Tuesday’s analyst upgrades and downgrades

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

RBC Dominion Securities’ forest industry equity analyst Paul Quinn expects third-quarter results to “mark a sharp return to normalized pricing for wood products firms after exceptional profitability in the first half of 2022.”

“We suspect investors will focus on the macro, with the effects of a potential recession looming large across most commodities,” he said in a research report released Tuesday. “We also expect continued discussion around inflation (particularly as it relates to the ability to achieve pricing increases versus inflation in inputs, energy and transportation), interest rates, and transportation challenges given how topical these themes have been year-to-date.”

Though lumber prices slid during the quarter, Mr. Quinn emphasized they still remain above third-quarter 2021 levels as well as historical averages. He expects them to remain range bound between US$425-625 per thousand board feet for the remainder of the year.

“Tight market conditions and transportation challenges in H122 drove lumber prices close to the newly established records of 2021,” said Mr. Quinn. “However, the jump in interest rates and a slowing North American housing market has cooled demand.”

“Lumber production year-to-date (to the end of June) is down 9.6 per cent in Canada and 2.2 per cent in the U.S., equivalent to a reduction of 2.6 Bfbm of production on an annualized basis (more than 4 per cent of the total market). Sawmillers in high-cost B.C. have reduced production (most are running at an 80-per-cent operating rate, with companies such as West Fraser, Canfor and Conifex announcing specific curtailments and capacity reductions) as companies struggle to stay above breakeven with increasing log costs (stumpage in B.C. increased as of July 1) and overall cost inflation.”

Citing a “weakening macroeconomic backdrop,” Mr. Quinn reduced his earnings and price target estimates for the majority of companies in his coverage universe. He also downgraded a pair of TSX-listed stocks:

They are:

* Resolute Forest Products Inc. (RFP-N, RFP-T) to “sector perform” from “outperform” with a US$23 target. The average on the Street is US$22.80.

“While we continue to see value in the Contingent Value Right (“CVR”) that will entitle the holder to a share of future softwood lumber duty deposit refunds, we think there are better opportunities in our coverage group given: (1) limited visibility to the timeline for refunds actually occurring; and (2) Resolute’s stock is now trading above the cash consideration of $20.50 per share offered by Paper Excellence. As such, we downgrade our rating,” he said.

* Western Forest Products Inc. (WEF-T) to “sector perform” from “outperform” with a $1.75 target, down from $2.25 and below the $2.21 average.

“While we continue to like that Western offers unique exposures compared to its commodity product-focused peers, we think a weakening near-term fundamental outlook could weigh on the stock as the company works through a confluence of lower wood products demand, higher stumpage costs, and a weaker Japanese yen, and revise our rating to Sector Perform. We have also removed the stock from our Canadian Small Cap Conviction List,” he said.

“We have significantly reduced our H222 estimates, and brought down our 2023/2024 EBITDA estimates by 41 per cent/5 per cent, respectively, to reflect a more challenging near-term fundamental outlook for the business, both for commodity products (with a worsening outlook for housing), and specialty products (e.g., cedar), including those sold to Japan (driven in part by a weaker JPY). We expect challenged product demand/pricing to be compounded by the current high cost of stumpage in Coastal B.C., which will squeeze profits. We also expect lower log shipments given a more challenging outlook for lumber demand and shipping challenges which continue to plague smaller, niche wood product producers.”

Mr. Quinn’s target adjustments include:

• Canfor Corp. (CFP-T, “outperform”) to $30 from $35. Average: $37.17.
• Doman Building Materials Group Ltd. (DBM-T, “sector perform”) to $6 from $7. Average: $6.54.
• Interfor Corp. (IFP-T, “outperform”) to $35 from $40. Average: $42.17.
• Mercer International Inc. (MERC-Q, “outperform”) to US$18 from US$20. Average: US$18.90.
• West Fraser Timber Co. Ltd. (WFG-N/WFG-T, “outperform”) to US$110 from US$120. Average: US$112.50.

“In Canada, our favorite names are Cascades, Canfor, Canfor Pulp, Interfor. In the United States, our favorite names are Louisiana-Pacific, West Fraser, Sylvamo and PotlatchDeltic,” said Mr. Quinn.

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While Desjardins Securities analyst Benoit Poirier said economic indicators are “flashing more yellow than green these days,” he maintains an “optimistic” outlook for Canadian railway companies, citing management’s comments on demand and discussions with market participants.

“There is no question that the global economic outlook has taken a bearish turn in the past quarter, but the question remains — how vulnerable is the transportation industry, and specifically the Canadian railroads, to these macro challenges?,” he said. “Desjardins Economic Studies is expecting a mild recession in Canada in 2023. One of our favourite economic indicators for the railroads is the U.S. inventory-to-sales ratio (lagging indicator), which signals whether company inventories are growing faster than sales. The ratio has increased in the past year to 1.32 (latest reading in July) from 1.25 in 2021. However, it is important to note that this reading is still below the pre-pandemic level of 1.40 and the five-year pre-pandemic average of 1.40.

“Another metric that we use to track the health of the transportation industry is U.S. industrial production (IP), as it has historically been a leading indicator for carloads. IP was down 0.2 per cent month-over-month in August, below consensus of 0.05 per cent; however, it is still expected to grow 4.3 per cent in 2022 (revised downwards from 5.3 per cent in June) and 1.5 per cent in 2023 (revised downwards from 2.5 per cent in June). While this is a concern, we view it as more of a normalization of demand/activity from pandemic highs rather than a full collapse and believe inventory replenishment opportunities will remain in the short term.”

In a third-quarter earnings preview released Tuesday, he cut his volume forecast based on a trio of unexpected events in late September: a workers union strike and complete suspension of operations at Westshore’s coal export terminal at Roberts Bank; the structural failure of a plant feed conveyor belt at the Teck Resources Ltd.’s Elkview steelmaking coal operation and a large sinkhole at CN’s Yale subdivision in southern B.C.

He’s now projecting revenue ton miles to increase for Canadian National Railway Co. (CNR-T) by 4.7 per cent, down from 8.6 per cent previously. His estimate for Canadian Pacific Railway Ltd. (CP-T) slid to 6.0 per cent from 9.9 per cent.

Looking forward, Mr. Poirier thinks sequential upside from foreign exchange and fuel, which he calls “shock absorbers,” are likely to assist both companies. However, he warned intermodal and lumber could face some headwinds in 2023.

“If the Canadian dollar to U.S. dollar is sustained above $1.38 (averaged $1.31 in 3Q), that would represent a potential tailwind of 32 cents to CN’s EPS on an annualized basis (4.1 per cent on our adjusted EPS FD forecast of $7.85 in 2023), based on our calculation,” he said. “For CP, we estimate the impact at 12 cents to its EPS on an annualized basis, representing 2.5 per cent on our adjusted EPS FD forecast of $4.79 in 2023.”

Expressing a preference for CN from CP, he trimmed his target price for both companies.

“CP’s shares offer a higher risk-adjusted potential return than CN’s given our view that future OR [operating ratio] improvement at CN is largely reflected in its current share price,” said Mr. Poirier.

His changes are:

* CP to $110 from $111 with a “buy” rating. Average: $108.53

“CP’s shares offer a greater risk-adjusted potential return (18 per cent vs 14 per cent including dividends) in our view, especially given that significant OR improvements beyond 2022 are already priced into the CN consensus (57.6 per cent expected for 2024 versus 59.9 per cent expected in 2022),” he said. “Additionally, CP CEO Keith Creel’s extensive operational track record reduces the integration risk and gives us confidence in CP’s ability to unlock shareholder value from the KCS acquisition. The integration plan presented by CP/KCS in their merger application is impressive and leads us to believe that the US$1-billion of revenue synergies targeted over three years may be conservative. That said, we acknowledge that CP’s elevated leverage ratio remains something of a risk in the mid-term even if deleveraging is expected to be rapid.”

* CN to $168 from $169 with a “hold” rating. Average: $157.64.

“As valuation comes down, we see a more attractive opportunity for investors starting to develop,” said Mr. Poirier. “We expect the company to capture additional upside following 3Q results, but we prefer to wait on the sidelines until a more detailed long-term strategic plan is presented by [new CEO Tracy] Robinson. It is important to note that CN is still trading at a premium vs U.S. railroads, which we believe is justified in light of its network and growth opportunities.”

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TD Securities analyst Brian Morrison thinks growing macro risks “temper” the financial outlook for Canadian Tire Corp. Ltd. (CTC.A-T).

Previewing the retailer’s third-quarter results, scheduled to be released on Nov. 10, Mr. Morrison thinks “ongoing investments to drive future growth in both the Retail segment and Financial Services segment may weigh on the near-term financial performance.

While he says consolidated operations “remain resilient at this time,” he’s forecasting a year-over-year decline in normalized earnings per share of 10.6 per cent to $3.75 (versus $4.20). That’s below the cosensus projection on the Street of $3.96.

“Despite our positive view on CTC’s 2025 growth strategy, we believe it is prudent to lower our financial forecasts based on growing macro risks to the consumer, specifically, the impact of higher-than-anticipated inflation, the need for greater-than-anticipated monetary policy to combat, and in-turn longer duration of higher rates to mitigate the ability for inflation to re-emerge,” he said. “As such, we have moderated our Retail growth outlook for 2022/2023. Recall, CTR is typically resilient through recessionary periods, and its growth pillars (loyalty, private label, data analytics, and improved omnichannel) have taken quantum leaps forward since the GFC. That said, we believe flat Retail revenue growth in 2023, coming off outsized growth during the pandemic, would be a commendable result.

“We have also lowered our FS outlook as the macro economic outlook has weakened in recent weeks/months. We now anticipate a higher degree of net write-offs and growth in the allowance provision as a result. We would also expect management to pull back upon its growth-through-acquisition strategy. Recall the FS portfolio performed well during the GFC (write-off rate +200bps), and we see no issue with respect to portfolio funding. There are numerous sources of available capital, inclusive of the $2.25-billion backstop financing agreement with BNS.”

Reaffirming a “buy” rating for Canadian Tire shares, he cut his target to $215 from $250. The average on the Street is $226.90.

“We view the mid-term risk/reward profile/valuation as compelling, although a lack of catalysts and potential for downward financial revisions may limit near-term appreciation until we see improved earnings visibility in 2023,” said Mr. Morrison.

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Pointing to the potential impact of rising global interest rates, rising input costs and the outlook for global vehicle production schedules, BMO Nesbitt Burns analyst Peter Sklar made “substantial” reductions to his earnings expectations for Linamar Corp. (LNR-T), Magna International Inc. (MGA-N, MG-T) and Martinrea International Inc. (MRE-T) on Tuesday.

For Linamar, his third-quarter earnings per share projection fell to $1.63 from $2.07, while his full-year adjusted 2022 and 2023 forecast slid to $6.07 and $7.52, respectively, from $6.92 and $8.57.

For Magna, his third-quarter earnings estimate is now 91 US cents, down from US$1.02. His full-year adjusted 2022 and 2023 forecast dipped to US$4.28 and US$6.34 respectively, from US$4.55 and US$6.79.

For Martinrea, Mr. Sklar is now projecting earnings per share of 36 cents, down from 42 cents previously. His 2022 and 2023 expectations are $1.42 and $2.26, respectively, from $1.49 and $2.64,

The analyst said all three stocks appear to offer value on an enterprise Value to EBITDA basis, however he warned of the risk of further downward revisions to his earnings estimates.

“If some of the risks we have highlighted above were to unfold, we believe the stock could see lower levels,” he said. “We also emphasize that auto parts stocks generally underperform the market during periods of Fed tightening as this is clearly an interest-sensitive sector in terms of consumer demand for vehicles; and we believe the Fed’s behavior largely accounts for the sector’s substantial year-to-date price decline and underperformance. While this decline has arguably taken [these stocks] to relatively low levels of valuation, we believe that there is a good likelihood of further tight monetary policy for the remainder of this year and potentially into 2023, and we believe investors will be reluctant to bid up the price of auto parts stocks in the middle of a Fed tightening cycle. We recommend that investors should curtail their weightings in Canadian auto parts stocks until such time there is evidence that the Fed is about to reverse policy and adopt a more accommodative monetary stance.”

Mr. Sklar made these target price adjustments:

* Linamar to $62 from $65 with a “market perform” rating. The average on the Street is $77.40.

“We believe Linamar can benefit from its higher operating leverage as the company significantly reduced structural costs during the COVID-19 downtime. The company also has an unusually large number of program launches beginning to achieve mature production levels,” he said.

* Magna to US$58 from US$63 with a “market perform” rating. Average: US$73.13.

“We believe Magna will enter into more agreements with BEV OEMs, which should lead to further re-rating of the stock. Historically, Magna has been valued within a range of 4-7 times EV/EBITDA. We believe Magna can trade towards the high end of the range,” he said.

* Martinrea to $10 from $11 with a “market perform” rating. Average: $14.22.

“We believe it is difficult for auto manufacturers to grow earnings during a period of flat-to-declining vehicle production volumes, which the global auto market is currently experiencing as it is in the later stages of the economic and auto cycles. As a result, we believe it is unlikely that Martinrea will experience meaningful multiple expansion,” he said.

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Introducing his 2024 estimates for engineering and construction firms, Stifel analyst Ian Gillies reaffirmed Stantec Inc. (STN-T) as his “top pick.”

“We are forecasting STN to deliver EPS growth of 15.6 per cent in 2023 and 8.3 per cent in 2024, compared to the engineering group average of 15.0 per cent and 10.6 per cent,” he said. “Our model does not contemplate any new M&A, and we would expect the company to be active. We estimate the company has dry powder of $930-million, assuming the company will not want to exceed 2.0 times net debt/EBITDA (ex leases) in 2023E. The faster than anticipated integration of Cardno, and higher interest rate environment (less competition from private equity), may create a more conducive M&A environment in 2023 for Stantec. STN trades at 17.1 times 2024 estimated price-to-earnings compared to the group average of 16.5 times and 10-year average of 16.2 times.”

Keeping a “buy” rating for Stantec shares, he raised his target to $76 from $72. The average on the Street is $74.27.

Mr. Gillies also made these target changes:

* WSP Global Inc. (WSP-T, “buy”) to $175 from $169. Average: $179.

“WSP is not far behind STN and it could be an exciting two years given the strength of the balance sheet,” he said. “WSP should show outstanding earnings growth in 2023 at 25.7 per cent, aided by the Wood E&I acquisition and a number of smaller bolt-ons. 2024 estimated EPS growth is 8.2 per cent, but we anticipate that the company will be active in deploying capital to M&A given that we forecast WSP to exit 2023 with a net debt/EBITDA (ex leases) of 0.5 times (goal: sub 2.0 times). The deployment of capital should allow the memory of RPS to fade into the background. This remains a best in class company, but its more expensive valuation (2024 estimated P/E: 19.4 times) is what puts it behind STN in our ‘pecking order.’”

* Bird Construction Inc. (BDT-T, “buy”) to $10 from $9. Average: $9.53.

“Bird is well positioned to manage economic headwinds,” he said “We are forecasting BDT’s 23 EBITDA to be up 5.1 per cent in 2023, after declining 15.5 per cent in 2022. In 2024, we estimate EBITDA will be up 6.9 per cent year-over-year as margins normalize post an inflationary period. At 0.5 times net debt/EBITDA in 2023, Bird is very well positioned to manage economic pressures. The 2024 EV/EBITDA of 3.2 times is a significant discount the construction average of 4.0 times. In our view, this is an interesting opportunity for patient value investors given the strong management team and healthy backlog.”

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Citing “a more attractive total return profile” and seeing as oversold, CIBC World Markets analyst Mark Jarvi raised Transalta Renewables Inc. (RNW-T) to “outperformer” from “neutral” with a $17 target, down from $19 and below the $17.77 average.

“While there is still some risk around rising bond yields with shares pulling back substantially in the last month (approximately 24 per cent), we believe the upside/downside scenario is now more skewed to the upside,” he said. “While we base our target on a risk-adjusted NAV/sh valuation, we would note that RNW is now trading below 8 times, 2.7 times below its average in the last five years and nearing its trough low of 7.1 times back in 2015. Further, RNW’s dividend yield at 7-per-cent has become more attractive relative to comparable equity income alternatives. Further, we believe the portfolio can deliver steady results and the recent Sarnia recontracting was a key de-risking event.”

Mr. Jarvi and colleague Robert Catellier also reduced his targets for several other stocks, noting:

“For Midstreamers, we have modified our estimates to reflect lower commodity prices and higher operating costs associated with Alberta power prices and inflation. Growing macro concerns (recession, interest rates) are pressuring trading multiples for the Midstreamers. Potential opportunities around energy security, notably LNG, continue to emerge and may generate additional long-term opportunities (ENB and TRP are best exposed to this trend). We will be looking for comments with respect to capital allocation, given the macro environment.

“In our Power coverage, CPX and TA could surprise to the upside in Q3 on stronger Alberta power price trends ... NPI should benefit from high spot prices in Germany. In the Utilities, we expect H to post another strong quarter and remains a preferred name. We decrease our price targets for all Power & Utilities under coverage to reflect the broader valuation reset across the sector/equity markets.”

His changes include:

• Atco Ltd. (ACO.X-T, “outperformer”) to $49 from $55. Average: $50.64.
• Boralex Inc. (BLX-T, “outperformer”) to $46 from $50. Average: $50.77.
• Canadian Utilities Corp. (CU-T, “neutral”) to $36 from $41. Average: $39.06.
• Capital Power Corp. (CPX-T, “neutral”) to $46 from $50. Average: $52.42.
• Emera Inc. (EMA-T, “neutral”) to $55 from $66. Average: $64.77.
• Fortis Inc. (FTS-T, “neutral”) to $54 from $63. Average: $60.68.
• Hydro One Ltd. (H-T, “outperformer”) to $20 from $23. Average: $36.89.
• Northland Power Inc. (NPI-T, “outperformer”) to $44 from $49. Average: $50.
• TransAlta Corp. (TA-T, “outperformer”) to $16 from $17.50. Average: $16.38.

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Seeing an improving growth outlook, National Bank Financial analyst Rupert Merer raised his recommendation for 5N Plus Inc. (VNP-T) to “outperform” from “sector perform” after its subsidiary AZUR SPACE Solar Power signed a 10-year extension to its exclusive agreement with Sierra Space to supply solar space cells.

“Under the terms of the agreement, AZUR will produce a new solar cell, referred to as the MWT, exclusively for use in the production of Sierra Space’s unique and patented Space Solar Surface Mount Technology solar array systems,” said Mr. Merer. “The solar cell technology is expected to be developed in partnership by both companies, under which AZUR will own the IP on the technology and Sierra will own the IP on the equipment. This agreement is expected to add to AZUR’s earnings going forward as it ramps up on capacity. Moreover, this agreement is in line with VNP’s long-term strategy of focusing on value-added markets and expanding its TAM in the space solar cells vertical.”

Mr. Merer also touted the potential gains from a late September renewal and increase to its multi-year agreement with First Solar Inc. (FSLR-Q) for the supply of semiconductor materials associated with the manufacturing of thin-film photovoltaic modules.

“Annual volume is expected to increase by 35 per cent in 2023 and by more than 100 per cent in 2024 from current levels,” he said. “We believe that FSLR represents about 16 per cent of VNP’s revenues and this agreement should result in a material increase in earnings over the next two years. The contract allows VNP to make the necessary planned investments in its Montreal facility to significantly increase the domestic supply of materials to the North American market by late 2023.”

Moving the Montreal-based company to “outperform” from “sector perform,” Mr. Merer maintained a $2.50 target for its shares. The average is $2.70.

“With little modeled for growth at VNP’s AZUR and FSLR businesses, this deal could provide some upside,” he said. “There is increasing visibility on growth in the space business, and VNP is well-positioned as a leading supplier of semiconductor materials for the industry. We believe revenue from sales to Sierra could start next year and could have strong margins. VNP is currently trading at 4.4 times EV/EBITDA on our 2023 estimate vs. peers in specialty materials at 6.5 times.”

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Scotia Capital analyst Orest Wowkodaw sees Cameco Corp.’s (CCO-T) US$2.2-billion acquisition of a 49-per-cent stake in Westinghouse Electric Co. as “transformative,” adding “a significant and stable source of recurring revenue and FCF (which diversifies [its] exposure to volatile uranium prices) while achieving vertical integration through the nuclear fuel cycle.”

“We think this acquisition makes strong strategic sense and that the price appears fair (13-per-cent NAVPS accretion). Overall, we view the transaction as positive for the shares,” he said.

“WEC adds fuel fabrication exposure to light water reactors, complimenting CCO’s CANDU base. There appears to be significant opportunities to win new business from existing Rosatom customers, particularly in Eastern Europe.”

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Maintaining a “sector outperform” rating for Cameco shares based on improving uranium fundamental, he cut his target to $42 from $44. The average is $43.13.

“We believe investors will need time to digest this transaction,” he noted.

Elsewhere, TD Securities’ Greg Barnes cut his target to $40 from $45 with a “buy” rating.

“In our view, the addition of Westinghouse’s nuclear services business to CCO’s uranium/conversion business creates a nuclear industry powerhouse that provides almost end-to-end solutions for nuclear utilities - the only gap being enrichment (which could be addressed by the late-2020′s with the commercialization of Global Laser Enrichment’s process),” said Mr. Barnes.

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Canaccord Genuity analyst Matthew Lee raised his full-year earnings forecast for Diversified Royalty Corp. (DIV-T), seeing it “well positioned for growth as pandemic challenges subside.”

“In our view, DIV has managed well throughout COVID-19 and is now poised to build its royalty portfolio while continuing to return capital to shareholders and repay debt.” he said. “As it stands, DIV’s royalty portfolio is nearing a full recovery, with Mr. Mikes reaching pre-pandemic traffic and Mr. Lube generating double-digit y/y growth, far surpassing F19 same-store sales. Importantly, DIV’s payout ratio has dropped below 100%, which has allowed management to raise its dividend in the quarter, indicating confidence in the firm’s trajectory. While we see several opportunities for DIV to grow its portfolio, we expect the company to remain steadfast in its objective of acquiring high-quality royalty streams associated with growing, proven businesses.”

Mr. Lee is now projecting adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $44.5-million, up from $41.8-million. His fiscal 2023 estimate remains $46.6-million.

Maintaining a “buy” recommendation for its shares, Mr. Lee raised his target to $3.50 from $3. The average on the Street is $3.76.

“Our target of $3.50 represents 14 times F23 EBITDA, which is a slight premium to royalty peers, justified by its revenue diversification and supported by our DCF,” he said. “DIV currently offers investors a 9.4-per-cent FCF yield and an 8.2-per-cent dividend yield.”

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In a research report on the lithium market titled O Canada!, Canaccord Genuity analyst Katie Lachapelle initiated coverage of a pair of companies focused on projects in the James Bay region of northern Quebec with “speculative buy” recommendations.

* Critical Elements Lithium Corp. (CRE-X) with a target of $3.50 per share. The average is $3.77.

“CRE is steadily advancing the Rose project with a near-term focus on securing final permits and funding,” she said. “On the permitting front, CRE has already received a favourable decision from the federal government. The only remaining step is the completion of the provincial permitting process, where delays have weighed heavily on CRE’s advancement and stock price performance. Despite this, the company remains confident it will receive a positive decision and aims to have Rose fully permitted by the end of 2022. We are optimistic on a decision within the next 12 months and believe this will act as a key re-rating catalyst. Our FY26E production timeline assumes receipt of permits by year-end CY23.”

“CRE continues to evaluate ongoing interest from potential strategic partners. During the time that CRE has been awaiting its final permits, we believe that the intensity of parties looking for offtake has increased substantially. As a result, we expect the company to lock in a strategic partner shortly after its permits are received, along with a financial contribution towards Phase 1 capex. In our view, a firm partnership agreement would be catalytic to CRE’s shares and present a potential re-rating opportunity.”

* Patriot Battery Metals Inc. (PMET-X) with a $9.75 target. Average: $9.13.

“In our view, PMET’s [Corvette] property clearly demonstrates the potential to host additional large-scale, high-quality deposits,” she said. “Only 30km of the 50km CV Lithium Trend has been explored, and multiple pegmatite clusters have yet to be drill tested. We highlight the recent discovery of CV13, a pegmatite cluster located 4.3km along trend of the main pegmatite corridor. Preliminary grab samples returned an average grade of 0.98-per-cent Li2O, with grades up to 3.73-per-cebt Li2O. A drill rig is now operating at CV13, with ~2,500m planned for this fall (weather permitting), and a follow-up program scheduled for winter 2023. We believe that CV13 could represent another material zone of mineralization and look forward to the initial assay results.”

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In other analyst actions:

* Calling its risk-reward is “more attractive,” Tudor Pickering & Co analyst Matthew Taylor raised TC Energy Corp. (TRP-T) to “buy” from “hold” in response to a recent selloff that started with the issuance of new equity to fund a project in Mexico. His $65 target is below the $68.80 average.

* Pointing to multiple compression across the capital markets industry, Desjardins Securities’ Gary Ho cut his Alaris Equity Partners Income Trust (AD.UN-T) target to $20.50 from $22.50 with a “buy” rating following the recent redemption of FNC Title Services (FNC). The average is $21.38.

“Our investment thesis is based on: (1) AD’s diverse portfolio is well-positioned to perform, even with an uncertain U.S. macro outlook; (2) a fortified balance sheet from the Kimco and FNC redemptions and recent debt financing; (3) a healthy 60–65-per-cent payout ratio; and (4) it is attractively valued at 0.85 times P/BV [price-to-book value], with an 8.6-per-cent distribution yield,” said Mr. Ho.

* Scotia Capital’s Himanshu Gupta lowered his Chartwell Retirement Residences (CSH.UN-T) target to $10 from $12.50, below the $12.79 average, with a “sector perform” rating.

“We downgraded CSH to SP rating (from SO rating) in mid-August,” he said. “Since then, CSH unit price is down 24 per cent (vs REIT sector down 14 per cent). Although valuation is looking much better now, we maintain our SP rating as we don’t expect a material positive catalyst before March 2023.”

* Expecting a guidance increase, Raymond James’ Stephen Boland increased his target for Element Fleet Management Corp. (EFN-T) to $20 from $18, reiterating an “outperform” recommendation. The average is $19.14.

“EFN has been one of the best performing financial services stocks so far in 2022, up 41.0 per cent year-to-date (compared to the S&P/TSX down 12.1 per cent),” he said. “We believe the outperformance is due to the more positive outlook with regard to the backlog being converted into originations and revenue. Additionally, in the 2Q22 results, management indicated that 2022 and 2023 guidance was too low. The last time 2023 guidance was updated in 3Q21, so a fair amount of time has passed since that announcement.

“Despite the outperformance of the stock, we believe there remains considerable upside from current levels. The valuation remains reasonable and below peak levels. We have adjusted our estimates for 2022 and 2023. Our 2023 adjusted earnings per share has increased to $1.23 from $1.19. ... This is a stock we would continue to buy before the quarter.”

* Canaccord Genuity’s Carey McRury raised his Endeavour Mining Corp. (EDV-T) target by $1 to $46 with a “buy” rating after announcing a go-ahead construction decision for its La Figué project on Côte d’Ivoire. The average is $39.68.

“Overall, we had expected the project to move forward, and we view the study update as slightly positive,” he said.

* After assuming coverage, Scotia Capital’s Jonathan Goldman raised the firm’s target for GDI Integrated Facility Services Inc. (GDI-T) to $53 from $52.50 with a “sector perform” rating. The average is $61.33.

“We view GDI as an up-and-coming compounder: pre-COVID, it was one of the fastest EBITDA compounders in Canada, while persistently trading at one of the lowest valuations,” he said. “Then, COVID produced a massive windfall: higher on-call volumes and labour efficiencies led to outsized margins and FCF generation. Margins have returned to pre-COVID levels in the U.S., but remain more than 2 times in Canada, mostly due to mix. While margins may stay “higher for longer”, we think directionally they will exhibit mean reversion, which could lead to negative earnings surprises. Shares are trading at 9.6 times on our 2023E or 10.2 times on what we view as normalized EBITDA. We believe a premium to its historical pre-COVID multiple of 8.8 times is warranted given the company’s track record and runway for earnings growth; however, we prefer to remain on the sidelines pending signs of margin stabilization or as the comps ease.”

* Canaccord Genuity’s Tania Armstrong-Whitworth trimmed her Small Pharma Inc. (DMT-X) target to 75 cents from $1 with a “speculative buy” rating. The average is $2.37.