Tuesday’s analyst upgrades and downgrades

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

While he remains “constructive” on the fundamental valuation and competitive position for Mullen Group Ltd. (MTL-T), iA Capital Markets analyst Matthew Weekes expects the trucking sector to start to endure further pressure given near-term economic headwinds.

Also seeing the valuation gap between the Okotoks, Alta.-based company and its logistics peers narrowing, he lowered his recommendation to “buy” from “strong buy” on Tuesday.

“Inflation has accelerated since Q1 reporting, which could reduce demand and pricing leverage going forward,” said Mr. Weekes. “While MTL demonstrated effective pricing leverage in its Q1 beat, we are cautious on market conditions going forward given continued high fuel prices along with accelerating general inflation and weakening consumer and business sentiment. Weaker-than-expected economic activity could provide downside to both the consumer and capital investment portions of the economy and therefore to consensus forecasts as the year progresses.”

“Factors working in Mullen’s favor. Supply chain and labour constraints and high diesel prices have likely limited new entrants into the trucking market compared to past cycles and additionally forced smaller competitors out of the market, reducing competitive pressures and potentially creating discounted M&A opportunities. Strong fundamentals for oil and gas could also provide upside to S&IS performance. This is somewhat of a natural hedge in the business against high fuel prices. Finally, we note that MTL’s Q1 results were strong despite pressures from cold weather, blockades, and the lag between fuel cost inflation and implementation of surcharges.”

Mr. Weekes emphasized logistics peers, particularly TFI International Inc. (TFII-T), have seen notable stock price declines thus far in 2022 “on concerns over freight market conditions related to the broad economy.”

“TFII is now trading within 0.5 times of Mullen’s EV/EBITDA multiple on 2023 estimates,” he said. “While we continue to project an attractive return for MTL based on our fundamental analysis and defensive 6.5-per-cent dividend yield, the upside based on a visible peer discount has been reduced.”

Pointing to higher cost of capital in the market and lower comparables, Mr. Weekes reduced his target for Mullen shares by $1 to $15.50. The average is $15.85, according to Refinitiv data.

“Nonetheless, we are constructive on MTL’s longer term outlook and fundamental valuation potential, and believe the Company also has several factors working in its favour that will help it manage through potential near-term market challenge,” he said.

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Accelerating interest rates warrant caution for investors in Canadian independent power and infrastructure companies, according to iA Capital Markets analyst Naji Baydoun.

However, he sees near-term buying opportunities with yields “racing higher” and stock prices holding up.

“The monetary policy outlook has dramatically shifted over the past six months, with (1) market expectations now pointing to more aggressive tightening over the next 12-18 months, and (2) North American benchmark bond yields rapidly increasing year-to-date,” said Mr. Baydoun.

“Overall equity performance in the Power & Infrastructure sectors has been relatively decent so far this year, with (1) Power companies under coverage delivering an average 8-per-cent TSR (ranging from down 9 per cent to up 27 per cent), and (2) Infrastructure companies under coverage generating approximately negative 15-per-cent TSR (ranging from negative 31 per cent to negative 2 per cent, dragged down by smaller capitalization/cyclical companies), compared to negative 9 per cent for the S&P/TSX Composite Index. The resiliency of companies’ business models and defensive portfolio characteristics (e.g., contracted cash flows) have helped partially offset the sharp move higher in interest rates; higher underlying interest rates (1) have impacted year-to-date performance and kept a lid on stock prices (among other macro and company-specific factors), and (2) could place further pressure on H2/22 returns. We note exceptionally strong YTD performance from (1) BLX (on the back of strong execution on various shareholder value-creative initiatives), (2) PIF (following highly anticipated capital deployment into several M&A opportunities), and (3) CPX (with strong Q1/22 results that benefited from above-average Alberta power prices, and revised forward expectations for 2022-23.”

In a research report released Tuesday in which he adjusted his valuation model to “incorporate revised macro-economic expectations,” the analyst downgraded TransAlta Corp. (TA-T) to “buy” from “strong buy,” keeping a $16.50 target. The average target on the Street is $16.29.

“We consider TA our preferred merchant and value IPP play in the Canadian IPP sector,” said Mr. Baydoun. “TA offers investors (1) a balanced mix of contracted and merchant power exposure, (2) improving balance sheet and cash flow fundamentals, (3) long-term upside to rising Alberta power prices, (4) a discounted relative valuation versus IPP peers, and (5) both downside protection and upside optionality from Brookfield’s strategic support. Since upgrading the shares to Strong Buy (from Buy) in late March2022, TA’s stock price has appreciated by 24 per cent, the highest return among our entire coverage universe. We continue to like TA’s clean energy transition plan, which we believe should (1) reduce the Company’s risk profile, (2) drive additional growth, and (3) support valuation multiple expansion over time. Despite the significant upside potential in the shares, we are electing to revise TA to Buy (from Strong Buy) based on the more limited upside potential to our price target.”

Conversely, he downgraded H2O Innovation Inc. (HEO-T) to “strong buy” from “buy” with a $3.50 target, matching the consensus but down from $3.60.

“HEO offers investors (1) low double-digit organic revenue and Adj. EBITDA growth (10 per cent plus per year, CAGR F2021-26), (2) mid-double-digit FCF/share growth (12-15 per cent per year, CAGR F2022-26), (3) potential upside from additional bolt-on acquisitions and strategic M&A, and (4) a discounted valuation relative to peers,” he said. “Despite improving fundamentals and accelerating growth, HEO’s shares have experienced significant valuation multiple compression and are down 31 per cent year-to-date. HEO’s shares are currently trading at 9 times FY2E EV/EBITDA, which is (1) below their recent historical average, (2) at a wider discount to peers than in the recent past, and (3) significantly below precedent transactions at 12-20 times for water businesses. In our view, the improving risk and growth profile of the Company is not currently being reflected in its share price, and we see limited relative downside risks at current valuation levels. The unwarranted YTD share price decline provides an attractive accumulation point for investors, in our view; given the significant potential upside to our revised price target, we are electing to upgrade HEO.”

Mr. Baydoun also a series of target changes to stocks in his coverage universe while naming his top picks for the third quarter. They are:

* Innergex Renewable Energy Inc. (INE-T, “strong buy”) to $24 from $25. Average: $21.46.

“We continue to like INE’s (1) high-quality asset portfolio (more than 3GW net in operation, 14-year weighted average contract term), (2) high single-digit FCF/share growth (7-9 per cent per year, CAGR 2021-26E), (3) healthy dividend (4-per-cent yield, with an improving payout ratio over our forecast period), (4) potential upside from organic development (7GW of prospects) and M&A, and (5) the support of the HQ strategic alliance,” he said. “Following weaker-than-expected quarterly performance and setbacks faced in 2021, INE (1) delivered stronger-than-forecast results over the past two quarters (beating expectations in Q4/21and Q1/22), and (2) executed on several initiatives to enhance performance (see here). In our view, management will be able to continue successfully executing on several initiatives that should drive shareholder value and move the Company forward in its growth ambitions. For H2/22, we expect (1) the successful Chilean portfolio debt refinancing initiative to be concluded (thereby removing a potential equity overhang in the shares), (2) progress on large-scale organic growth projects in the US (e.g., Palomino solar and Boswell Springs) and in Canada (Quebec RFPs), (3) further updates on the newly announced battery storage investment in Chile (which adds further diversification and scale in the country), and (4) solid financial performance (including revised guidance to reflect the recent Aela acquisition).Overall, these catalysts should provide support for INE’s stock, particularly after the YTD share price pullback of 5 per cent which has created a compelling buying opportunity in the shares; INE’s current relative valuation is attractive, with the shares trading below (1) their own historical average trading multiples, and (2) peers valuations (vs. premium valuation to peers historically.”

* Brookfield Infrastructure Partners LP (BIP.UN-T, “strong buy”) to US$46 from US$48. Average: US$47.07.

“We view BIP as a unique and diversified way for investors to play the broad long-term infrastructure investment theme, with (1) access to a global, large-scale infrastructure investment platform (ownership interests in more than $70-billion of assets), (2) defensive cash flows (90 per cent of FFO regulated/contracted), (3) visible and sustainable organic cash flow growth (6-9 per cent per year, CAGR 2021-26E), (4) potential upside from accretive M&A, and (5) attractive income characteristics (3.75-per-cent yield, 60-70-per-cent long-term FFO payout, and a 5-9 per cent per year dividend growth target). After a record year for financial performance, capital deployment, and capital recycling in 2021, BIP has continued to successfully execute on its growth strategy in 2022. The Company is already on track to meet its full-year M&A capital deployment target for2022 (US$1.5-billion); given the volatile market environment and BIP’s strong access to capital, we would not be surprised to see the Company execute on additional acquisition opportunities in 2022 (thus exceeding its growth targets yet again). In the meantime, forward Adj. EBITDA consensus estimates are already up >10% since the start of the year. With an ever-stronger near-term growth outlook (double-digit growth potential, the strongest over the past five years ,by our calculations), and an 4-per-cent year-to-date share price pullback, we estimate that BIP’s shares are currently trading at some of the most attractive forward valuation levels in recent years (from a per-unit-of-growth perspective). We continue to see BIP as a standout growth vehicle for long-term shareholders in the current macro-economic context.”

His other target changes are:

• Aecon Group Inc. (ARE-T, “buy”) to $20 from $23. The average on the Street is $19.83.
• Algonquin Power & Utilities Corp. (AQN-T, “hold”) to $19 from $20. Average: $22.23.
• Bird Construction Inc. (BDT-T, “buy”) to $11.50 from $12. Average: $12.39.
• Boralex Inc. (BLX-T, “hold” to $43 from $45. Average: $46.52.
• Brookfield Renewable Partners LP (BEP.UN-T, “hold”) to US$40 from US$42. Average: US$40.46.
• Capital Power Corp. (CPX-T, “hold”) to $44 from $45. Average: $47.
• Northland Power Inc. (NPI-T, “buy”) to $44 from $47. Average: $46.45.
• TransAlta Renewables Inc. (RNW-T, “hold”) to $18 from $19. Average: $18.42.
• UGE International Ltd. (UGE-X, “speculative buy”) to $3 from $3.25. Average: $3.25.

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In a separate note, the other equity analysts at iA Capital Markets revealed their top stock picks for the third quarter.

They are:

Diversified Industries

Exchange Income Corp. (EIF-T) with a “buy” rating and $53 target. The average on the Street is $58.50.

Matthew Weekes: “EIF is well diversified and is expected to deliver strong growth in 2022 and 2023, driven by organic growth and contract incrementals, ongoing improvement in certain operations, and recent M&A activity, with Northern Mat expected to provide double digit free cash flow per share accretion on a normalized basis. We expect the Company’s legacy airlines to be resilient to high jet fuel prices, as these airlines provide niche, essential travel, cargo, charter, and medevac services to remote communities, with government contracts underpinning much of flight volumes. EIF’s Regional One subsidiary is driven by U.S. and European airline markets, where we believe that pent-up demand will make travellers less price elastic. We would note TSA travel checkpoint numbers indicate that U.S. air travel demand remained healthy in Q2. While Air Canada’s (AC-T, Not Rated) recent cancellation of many of its flights has highlighted capacity constraints in the airline industry, it also highlights that demand is robust coming out of pandemic restriction.”

Freehold Royalties Ltd. (FRU-T) with a “strong buy” rating and $19.50 target. Average: $20.80.

Mr. Weekes: “Our belief that the stock is positioned to deliver strong total returns due to its valuation discount to peers, high dividend yield (more than 7 per cent with an 60-per-cent payout ratio at US$70/bbl WTI), minimal debt, and U.S. organic production growth and accretive M&A potential.”

GDI Integrated Facility Services Inc. (GDI-T) with a “buy” rating and $72.50 target. Average: $63.07.

Neil Linsdell: “We remain convinced that both janitorial services and technical services will be in high demand for the foreseeable future. We are particularly focused on opportunities in HVAC, as we see air quality being a growing focus in offices, shopping centres, government buildings, sporting arenas, etc… GDI has also continued with its M&A plans as it further extends its product offering and geographic reach, specifically into the U.S., most recently with a sizeable acquisition in the southeastern U.S., which increased our Janitorial USA segment revenue forecast for 2022 by 71 per cent.”

Premium Brands Holdings Corp. (PBH-T) with a “buy” rating and $145 target. Average: $136.38.

Mr. Linsdell: “Recent weakness in the shares is likely reflective of concerns over input cost inflation and the potential for consumers to move away from the premium food offerings, but we expect demand to remain strong, supplemented by returning demand from economy reopening opportunities such as with restaurants, airlines, and cruise ships. Additionally, PBH benefits from scale and a resilient supply chain to ensure its own supplies while actively adjusting prices to maintain margins. We retain high confidence in this name.”

Healthcare & Biotechnology

DRI Healthcare Trust (DHT.UN-T) with a “buy” rating and $18 target. Average: $14.50.

Chelsea Stellick: “DRI has multiple advantages in today’s difficult macro-environment. First, the Trust has capital to deploy at a time when cash is in short supply in the biotech/pharma space, which will facilitate the execution of favourable deals in the balance of 2022. Second, DRI has no exposure to inflationary cost pressures given its flow-through royalty business model. Third, DRI’s portfolio consists of medically necessary pharmaceutical products that render sales and royalty receipts recession-resistant. Finally, the Trust pays a quarterly dividend well-covered by cash flow from existing assets, and remaining cash flow is reinvested.”

Quipt Home Medical Corp. (QIPT-X) with a “buy” rating and $14 target. Average: $12.84.

Ms. Stellick: “QIPT trades at a significant discount to its peers (approximately 5 times vs. 10 times F2022E EV/Adj. EBITDA), which we believe is unwarranted given management’s strong track record of successfully improving profitability over time and the superb demographic and regulatory tailwinds of the business.”

Technology

East Side Gaming Group Inc. (EAGR-T) with a “buy” rating and $5 target. Average: $6.06.

Neehal Upadhyaya: “We are selecting EAGR as our top technology pick. EAGR is poised to see impressive growth in the near future as we expect the Company to achieve year-over-year growth exceeding 40 per cent over the next three quarters while maintaining positive Adj. EBITDA margins and generating free cash flow. We expect a catalyst-rich Q3 as the Company is scheduled to launch multiple games (both regular and super marquee). Specifically, EAGR expects to release Star Trek: Lower Decks and Dr. Who during Q3 which will increase the Company’s super marquee game count to four and will materially impact revenues in the latter half of the year. As a reminder, Q2 is seasonally softer, and after the summer lull, quarterly growth should start to accelerate in Q3 and Q4.”

Real Estate & REITs

Nexus Industrial REIT (NXR.UN-T) with a “strong buy” rating and $15.50 target. Average: $14.86.

Gaurav Mathur: “We expect market rents to continue to increase across most of the REIT’s markets along with some cap rate compression, which in turn should add further fair value gains across the portfolio and to the REIT’s NAV. The REIT’s London industrial portfolio continues to witness strong rental growth, with 345K sf expiring in 2022 with an average 30-per-cent increase in rental rates and significant rental rate escalators. Looking ahead to 2023, management expects rental rates on renewals to be in the 50-75-per-cent range.”

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Raymond James analyst Frederic Bastien and Bryan Fast think it’s now appropriate to “temper” their optimism toward Infrastructure and Construction (I&C) stocks.

In a report released Tuesday, they cut their expectations for most companies in their coverage universe, citing “extreme market volatility resulting from supply chain disruptions, runaway inflation and the Ukraine war.”

“The 19 companies included in today’s report underwhelmed in 1H22, with only five stocks faring better than the broader TSX Index over the period as inflation fears gripped the market,” they said. “Last year’s runner-up (IBG), asset-heavy names (BIP, BEP) and large machinery stocks (RBA, TIH) accomplished the feat, while many labour intensive businesses (FSV, DXT) suffered steep declines. Our other professional services firms and engineering consultancies (CIGI, STN, WSP) gave up some of their exceptionally strong 2021 gains early in the year, but have recently firmed up on the premise they should have a hand in helping governments implement their green recovery plans and organizations transition to a net zero future.”

The analysts do see I&C stocks “entering a possible economic recession in much better shape than they were at the onset of the Global Financial Crisis.”

“They have diversified their revenue streams by discipline, end-market and geography, and many can count on stronger balance sheets to see them through tougher times,” they said. “Moreover, weaker links are no longer part of the equation due to takeovers, bankruptcies or research coverage realignment, which partly justifies the positive bias behind our stock recommendations. The risk, of course, is that while many management teams we discussed with in the past week are innately optimistic, demand conditions are on the cusp of deteriorating as the world rapidly adjusts to the dramatic events that have unfolded in the financial markets.”

Expecting its Modular Solutions business to come under further pressure, Mr. Bastien downgraded Dexterra Group Inc. (DXT-T) to “market perform” from “outperform” with an $8 target, down from $10 and below the average on the Street of $10.63.

“Inflationary pressures on fixed-price contracts are persisting, as are delays in rapid affordable housing projects in Ontario and B.C.,” he said. “We suspect these may compel management to dial down its expectations for government-funded programs, and look south of the border for new opportunities. Whatever the outcome, it is prudent to reduce our revenue and margin expectations for the segment, and lower our recommendation on the stock down a notch, to Market Perform. Save for the potential of a small tuck-in acquisition later this year, we see no big catalyst pushing the stock higher in the near-term.”

The analyst also made these target adjustments:

• Aecon Group Inc. (ARE-T, “outperform”) to $21 from $23. Average: $19.83.
• Bird Construction Inc. (BDT-T, “outperform”) to $12 from $13.50. Average: $12.39.
• Black Diamond Group Ltd. (BDI-T, “outperform”) to $6.50 from $7. Average: $7.33.
• Brookfield Infrastructure Partners LP (BIP.UN-T, “outperform”) to US$47 from US$70. Average: US$47.07.
• Colliers International Group Inc. (CIGI-T, “strong buy”) to US$170 from US$180. Average: US$159.86.
• Finning International Inc. (FTT-T, “outperform”) to $39 from $46. Average: $44.67.
• FirstService Corp. (FSV-T, “outperform”) to US$160 from US$175. Average: US$152.50.
• North American Construction Group Ltd. (NOA-T, “outperform”) to $24 from $27.50. Average: $27.30.
• Richie Bros. Auctioneers (RBA-T, “market perform”) to US$60 from US$55. Average: US$60.
• Russel Metals Inc. (RUS-T, “outperform”) to $36 from $44. Average: $40.50.
• SNC-Lavalin Group Inc. (SNC-T, “outperform”) to $35 from $37. Average: $39.
• Stantec Inc. (STN-T, “strong buy”) to $75 from $77. Average: $72.83.
• Toromont Industries Ltd. (TIH-T, “outperform”) to $120 from $127. Average: $128.44.
• Wajax Corp. (WJX-T, “outperform”) to $25 from $29. Average: $27.50.

“We offer high-conviction ideas for each of the I&C sub-groups we track: CIGI, STN, FTT, BDT and BDI,” he said. “Colliers and Stantec are both entering the second half of 2022 year fresh off acquisitions, with reasonable valuations and room for margin improvement still. The recent pull back has pushed the valuations of Finning and Bird Construction well below their respective long-term averages, providing good basis for patient investors to wait out the trough. Rounding out our Top-5 is Black Diamond Group, a radically transformed small-cap stock that is capitalizing on today’s inflationary pressures.”

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JMP analyst Andrew Boone thinks Shopify Inc. (SHOP-N, SHOP-T) “offers a best-in-class commerce service and expect it to take share of merchants and overall commerce going forward.”

However, seeing the Ottawa-based e-commerce giant “major investment cycle as it offers fulfillment services to merchants,” he expects limited margin expansion and free cash flow generation. That led him to initiate coverage with a “market perform” recommendation on Tuesday.

“The Shopify Fulfillment Network can be differentiated but we expect it to be capital intensive and to weigh on margins and FCF,” said Mr. Boone. “While Shopify has already made significant investments in SFN with its $450-million and $2.1-billion acquisitions of 6 River Systems and Deliverr, respectively, and in 2019 guided to $1-billion of capex over five years, given our view that Shopify will want to own and operate more of this network due to the complexities of delivery, we believe there is upside risk to Shopify’s capex guidance. While we view SFN as a differentiated service, which we believe is highly valued by merchants, it is likely to weigh on FCF in an investing environment that is increasingly focused on profitability.”

Mr. Boone did not specify a target for Shopify shares, seeing the risk-reward proposition for investors “balanced at current levels.” The average on the Street is US$57.61.

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Seeing a “disconnect” between its valuation and outlook, National Bank Financial analyst Michael Robertson raised his recommendation for shares of CES Energy Solutions Corp. (CEU-T), believing “all signs pointing to a banner second quarter.”

Moving the Calgary-based company to “outperform” from “sector perform,” he said increased margin expectations “support a constructive outlook in the face of recent pressure on share prices.” CEU shares are now down 22 per cent from their 2022 peak in early June versus a 6-per-cent decline for the S&P/TSX composite index.

“On the Q1/22 results conference call, CEU noted adj. EBITDA margins exited the quarter between 12.5 per cent and 13 per cent (well above the first-quarter average of 10.6 per cent as price increases began to take hold in March),” said Mr. Robertson. “While spring breakup typically results in a sequential decline in Q2 EBITDA, given the timing of price increase implementation and a relatively brief breakup, we believe CEU will maintain the margin momentum through Q2 and could surpass the $42.5-million in adj. EBITDA generated in Q1 (well above the current consensus estimate of $40-million and potentially representative of a new high watermark for Q2).”

Alongside a higher second-quarter adjusted EBITDA forecast, Mr. Robertson increased his full-year estimate for 2022 by 9 per cent and 2023 by 13 per cent, both 4 per cent higher than the consensus on the Street, based on improved pricing and margin forecasts.”

That led him to raise his CES target to $3.50 from $3.35, viewing its “current risk/reward balance favourably.” The current average target is $3.80.

“We continue to see considerable potential upside to our target should CEU’s forward-year multiple expand to levels more in line with the longer-term historical average and current peer group average, but with multiples contracting (broadly speaking) in the current environment given concerns surrounding a broader economic slowdown, we believe a relatively conservative target multiple is more appropriate at this time,” he said.” We note our updated forecasts imply a current 2023 estimated EV/EBITDA multiple of 4.0 times based on the closing price, already below the 4.6-times forward year multiple CEU averaged during the great recession (from December 2007 to June 2009). While CEU’s forward year multiple troughed at 3.0 times during that time period (potentially suggestive of further downside from current price levels should multiples continue to contract), even in the event of a recession from a fundamental perspective we see a far more constructive macroeconomic backdrop for CEU relative to previous economic downturns (with our full-year forecasts implying record level annual EBITDA generation this year and next). With our target price implying a 50-per-cent-plus return (driven by what we view as a relatively conservative multiple) and our estimates continuing to point to an improvement in CEU’s leverage profile through our forecast period, we are moving to Outperform.”

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Canaccord Genuity analyst Michael Fairbairn sees Rupert Resources Ltd.’s (RUP-X) Ikkari deposit at the Rupert Lapland Project in Finland” delivering cornerstone value.”

He resumed coverage of Toronto-based gold company with a “speculative buy” recommendation on Tuesday, calling it “as a well-rounded developer that offers substantial, low-cost production and sizable FCF possibilities in a top-tier jurisdiction, proven exploration potential, and a path to future upside via M&A.”

“The company’s recent discovery of the Ikkari deposit, which we believe to be the most significant gold discovery of recent memory in northern Europe, positions Rupert as a top story in the junior gold space, in our view,” he said “With Ikkari’s 4Moz, 2.5g/t maiden inferred resource delivered in late 2021, less than two years after discovery, the team at Rupert is working rapidly to de-risk and expand the project beyond its strong foundation, targeting a maiden PEA by H2/22.

“Since Ikkari was discovered in January 2020, Rupert shares have returned more than 550 per cent and the company currently has a $900-million market cap. With a cornerstone deposit located in Finland’s mining and investment friendly jurisdiction, we believe Ikkari and the rest of the company’s prospective land package offers investors a compelling combination of further upside through exploration, development, and M&A potential.”

Mr. Fairbairn suggested Rupert could become a target of a larger peer, like Agnico Eagle Mines Ltd. (AEM-T).

“We recently resumed coverage of six junior developers, where we took a constructive view on M&A over the next 12-24 months. We believe RUP stands to benefit from the compelling macro setup, and has multiple characteristics that potential acquirers look for, including a flagship asset, an attractive jurisdiction, and exploration potential. Multiple producers may be interested in RUP, and we see AEM as the most likely suitor. AEM has operated in Lapland for more than 10 years and maintains a 15-per-cent strategic holding in RUP following an initial $13-million investment in early 2020. Additionally, CEO James Withall brings deep capital markets experience as a former top precious metals fund manager in Europe,”

He set a $7 target for Rupert shares. The current average is $8.36.

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Forecasting lower organic growth and unit prices following the recent drop in steel prices, Stifel analyst Ian Gillies cut his financial expectations for Russel Metals Inc. (RUS-T).

With “ongoing uncertainty” over product demand in its metals service centre business, he cut his organic growth forecast for the third and fourth quarters as well as full-year fiscal to 4 per cent from 8 per cent previously.

“The sharp decline in steel prices could cause margin volatility in 2H22,” said Mr. Gillies. “There are no previous negative moves in steel prices that can be used as a reasonable proxy for the current market. With that said, we believe EBITDA margin compression of 300-400 basis points on a quarter-over-over quarter basis in 3Q22 could be possible given the change in commodity prices (SGMP: 300 bps). Nonetheless, we would expect segment margins for Metals Service Centres/Energy Products/Steel Distributors to be in the low-20s / mid-20s / midteens once market volatility subsides. On an overall basis, we would expect the company to reverse course to EBITDA margins in the mid- to high-single digits on a normalized basis after considering asset acquisitions and divestitures that have been executed in the prior three years. Recall, EBITDA margins in 2021 were a record high 15.8 per cent, while our 21/22 estimates are 9.2 per cent/8.1 per cent.”

Based on that view, he reduced his 2022 and 2023 estimates by 5 per cent and 7 per cent, respectively. His EBITDA forecasts slid by 12.9 per cent and 19.2 per cent.

Keeping a “buy” rating, Mr. Gillies cut his target for Russel shares to $34 from $40. The average is $40.50.

“RUS currently trades at 1.1 times 2023 estimated P/Book, which is attractive in the context of the 10-year average of 1.7 times and a one standard deviation move to the downside of 1.4 times,” he said. “During COVID-19 the stock reached a P/Book of 0.7x and the 2009 financial crisis caused the stock to fall to 0.6 times. In the near term, there is the potential for further share price weakness but would suggest over time there is more upside to the P/Book valuation than downside given the 10-year average is 1.7 times and an upside scenario would be 2.0 times. We think this is a stock worth keeping an eye on to be added on any additional weakness.”

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Touting its “attractive” valuation, “significant” capital to deploy and the “exceptional” track record of its management team, Scotia Capital analyst Daniel Sampieri initiated coverage of Anglo Pacific Group PLC (APY-T) with a “sector outperform” rating on Tuesday.

“APF is a small cap, diversified, non-precious royalty and streaming company predominantly focused on developed markets (mostly in Canada, Brazil, and Australia),” he said. “The company invests in high-quality projects in well-established mining jurisdictions. APF currently holds 15 royalty and stream assets in its portfolio, eight of which relate to producing mines. Our target price is based on 1.4 times our NAVPS(5%) estimate.”

“Similar to other royalty companies, APF offers investors markedly lower-risk commodity exposure to mining equities, which is particularly valuable in today’s inflationary environment. However, APF is unique because of (1) its diversified commodity exposure versus the relatively crowded precious metals royalty/streaming space and (2) its focus on commodities that support a more sustainable world.”

As it moves its asset mix toward greener commodities through its “transformational” Voisey’s Bay cobalt stream acquisition, Mr. Sampieri sees Anglo Pacific possessing the ability to further growth its portfolio in the near term, forecasting year-end liquidity of $113-million versus net debt of just $12-million.

“While we believe the company will continue to focus on de-leveraging near term (total debt of $112 million as at Q4/21), we believe management will opportunistically add to its portfolio via accretive acquisitions,” he said. “In our view, management has an exceptional track record with respect to its transactions over approximately the last eight years, with current economics (excluding potential upside scenarios) implying an average 8.0-per-cent internal rate of return (IRR) over eight separate deals.”

The analyst set a target of $3.50 per share, implying an “attractive” 55-per-cent return.

“APF shares are currently trading at a P/NAV(5%) of only 0.92 times, representing a healthy discount to the royalty peer group average of 1.32 times,” said Mr. Sampieri. “Moreover, at spot pricing, APF shares trade at an even sharper discount of 0.63 times on P/NAV(5%) versus the royalty peer group average of 1.13 times. Furthermore, APF offers a very attractive 4.7-per-cent dividend yield versus the royalty peer group average of 2.6 per cent.”

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In other analyst actions:

* Raising his forecast for its second quarter, ATB Capital Markets analyst Tim Monachello raised his target for Ag Growth International Inc. (AFN-T) shares to $59 from $57, keeping an “outperform” rating. The average on the Street is $51.40.

“While AFN continues to face a strong fundamental outlook, and is relatively insulated from a slowing broad market economy given the low demand elasticity of its end markets, its shares have remained pressured since its Q1/22 results (down 16 per cent),” he said. “We believe strengthening results and upside to consensus estimates for 2022 are likely catalysts for AFN shares, and its current valuation represents a strong buying opportunity prior to Q2 results.”

* JP Morgan’s Kenneth Worthington lowered his Brookfield Asset Management Inc. (BAM-N, BAM.A-T) target to US$66, below the US$69.82 average, from US$67 with an “overweight” rating.

* In response to its acquisition of a 75-per-cent stake in Versus Capital, a Denver-based alternative real asset management firm, Scotia Capital’s George Doumet raised his Colliers International Group Inc. (CIGI-Q, CIGI-T) target to US$165 from US$160 with a “sector outperform” rating. The average is US$159.86.

“We see merits to the acquisition, notably expanded private wealth distribution capabilities and further cross-selling opportunities between CIGI IM and Versus investor bases,” he said. “We expect the acquisition to transact in the 11-times EBITDA range, in line with other more recent IM transactions (including Basalt and Rockwood). This is also in line with CIGI’s current valuation and provides the company with a higher-growth/higher-margin business.”

* CIBC World Markets’ Nik Priebe cut his target for shares of First National Financial Corp. (FN-T) to $36 from $43 with a “neutral” recommendation. The average is $38.

* After a fourth-quarter earnings and revenue miss, Laurentian Bank Securities’ Nick Agostino reduced his MDF Commerce Inc. (MDF-T) target to $6.50 from $9 with a “buy” rating. The average is $4.

“Current macro-economic conditions are impacting deployment rates and slowing pipeline development/conversions across the board,” he said. “In our view the fair value accounting completion, noted cost savings and potential labour market improvements over the next year provide levers for both sales growth and EBITDA/margin gains but until we see firm signs of a recovery, MDF remains a show-me story.”