Inside the Market’s roundup of some of today’s key analyst actions
"What stood out from a recent visit to the company’s modern plate processing plant is that catch-up demand is sustaining solid volumes across Alberta just as management’s value-added initiatives continue to gain traction with industrial users," he said. "As we look further out, we are encouraged by what’s to come from LNG Canada. We see Russel not only green fielding an Energy Products outlet in Kitimat, but also selling good volumes of line pipe to TransCanada’s Coastal GasLink project. In the United States, where lead times are longer than at the same time last year, the firm is enjoying broad based strength. Just as importantly, prices for steel plate—a close proxy for RUS operating profit—continue to trade near their summer highs of $1,000 per ton as U.S. mills look to fill December order books, domestic supply remains limited and Canada starts imposing a provisional safeguard surtax to prevent dumping. When taken together, these factors lead us to believe Russel’s 2H18 results will turn out stronger than the Street expects."
Mr. Bastien has a "strong buy" rating and $36 target price for Russel Metals shares. The average target on the Street is $35.25, according to Bloomberg data.
He also has a "strong buy" rating for Aecon with a $23 target, exceeding the average of $22.15.
"We are removing Aecon Group from Raymond James' list of Analyst Current Favourites after the share price reacted strongly to better-than-expected 2Q18 results and a very upbeat outlook for 2019," he said.
Altius Minerals Corp. (ALS-T) provides investors with low risk royalty exposure to base metal and bulk commodities, according to Canaccord Genuity analyst Carey MacRury.
In a research report released Tuesday, he initiated coverage of St. John's-based company with a "buy" rating.
"Altius’ royalty portfolio backed by strong operators with long-life, low-cost assets and located in safe jurisdictions," said Mr. MacRury. "Altius’ potash royalties are on mines operated by Nutrien and Mosaic, which represent almost 80 per cent of the potash capacity in the province of Saskatchewan. We estimate the potash reserves support over 50 years of production at current levels (or 30+ years assuming annual demand growth; there is also sufficient potash capacity in place to support a 50-per-cent increase in production from current levels). We model a more than 30-year mine life for the copper stream on Yamana’s Chapada mine in Brazil and almost 40 years on the Iron Ore Company of Canada (IOC)
mine in Labrador that is operated by Rio Tinto. Altius’ royalties on the Alberta coal mines have a 10-year life on our estimates. The thermal coal mines supply coalpowered plants operated by ATCO, Capital Power, and TransAlta. The company’s royalty assets are also located in relatively safe jurisdictions with 80 per cent of the royalty assets (on a NAV basis) located in Canada and 17 per cent in Brazil (Chapada stream).
"We like the royalty/streaming model: higher return potential, lower-risk exposure to the commodity cycle. The royalty model has been a clear success story in the precious metals sector with the royalty companies largely outperforming their mining peers and precious metal prices over the long run. We believe that Altius has the necessary attributes to continue to do the same in the diversified mining sector."
Mr. MacRury emphasized that Altius is the lone publicly traded royalty company in North America with a focus on the diversified mining sector, and it aims to replicate the commodity exposure of larger diversified mining companies globally, like Rio Tinto and BHP.
"Altius increased its royalty revenue to $65 million in 2018 from $6-million in 2013," the analyst said. "We forecast revenue increasing to $70-75 million over the next two years. With approximately $150-million in available liquidity, we see Altius as well positioned to continue to grow. We estimate that the deployment of $100-million into new streaming or royalty opportunities could boost Altius' FCF by 20-30 per cent. We also expect Altius to continue to increase its dividend over time; a current payout ratio of 18 per cent of FCF leaves ample room to increase the dividend (vs. royalty peers at 30-40 per cent of FCF)."
He set a target price of $18.50 for Altius shares. The consensus on the Street is $17.55.
Though it’s had a “solid run,”, CIBC World Markets' Mark Jarvi downgraded his rating for Capital Power Corp. (CPX-T) to “neutral” from “outperformer,” seeing its upside “fade” in the wake of the release of its third-quarter results.
“Capital Power has had a strong run year-to-date (up 16 per cent versus a 12-per-cent decline for the S&P/TSX Capped Utilities Index)," the analyst said. "However, following Q3 results and a review of our assumptions, we have trimmed our estimates slightly and .... we now see only a modest total return potential of 12 per cent from current levels. While CPX provides an attractive dividend (that should continue to grow), absent further improvements in the Alberta power market, we cannot point to operational levers or likely near-term catalysts that will allow the shares to continue outperform the peer group.”
Mr. Jarvi maintained a $30 target, which exceeds the consensus of $29.59.
Elsewhere, despite a “modest” third-quarter earnings miss, Raymond James analyst David Quezada said he’s maintaining his “neutral” stance on Capital Power.
“With shares of CPX up 16 per cent year-to-date, the stock has substantially outperformed its peer group, which has declined by an average of 17 per cent,” he said. “Accordingly, the stock has moved to within 10 per cent of our target price, prompting our recent move to Market Perform. We continue to see much to like in Capital Power, including a 6.3-per-cent dividend yield and large wind development portfolio however, for the time being, we see other compelling opportunities among the IPPs where we believe stocks have been unduly punished.”
He kept a “market perform” rating and $31 target.
Expecting macro concerns to limited its upside, Citi analyst Alexander Hacking lowered his rating for Vale S.A. (VALE-N) to “neutral” from “buy.”
"We rate Vale at Neutral, given that FCF [free cash flow] yield is still strong (12 per cent 2019 estimate) and the company’s balance sheet is in very good shape," he said. "The main risk to our downgrade is that U.S.-China trade tensions ease up sooner than expected triggering 'risk on; or that Vale is able to improve returns in non-iron ore operations faster than expected."
In justifying his downgrade, Mr. Hacking pointed to a quartet of factors:
- His believe the company's FCF yield is "no longer compelling" in comparison to its global peers following a period of "significant" share price outperformance
- The outperformance of Chinese iron ore and steel prices versus other base metals and "risky" assets. which he deems unsustainable if macro risks build further.
- A limited upside optionality for its base meltal business due to Tsingshan’s move into battery-grade nickel sulphates.
- The company may be an "underperformer" in Brazil as its economy turns the corner.
Mr. Hacking's target for Vale shares remains US$16. The average is 40 US cents higher.
Canaccord Genuity analyst Bobby Burleson initiated coverage of a pair of cannabis companies with high leverage to the "briskly growing" Nevada recreational market on Tuesday.
“We are forecasting Nevada cannabis retail sales to reach nearly $1-billion by 2022, growing at a 30-per-cent CAGR [compound annual growth rate] from $266-million in 2017,” said Mr. Burleson.
“PLTH is a vertically integrated operator with existing retail distribution and cultivation, and imminent plans for a Las Vegas ‘superstore’ just off the strip. TGIF is a producer/manufacturer of flower and cannabis concentrate with several of its own branded consumer products and a healthy wholesale distillates business supplying Nevada’s rapidly growing vape market. Although PLTH and TGIF target different points in the legal cannabis supply chain, both companies offer differentiated business models that appear well-positioned to benefit from the strong ramp of Nevada’s recreational use market while trading substantially below U.S. peer average multiples on an EV/EBITDA basis.”
Mr. Burleson set a target price of $4.20 for shares of Las Vegas-based Planet 13. The average target on the Street is currently $6.10.
“We like PLTH for its prized superstore asset and long-term optionality to leverage the Planet 13 brand into additional high-end stores across multiple states,” he said. “We view Las Vegas as an unparalleled launch point for this brand-building exercise considering the city’s reach as a global tourist destination and reputation for over-the-top entertainment. With the imminent launch of its flagship Las Vegas superstore on Nov. 1, we believe PLTH appears catalyzed for a near-term appreciation followed by healthy longer-term returns given its 50-per-cent discount to U.S. cannabis retail peers, (5 times 2020 estimated EV/EBITDA versus 10-times peer average). We expect PLTH to represent approximately 19% of the Nevada market over the long term with additional upside from expansion into other states.”
His target for 1933 Industries, based in Vancouver, is 70 cents, which falls in-line with the consensus.
“Although TGIF also produces flower under its own brand, we believe a heavy focus on concentrates (70 per cent of production revenues) will support stable pricing and margins going forward, while exposing the company to the fastest-growing product category (vape) in recreational cannabis,” the analyst said. “We expect TGIF to represent approximately 7 per cent of Nevada’s longer term concentrate market. In addition, TGIF’s reach extends beyond Nevada and THC through its Infused MFG business, which markets a line of hempbased CBD wellness products marketed across the U.S.. With the shares trading at 4 times 2020 estimated EV/EBITDA versus a 10-times peer average, we believe the combined value of TGIF’s concentrates production in Nevada coupled with a CBD brand with solid national traction offer substantial upside for the stock.”
In reaction to a post-earnings share price dip, JPMorgan analyst Jamie Baker lowered his rating for a trio of U.S. airlines on Tuesday.
Since the beginning of October, the airlines have suffered a 14-per-cent drop in price amid mixed quarterly results and as global equities have suffered a roller-coaster performance.
Though he thinks "the industry remains on a path towards margin expansion for the first time since 2014," Mr. Baker downgraded the following stocks:
Southwest Airlines Co. (LUV-N) to “underweight” from “neutral” with a target of US$52, down from US$63. The average is US$64.88.
United Continental Holdings Inc. (UAL-Q) to “neutral” from “overweight” with a US$95 target, falling from US$98. The average is US$98.50.
Spirit Airlines Inc. (SAVE-N) to “neutral” from “overweight” with a US$59 target, rising from US$51. The average is US$60.
Conversely, Mr. Baker upgraded on JetBlue Airways Corp. (JBLU-Q) to “overweight” from “neutral,” expressing optimism about the industry in 2019 due to improving margins and strong seasonal traffic.
His target for the stock is US$20, which is 42 US cents ahead of the consensus
BMO Nesbitt Burns analyst Joel Jackson initiated coverage of Lithium Americas Corp. (LAC-T) with a “market perform” rating and Street-low $6 target. The average is $11.65.
Mr. Jackson said: “LAC could prove to be a future material lithium carbonate supplier partnering with heavyweight Ganfeng on the under-construction Cauchari-Olaroz brine project in Argentina. Plus LAC may be able to prove value with the early-stage Thacker Pass Nevada clay project. ... However, amid an expected falling lithium commodity tape, LAC seems reasonably valued considering risks at Cauchari-Olaroz (non-trivial brine start-up challenges, Ganfeng replacing brine-leader SQM as partner, Argentina volatility), and Thacker Pass hurdles (large capex, permitting, proving the process/costs at scale, etc.).”
In other analyst actions:
BMO Nesbitt Burns analyst Andrew Breichmanas downgraded Guyana Goldfields Inc. (GUY-T) to “market perform” from “outperform” with a target of $3.75, falling from $5 and below the average of $4.65.
With a file from Bloomberg News