. The average is $156.55.

* Atlantic Equities’ Lindsay Bettiol cut her target for shares of Canadian Pacific Railway Ltd. (CP-T) to $106 from $111 with an “overweight” recommendation. The average is $106.51.

* With the completion of a $500-million unsecured debentures offering, Scotia Capital’s Himanshu Gupta cut his target for Choice Properties REIT (CHP.UN-T) by $1 to $15.50 with a “sector perform” rating. The average is $16.06.

“CHP has been one of the best performing REITs year-to-date and outperformed the REIT sector by 11pt,” he said. “In the U.S. as well, net lease REITs have outperformed the U.S. REIT sector by 15pt . We think at a time when market rent growth for the real estate sector is being questioned, predictable long-term triple-net cash flows provide some margin of safety.”

* Scotia Capital’s Phil Hardie trimmed his targets for Definity Financial Corp. (DFY-T, “sector outperform”) to $35 from $37 and Intact Financial Corp. (IFC-T, “sector outperform”) to $195 from $207. The averages on the Street is $37.27 and $207.29, respectively.

“We remain positive on both Intact and Definity but are bringing down our EPS and BVPS forecast for Q2/22 and trimming our targets,” he said. “The downward EPS revision reflects higher estimates of cat losses for the quarter, while the impact from the portfolio valuation adjustment is the predominant factor in our reduced BVPS forecast and lower targets. We believe the majority of Street estimates have not reflected these changes and anticipate downward revisions over the coming weeks. While this risks putting some modest near-term pressure on the stocks, we remain constructive on both stocks and believe they are well-positioned for the uncertain environment. Further, we believe M&A activity could potentially yield upside to our current 12-month targets.”

* Credit Suisse’s Fahad Tariq dropped his targets for Hudbay Minerals Inc. (HBM-T, “outperform”) to $9 from $12 and Lundin Mining Corp. (LUN-T, “neutral”) to $9.50 from $11.50. The averages are $12.56 and $13.75, respectively.

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