Inside the Market’s roundup of some of today’s key analyst actions
Seeing “modest growth ahead with [a] dividend reset,” Canaccord Genuity analyst Carey MacRury upgraded Newmont Corp. (NEM-N, NGT-T) to “buy” from “hold” on Tuesday.
“Overall, we viewed the Q4/22 results and updated guidance as in line to slightly positive (we view in-line costs as a positive in this environment), although 2022 overall was a challenging year for Newmont with production coming in at the low end of guidance and costs above the high end,” he said in a research note. “The company also reset its dividend framework as expected to $1.60 per share annualized, down from $2.20 per share and represents 45 per cent of 2023 estimated sustaining FCF and a 3.6-per-cent yield.
“We view Newmont as offering investors a steady gold production profile centered on geopolitically stable jurisdictions, with a deep project pipeline, strong balance sheet and FCF generation, and a proven operating team.”
On Feb. 23, Newmont reported adjusted earnings per share and earnings before interest, taxes, depreciation and amortization of 44 US cents and US$1.22-billion, respectively, topping Mr. MacRury’s estimates on better-than-expected production and largely in-line cash and all-in sustaining costs. For 2023, it’s projecting gold production of 6.0 million ounces on cash costs of US$870-970 per ounce, both also meeting his expectations (5.99 million and US$950 per ounce).
“Gold production is expected to trend higher from 6.0Moz in 2023 to 6.4Moz (mid-point) by 2026, up 7 per cent,” said Mr. MacRury. “Costs are expected to trend downwards from $920 per ounce in 2023 (mid-point) to $800 per ounce by 2026 on expectations of normalizing inflation and higher production levels.”
After “minor” revisions to his estimates, the analyst raised his target for Newmont shares to US$55 from US$53. The average on the Street is US$56.70, according to Refinitiv data.
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Scotia Capital analyst Orest Wowkodaw sees the copper market “finely balanced as supply struggles” and believes there’s “an attractive copper equity for every investor.”
“After further downgrading both our 2023 consumption and supply expectations, we continue to forecast a copper (Cu) market largely in balance near-term with very low visible inventories, before the emergence of large structural deficits in the medium-term driven by a lack of meaningful supply growth,” he said. “Despite the obvious near-term demand risks, we believe that Cu prices near $4.00 per pound remain well-supported due to struggling supply, critically low inventories, and a large looming projected structural deficit ahead.”
In a research report released Tuesday, Mr. Wowkodaw made “material” 10-per-cent increases to his 2023 price forecasts for copper (to US$4 per pound), 62-per-cent iron ore (to US$110 per ton) and high coking coal (US$260 per ton). That led him to increase his targets for stocks in his coverage universe by a similar amount.
“All copper equities are likely to move higher if Cu prices improve,” he said. “Moreover, we believe valuation multiples could re-expand if Cu prices trade sideways given the solid margins (spot Cu of $4.00/lb vs. average AISC’s of $2.48/lb) and FCF generation of many larger producers at current prices. Moreover M&A speculation could also fuel the fire.”
“Overall, TECK is our top pick, while FM and CS remain our other preferred picks for Cu exposure; we also recommend FCX, ERO, HBM, and IVN. Among the small cap producers we prefer CMMC. Among the developers, we recommend AMC, FIL, FOM and IE. Our Sector Outperform-rated copper equities currently have an attractive 12-month average implied return of 47 per cent. GMEXICO and SCCO are rated Sector Underperform due to an unattractive risk/reward profile.”
Mr. Wowkodaw upgraded Freeport-McMoRan Inc. (FCX-N) to “sector outperform” from “sector perform” with a US$50 target, up from US$41 and above the US$45.98 average on the Street.
“FCX ranks well in Cu price leverage and in our view, valuation now also appears reasonable (spot 2024E EV/EBITDA of 5.9 times vs. the large cap peers at 5.9 times),” he said. “The company is also a prime beneficiary of markedly higher molybdenum prices, including volume optionality. FCX has successfully deleveraged and has relatively limited internal uses of cash (the company appears growth challenged). We anticipate meaningful shareholder returns to resume in 2024. Based on an improved relative valuation (FCX typically trades at a significant premium to its peers), we have upgraded our investment rating.”
Mr. Wowkodaw’s target changes include:
* Capstone Copper Corp. (CS-T, “sector outperform”) to $9 from $7. Average: $7.05.
Analyst: “CS ranks very well in Cu growth, Cu price leverage, and valuation (P/NAV and 2024E EV/EBITDA as significant growth is expected to arrive by year-end 2023). CS also appears catalyst rich over the transition period. However, we anticipate negative FCF until 2024 due to growth spending.”
* Champion Iron Ltd. (CIA-T, “sector outperform”) to $9 from $8. Average: $8.03.
Analyst: “We highlight that the three Fe producers under our coverage (CIA – Sector Outperform; LIF – Sector Perform, VALE – Sector Outperform) are currently trading at an average spot P/NAV of only 0.37 times, an average implied 62-per-cent Fe price of only $78 per ton, and have impressive average 2023E spot FCF yields of 18 per cent. We also note that CIA appears to be the cheapest producer within our large and mid-cap coverage on both spot EV/EBITDA and P/NAV metrics. However, with Chinese steel mill margins still in significant negative territory, in our view, spot Fe (and HCC) pricing risks appear to be skewed to the downside.”
* Ero Copper Corp. (ERO-T, “sector outperform”) to $30 from $25. Average: $23.95.
Analyst: “ERO ranks well on medium-term Cu growth driven by the development of the Tucuma project and a new underground shaft at Pilar. ERO also ranks relatively well on valuation once growth is delivered (2025+). However, the company is projected to be FCF negative until 2025 due to elevated growth spending. In our view, exploration upside (for both Cu and Ni) remains essentially an attractive free option at the current share price.”
* First Quantum Minerals Ltd. (FM-T, “sector outperform”) to $38 from $33. Average: $30.82.
Analyst: “FM appears attractive given its strong relative ranking in Cu price leverage and reasonable valuation (we also see modest Cu growth ahead). Moreover, the recent agreement on a new fiscal contract in Panama removes a significant overhang.”
* Hudbay Minerals Inc. (HBM-T, “sector outperform”) to $10 from $9. Average: $9.28.
Analyst: “HBM ranks very well on valuation (the cheapest on both EV/EBITDA and P/NAV), Cu price leverage, and anticipated FCF yield, but has a highly levered balance sheet and medium-term growth challenges due to the uncertainty of Copper World/Rosemont. Heightened geopolitical risk in Peru also remains a significant overhang.”
* Ivanhoe Mines Ltd. (IVN-T, “sector outperform”) to $16 from $14.50. Average: $14.85.
Analyst: “IVN ranks extremely well on growth (world-class assets to boot). IVN’s execution to date at Kamoa-Kakula (Phase 2 now fully ramped) has been nothing short of remarkable.”
* Teck Resources Ltd. (TECK.B-T, “sector outperform”) to $75 from $70. Average: $66.03.
Analyst: “TECK appears attractive on valuation and FCF yield driven by elevated HCC prices (the implied 2023E HCC price in the shares of $217 per ton based on a 6.5 times EV/EBITDA is 41 per cent below spot). Given the significant impending portfolio transition (the giant QB2 Cu project is anticipated to start-up any day now; this will drive peer-leading Cu growth) and limited internal cash needs, we anticipate meaningful shareholder returns ($1.9-billion in 2022) to continue post the ramp-up of QB2.”
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While their fourth-quarter 2022 results exceeded his expectations, Stifel analyst Cole Pereira downgraded Tidewater Midstream and Infrastructure Ltd. (TWM-T) and its subsidiary Tidewater Renewables Ltd. (LCFS-T) to “hold” recommendations from “buy” previously, citing “meaningful near-term uncertainty” from its Hydrogenation Derived Renewable Diesel (HDRD) facility.
The Prince George Refinery in British Columbia now has a capital cost of $217-million, rising from $130-140-million. Commissioning has been delayed one quarter to the second quarter.
That led Mr. Pereira to lower his EBITDA and net asset value estimates for both companies while raising his capex projections.
His target for Tidewater Midstream shares slid to $1.15 target from $1.80, below the $1.43 average on the Street.
“We believe there is significant value to be unlocked at TWM given its valuation at 5.3 times Proportionate 2024 estimated EV/ EBITDA, 3.9 times 2024 estimated P/DCFPS and 0.7 estimated P/NAV. However, there is also meaningful near-term uncertainty around the timing, cost and EBITDA contributions from its Renewable Diesel facility, as well as the funding requirements.”
His Tidewater Renewable target is now $11.50 from $18. The average is $16.14.
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In a research report titled Headwinds finally make landfall, National Bank Financial analyst Zachary Evershed said he expects Adentra Inc. (ADEN-T) to endure “short-term softness” after its fourth-quarter results fell short of expectations.
Before the bell on Monday, the Langley, B.C.-based company, formerly known as Hardwoods Distribution Inc., announced revenue of $574.7-million, up 11 per cent year-over-year but below both Mr. Evershed’s $605.2-million estimate and the consensus forecast of $589.6-million. Adjusted earnings per share of 65 cents was also well below projections (86 cents and 80 cents, respectively).
“Headwinds in both volumes and pricing for ADEN’s products have been building for the better part of a year,” said Mr. Evershed. “The substantial miss in Q4 indicates these headwinds are manifesting sooner than anticipated, but a decline in sales was inevitable in our view. Thus, our downward estimate revisions in our 2023 forecasts do not reflect a change in outlook, but rather moving forward the steeper part of the leg downward by 1-2 quarters in our model. Short term, the daily pace of sales in the first two months of 2023 is similar to Q4/22. Long term, our view remains unchanged as once housing affordability reaches a balance, we believe demand heavily outweighs supply in housing.”
The analyst expects the company to now focus on inventory management and “disciplined” capital allocation.
“Notwithstanding the $7.6-million inventory write-down in Q4 ($2-million per quarter more typical), ADEN aims to shed a good portion of a targeted $40-50-million reduction in inventory by mid-year, releasing cash,” he said. “In the back half, the company should thereby have moved through higher-priced inventory on the books, allowing gross margins to rise slightly above the 20-per-cent level. Debt repayment remains a top priority for FCF with leverage falling 0.2 times quarter-over-quarter to 2.4 times, even as the company’s M&A pipeline continues to bear fruit with the tuck-in of Rojo Distributors. Additional acquisitions are supported by over $300-million in dry powder as at Q4/22. As we anticipate the company will continue to shed leverage rapidly in the absence of significant M&A, we are pleased to see continued action under the NCIB entering 2023; QTD, ADEN has repurchased 255.4k shares for $7.9-million returned to shareholders, following the repurchase of 1.2 million shares for $35.6-million in 2022.”
While he said Adentra’s free cash profile is “intact” and his long-term thesis is unchanged, Mr. Evershed trimmed his target for its shares to $65 from $69 after reductions to his 2023 and 2024 revenue and earnings estimates. The average on the Street is $46.50.
“Our target moves down on an unchanged 15 times 2024 earnings EPS primarily due to higher debt servicing in 2023 as we move steeper organic declines forward in our model, and our 2024e outlook changes only modestly,” he said. “Given visibility on supportive long-term dynamics remains unobstructed and valuation is undeniably attractive, we reiterate our Outperform rating.”
Elsewhere, others making changes include:
* Canaccord Genuity’s Yuri Lynk to $29 from $34 with a “hold” rating.
“We believe this is a well-run business with favourable long-term organic and inorganic growth opportunities,” said Mr. Lynk. “However, in the medium term, consensus estimates are set to once again move lower (especially for Q1) as the company faces revenue and margin headwinds. Add a potential trade case, and we see a neutral risk/reward outlook.”
* Acumen Capital’s Nick Corcoran to $54 from $60 with a “buy” rating.
“We remain encouraged by the strength of ADEN’s business model in the event of a downturn; however, the loss of operating leverage in the near-term may take the street by surprise. We see this as a strategic decision by Management to keep the Company on track to meet its 2026 targets,” said Mr. Corcoran.
* Stifel’s Ian Gillies to $45 from $48 with a “buy” rating.
“ADEN’s 4Q22 results were marred by an inventory impairment which resulted in EBITDA of $44-million falling below our forecast of $50-million,” said Mr. Gillies. “Our 2023 estimated EBITDA and EPS also undergo significant reductions due to stickier-than-expected fixed costs and higher interest expense. In spite of these changes, we continue to have a constructive view on the company’s consolidation strategy in the U.S. and long-term implications for the share price.”
* CIBC’s Hamir Patel to $32 from $34 with an “outperformer” rating.
“We continue to adjust our valuation to reflect the potential trade case duty liability ($52-$62-million). We believe the 11-per-cent share price correction on Monday was overdone. We attribute the weakness to investor concerns around inventory write-downs and gross margin trends, two areas we believe management confidently addressed on the earnings call,” said Mr. Patel.
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Despite Canadian trucking volumes “experiencing some weakness,” National Bank Financial analyst Cameron Doerksen reaffirmed “a positive view” on Mullen Group Ltd. (MTL-T), seeing the potential for a “favourable environment” later this year and emphasizing pricing has been “resilient so far.”
He assumed coverage of the Okotoks, Alta.-based freight transport services company with an “outperform” recommendation on Tuesday, seeing an “attractive valuation with M&A upside.”
“While most freight indicators we track remain soft, recent commentary from publicly traded North American trucking companies suggests an expectation that volumes could strengthen later in 2023 and into 2024 as current high retail inventory levels are drawn down and a re-stocking begins,” said Mr. Doerksen. “Mullen’s Specialized & Industrial Services segment is experiencing some pricing strength supported by modestly higher activity levels in the oil field services industry.”
“With seller valuation expectations re-set lower, management is seeing more potential opportunities for M&A in 2023. Mullen ended 2022 with comfortable leverage (2.1 times net-debt-to-EBITDA) and only $23 million drawn on its $250 million credit facility. We estimate that the company could deploy upwards of $200 million towards M&A in 2023 and keep its leverage ratio below management’s comfort level of 2.5 times.”
The analyst noted investor sentiment toward trucking stocks has improved, however Mullen “has not participated,” lagging peers thus far.
“From the peaks in late 2021 and early 2022, trucking valuations plunged last year as freight rates and demand softened and as fears of a recession grew,” said Mr. Doerksen. “However, trucking stocks have rallied so far in 2023, with LTL [less-than-truckload] stocks up an average of 19.3 per cent year-to-date, TL [trucking/logistics] stocks up an average of 8.5 per cent year-to-date and the Dow Jones Trucking Index up 10.0 per cent year-to-date. By contrast, Mullen shares are essentially flat so far in 2023 and the stock’s valuation based on both forward P/E and EV/EBITDA is below comparable U.S. peers. Based on our 2023 forecast, Mullen is currently trading at 6.7 times EV/EBITDA versus the weighted average peers (based on MTL’s revenue segmentation) at 7.9 times while on P/E Mullen is trading at 12.6 times versus the weighted average peers at 15.6 times.”
Seeing Mullen’s 2023 guidance as “relatively conservative” and pointing to its “history of strong free cash flow and a supportive dividend,” Mr. Evershed set a target of $18.50 per share. The average is currently $16.30.
“Mullen has a proven track record of generating solid free cash flow as well as capital discipline,” he said. “The strong cash performance will allow the company to make acquisitions without the need for additional equity capital. Given the softer market conditions, we expect Mullen’s dividend to remain flat in 2023, but would expect dividend increases in 2024 and beyond as market conditions improve. The current dividend yield is 5.0 per cent. Mullen also has a track record of returning cash to shareholders through its NCIB. Under its NCIB that ran the past twelve months, Mullen repurchased a little over 2.0 million shares at an average cost of $13.33 per share. The company recently renewed its NCIB for another year allowing it to repurchase up to 8.6 million shares. We note that our forecast does not incorporate any NCIB activity.”
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Desjardins Securities analyst Chris Li expects Premium Brands Holdings Corp. (PBH-T) to display “solid” sales growth when it reports fourth-quarter 2022 financial results on Thursday, however he lowered his earnings forecast based on “lingering margin pressures.”
He’s now projecting adjusted earnings before interest, taxes, depreciation and amortization of $134-million on adjusted EBITDA margin of 8.2 per cent. Both are lower than the consensus forecast ($135-million and 8.7 per cent).
“We expect management to reiterate its 2023 sales and EBITDA targets of more than $6-billion and $600-million, respectively,” said Mr. Li. “We and consensus are slightly more conservative with EBITDA of $585-million (implying margin improvement of 100 basis points to 9.3 per cent). This assumes organic revenue growth of approximately 6 per cent (at the low end of management’s long-term target of 6–8 per cent). Growth will be mainly driven by increased featuring as commodities stabilize/deflate, and new program wins and product launches by leveraging new capacity. We expect margin improvement to be skewed to 2H, supported by (1) improving volumes resulting in manufacturing efficiencies; (2) price increases outpacing underlying cost inflation; (3) lower freight/transportation costs; (4) lower outside storage costs as inventory levels normalize; and (5) improvement in margin profile of recent M&A.
“Management will provide its next five-year plan (2023–28), likely featuring favourable sales growth comprising both organic (6–8 per cent) and M&A, and margin expansion. Management will likely provide more colours on capex striking a balance between growth and return. While the market will naturally take a wait-and-see approach, we note that PBH is largely on track to achieve its current five-year-plan financial targets, which the market viewed as aggressive when they were first unveiled in 2018.”
While he lowered his full-year 2023 and 2024 adjusted earnings per share projections to $6.07 and $6.49, respectively, from $6.11 and $7.87, Mr. Li kept a “buy” recommendation and $110 target for Premium Brands shares, reaffirming a “positive long-term view.” The average on the Street is $114.60.
“While macro uncertainties could keep the shares rangebound in the near term, our positive view is based on below-average valuation (11 times forward EBITDA vs 14 times) with improvement driven by reacceleration of organic volume growth, deleveraging, M&A and margin expansion,” he said.
In a separate note, Mr. Li said he expects the third-quarter results from Alimentation Couche-Tard Inc. (ATD-T), scheduled to be released Wednesday after the bell, to “reflect the resiliency of the c-store business, favourable fuel margins and slightly easing SG&A headwinds, partly offset by fuel demand pressures.
“While EPS growth will moderate this year as ATD laps strong fuel margin comps, we believe ATD is well positioned to generate 10-per-cent organic EPS growth longer term, supported by a strong pipeline of initiatives (more details and capital return (strong balance sheet), he said. “We believe valuation is reasonable at 16 times forward P/E (vs 17 times average).”
Forecasting earnings per share of 78 US cents, a penny below the consensus on the Street, Mr. Li kept a “buy” rating and $72 target for Couche-Tard shares. The average is $71.69.
“Our positive view is based on: (1) sustainable solid c-store trends driven by multiple initiatives and moderating inflation/higher traffic; (2) funds flow to staples that benefit from an improvement in macro conditions; and (3) upside to FCF from fuel margins remaining elevated and value creation from a strong balance sheet (M&A/share buybacks),” he said. “As we progress through the year and investors get further confirmation that the Street’s long-term fuel margin forecast of mid-to-high 30 cents per gallon is sustainable, and with ATD likely hosting an investor day in the fall to talk about long-term growth, we expect sentiment to improve.”
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In other analyst actions:
* JP Morgan’s Arun Jayaram upgraded Vermilion Energy Inc. (VET-T) to “overweight” from “neutral” with a $29 target, below the $30.96 average.
* JP Morgan’s John Royall raised his Canadian Natural Resources Ltd. (CNQ-T) target to $94, above the $92.15 average, from $92 with a “neutral” rating.
* CIBC’s Nike Priebe hiked his target for Fairfax Financial Holdings Ltd. (FFH-T) to $1,200 from $1,050 with an “outperformer” rating, while National Bank’s Jaeme Gloyn raised his target to $1,300 from $1,200 with an “outperform” rating. The average target is $1,140.47.
“The filing of the annual report did not materially change our interpretation of Q4 operating highlights, which were released in February,” said Mr. Priebe. “We believe that Q4 results were encouraging and we are taking our earnings estimates and price target higher on improved underwriting margins and higher run-rate dividend and interest income. In the context of elevated and newly emerging sources of macro risk, we prefer defensive holdings like the P&C insurers (particularly those with an improving narrative like Fairfax) over the more market- or credit-sensitive names in our coverage universe.”
* BMO’s Tom MacKinnon increased his Power Corp. of Canada (POW-T) target to $40, above the $39.25 average, from $36 with a “market perform” rating.
* Canaccord Genuity’s Katie Lachapelle cut his Rock Tech Lithium Inc. (RCK-X) target to $2.75 from $3.50 with a “hold” rating. The average is $6.06.
* CIBC’s Jacob Bout raised his Westshore Terminals Investment Corp. (WTE-T) target to $28, above the $27.50 average, from $27 with a “neutral” rating.
“While WTE reported weak Q4/22 results, this was largely due to transitory factors (i.e., extreme winter weather, weak U.S. rail performance and retroactive recognition of costs),” said Mr. Bout. “Overall 2023 volume/pricing guidance was revised higher, which we suspect is likely due to an expected improvement in U.S. volumes / rail performance from U.S. thermal coal producer customers. Historically, U.S. thermal coal volume exports through WTE have been very sensitive to the prevailing coal price environment (met coal less sensitive). While thermal coal prices have currently eased from peaks seen in H2/22, prices remain historically elevated. That said, prices could weaken further substantially in a recession (and lower WTE’s volumes/loading rates), and hence why we maintain our Neutral rating. We are raising our 2023 estimates (and 2024 estimates slightly) on WTE’s improved guidance.”
David Leeder