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

Higher interest rates, bad weather and lingering inflation continue to be headwinds for renewable power infrastructure stocks, according to National Bank Financial analyst Rupert Merer.

“With the Canada 10-year now trading at an approximately 3.3-per-cent yield, some stocks are close to 52-week lows,” he said. “However, with contracted cash flows that are largely CPI-indexed, tailwinds to growth in the power sector and improved weather, the renewable power IPPs should perform better.”

In a research report released Tuesday, he lowered his target prices for the eight stocks in his coverage universe, despite emphasizing potential gains from inflation for independent power producers and predicting legislation both in Canada and Europe could act as “a material tailwind.”

“While inflation has created pressure on returns for near-term growth projects, most IPP’s see inflation to operational contract prices and growing spot exposure as contracted assets roll-off PPAs,” he said. “Growth contributes an average of only 10 per cent to our target prices, which is small compared to the 80-per-cent contribution from operating assets. With that, we are believe the benefit of inflation to operations should outweigh the risks to growth.”

“Canada is expected to announce a rival to the Inflation Reduction Act (IRA), alongside the 2023 Federal budget in March. This comes after the initial high-level proposal of Europe’s Green Deal Industrial Act in February. Despite a lack of clarity on the specifics, we believe similar policies to the IRA could be introduced, with both Canada and the EU emphasizing the need to remain competitive in the renewables race. A clear path forward on government incentives could lead to an acceleration of growth in Canada, where most companies have an established footprint. Although expectations of further support for renewable energy exist today, the market could react positively to new incentives.”

In response to rising bond yields and “a risking market risk premium,” Mr. Merer increased his discount rates for his IPP companies, leading to target reductions of 5-13 per cent. His changes are:

  • Algonquin Power & Utilities Corp. (AQN-T, “sector perform”) to $10 from $11. The average on the Street is $12.
  • Altius Renewable Royalties Corp. (ARR-T, “outperform”) to $11.75 from $13.50. Average: $13.42.
  • Boralex Inc. (BLX-T, “outperform”) to $42 from $47. Average: $46.85.
  • Brookfield Renewable Partners LP (BEP.UN-T, “outperform”) to $31 from $33. Average: $35.18.
  • Innergex Renewable Energy Inc. (INE-T, “outperform”) to $20 from $23. Average: $19.42.
  • Northland Power Inc. (NPI-T, “outperform”) to $40 from $44. Average: $45.17.
  • Polaris Renewable Energy Inc. (PIF-T, “outperform”) to $20 from $21. Average: $27.29.
  • TransAlta Renewables Inc. (RNW-T, “sector perform”) to $12.75 from $14.25. Average: $13.31.

“With returns to target that range from 15 per cent to 52 per cent, we have not changed our ratings at this time,” said Mr. Merer. “Our highest return to target is for PIF, which trades at an implied discount rate of more than 14 per cent by our estimates, likely given its developing market exposure. This is followed by INE, at an implied discount rate of 8.9 per cent, following a soft Q4 with poor performance across its operating fleet. With good weather, we believe that INE could outperform its peers this year. Our target on BLX is 15 per cent, but we believe it could continue to perform well, given a strong execution track-record, growth tailwinds in France and the U.S and a strong balance sheet.


While he continues to see Cargojet Inc. (CJT-T) “well-positioned for market weakness” and reiterated his bullish long-term view, National Bank Financial’s Cameron Doerksen does not see “an obvious catalyst” for valuation multiple expansion for its shares in the short-to-medium term, pointing to “macroeconomic uncertainty.”

He was one of several equity analysts on the Street to reduce their forecast and price targets for the Mississauga-based company’s shares following the release of weaker-than-anticipated fourth-quarter results and financial guidance, which sent its shares plummeting 10.8 per cent on Monday.

“We remain positive on Cargojet’s longer-term growth prospects supported by aircraft additions under contract with DHL and secular growth in e-commerce volumes,” he said. “Valuation is also reasonable, with the stock currently trading at 7.9 times forward EV/EBITDA on our updated forecast, which is below the historical average for the stock at 8.9 times.”

Cargojet reported quarterly revenue of $267-million, up 13 per cent year-over-year and in line with Mr. Doerksen’s $268-million and the Street’s expectation of $260-million. However, adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) and earnings per share of $83-million and 90 cents, respectively, both fell short of estimates ($96-million and $2.27 and $91-million and $2.02).

It also gave a “cautious” view for 2023 and announced its planned international expansion has been deferred due to difficult macroecono.ic conditions.

“Management indicates that the slower than expected peak season in Q4/22 portends potentially softer volumes and block hours for 2023, which is consistent with our view of the air cargo market (although volumes so far in Q1 are relatively stable according to management),” said Mr. Doerksen. “Growth in ACMI is still expected this year as new contractually committed aircraft are added with DHL. Overall, management still sees modest revenue growth in 2023 with lower costs as the company will not incur the unusually high costs from overtime, pilot training and temporary workers that it had last year.”

“Despite the macro headwinds, CJT is well-insulated against a market pullback. The long-term contract with DHL will see growth this year and next and the company has maintained sufficient capex flexibility to defer new planes scheduled for delivery in 2023 and 2024. Management expects capex for 2023 to be $100-125 million lower than previously announced at its 2022 investor day, with total capex over the coming years to reduce by as much as $320- $400 million.”

Reducing his 2023 and 2024 revenue and EBITDA forecasts to “reflect softer volume expectations as well as modestly lower assumed margins,” Mr. Doerksen cut his target for Cargojet shares to $140 from $147, keeping a “sector perform” rating. The average is $178.73.

“Given the share price weakness today, we see limited further downside to the stock. Indeed, while we do not see a near-term positive catalyst for the stock, we view the current share price as a more compelling entry point for value-oriented longer-term investors,” he said.

Elsewhere, Cormark Securities’ David Ocampo downgraded Cargojet to “market perform” from “buy” with a $120 target, down from $175.

Others making changes include:

* Canaccord Genuity’s Matthew Lee to $155 from $175 with a “buy” rating.

“Our main takeaway was management’s mid-single-digit revenue growth outlook and the willingness to taper capex while maintaining conversion slots to rebound quickly if needed,” he said. “Our pre-quarter F23 forecasts, which assumed only 5 per cent consolidated top-line growth, still appear attainable, but we have opted to further moderate expectations, primarily on the domestic side. In terms of capital spending, management has committed to a substantial reduction with F23 growth capex declining by $100-$125-million, and a similar decline expected in F24. We maintain our BUY rating on CJT given the company’s balance sheet flexibility, well-managed capital spending, and longer-term growth trajectory but note that near-term oscillations in consumer spending could create further difficulties for the name.”

* ATB Capital Markets’ Chris Murray to $150 from $158 with an “outperform” rating.

“We have lowered our target price to account for slower growth rates, but we continue to see valuations providing an attractive risk/reward setup for longer-term investors,” said Mr. Murray.

* Scotia’s Konark Gupta to $172 from $180 with a “sector outperform” rating.

“We are encouraged to see that CJT is able to grow against a challenging backdrop and generate positive FCF earlier than expected as capex profile looks more balanced now,” he said. “We are trimming our EBITDA outlook through 2026E while improving our FCF and leverage ratio forecasts over the medium term. As a result, our target decreases to $172 (was $180). However, we maintain our Sector Outperform rating given valuation appears quite attractive at 7.8/7.1 times EV/EBITDA on our 2023/2024 estimates, below the pre-pandemic range of 8-14 times (average 10 times). We would view continued growth, positive FCF and leverage peak as key drivers over the next 12 months.”

* RBC’s Walter Spracklin to $231 from $247 with an “outperform” rating.

“CJT Q4 results came in below expectations on a weaker than expected peak season,” said Mr. Spracklin. “We expect macro that impacted Q4 to persist into 2023 and negatively weigh on ACMI growth rates versus our prior expectations. Key however is that management deferred / cancelled four 777s, which we view as meaningfully reducing overcapacity risk as well as pulling forward the company’s FCF inflection. While macro likely to weigh on sentiment in the near-term, we view the decreased risk profile and FCF inflection pull forward as positive drivers of valuation looking ahead.”

* BMO’s Fadi Chamoun to $130 from $140 with a “market perform” rating.

“Fourth quarter results came in below consensus expectations as a more challenging macro weighed on the demand environment. CJT has taken steps to reduce its capex program including the sale of aircraft and the deferral of deliveries. We believe that the company’s unique franchise and strong management team will help CJT weather challenging industry dynamics. Our Market Perform rating is maintained as we await better visibility into an improving macro,” said Mr. Chamoun.

* CIBC’s Kevin Chiang to $193 from $196 with an “outperformer” rating.

“CJT’s Q4 results and outlook reflect a weaker freight environment, which in and of itself should not a be a surprise. The question we had entering Q4 earnings was what levers CJT would pull to offset these cyclical headwinds? While the stock is off 10 per cent on the back of the weaker Q4 EBITDA print, and we recognize 2023 consensus estimates will likely need to come down (though we would note CJT’s 2023 outlook was more in line with our expectations), we remain positive on the long-term outlook for the company. We believe CJT’s flexibility will help maintain its balance sheet strength and margins, while near-term revenue trends point to a business model that is more resilient than the average air freight company. CJT is facing slowing growth, not negative growth,” said Mr. Chiang.

* TD Securities’ Tim James to $185 from $195 with a “buy” rating.


Canaccord Genuity analyst Robert Young raised his recommendation for Haivision Systems Inc. (HAI-T) to “buy” from “hold” after the video streaming technology company received an offer to be acquired by Evertz Technologies Ltd. (ET-T).

On Monday, Evertz, a Burlington, Ont.-based company, revealed a “non-binding” proposal to acquire all of its issued and outstanding common shares at $4.50 per share, a 21.6-per-cent premium to the last trade. Last month, it disclosed a 10-per-cent stake in Haivision.

“We expect Haivision shares to trend higher and no longer see the stock limited by recent fundamental performance,” said Mr. Young. “We suspect that the offer will be turned down but this may put Haivision into play or create a short squeeze.”

“We believe there are merits to a combination. Haivision and Evertz are competitors in the global video hardware and software market with a degree of customer and product overlap, particularly in low-latency encoders, decoders, and IP video streaming. Haivision has a larger mix of its business driven by enterprise and government/defense sales, while Evertz has a larger proportion of its business driven by traditional and streaming broadcasters. Haivision is a leader in low latency and would also add a wireless element, including bonded 5G capabilities, to complement Evertz’ solutions. We note that Haivision’s gross margin structure (high 60 per cent) is accretive to Evertz’s (56-60 per cent), and we believe Evertz could realize revenue and cost synergies, particularly by eliminating pubco and other duplicate corporate costs. Evertz is also able to consolidate manufacturing and material purchasing into its larger scale operation.”

Mr. Young said he expects Haivision to turn down offer, citing its valuation “also given the condition on due diligence which could provide valuable information to a strong competitor.”

“Haivision can pool more than 34 per cent of shares which makes it difficult for Evertz to reach a supermajority as a hostile bidder,” he added. “We estimate insider ownership (employees and directors) at 23 per cent and holdings under Thomas Hecht/Haemosan, which we view as friendly to the management of Haivision, bring the total to 34 per cent. While we expect many shareholders to be happy with a 20-per-cent premium, we also note that the last deal price was Haivision’s IPO priced at $6.00 per share in December 2020. There is likely to be a block of longer-term shareholders who will argue for a price above or at par with that level. Another factor to consider is that Evertz has likely already paid more than its $4.50 per share proposed offer; the bulk of Evertz’s position in Haivision was built in July 2022, when Haivision was trading in the $5.00-$5.75 range based on marketable securities purchases in Evertz quarterly disclosure. Finally, we do not rule out potential for a competitive bidder to emerge given the high quality of Haivision offerings tied to low latency video. We would highlight hardware vendors in broadcast or defense.”

The analyst raised his target for Haivision shares to $5 from $3.50. The current average is $4.75.


Analysts on the Street continued downgrade Secure Energy Services Inc. (SES-T) after the Competition Tribunal ordered the divestiture of 29 of the 103 facilities acquired in connection with its 2021 merger with Tervita Corp, citing a failure to meet “the requirements of the efficiencies defence that it invoked.”

A day after Canaccord Genuity and National Bank Financial lowered its recommendations, two more analysts made changes on Tuesday. They are:

* RBC’s Keith Mackey to “sector perform” from “outperform” with an $8 target, falling from $10. The average is $9.77.

“The Competition Tribunal’s decision to require Secure to sell 29 facilities sets up for a time-consuming legal appeals process, creates EBITDA uncertainty, and introduces forced asset-sale risk,” he said. “Granted, some of these risks may now be reflected in [Monday’s] 20-per-cent sell-off, but we move to the sidelines as the legal process plays out.”

“Given the uncertainty ahead, we have left our EBITDA estimates relatively unchanged, but have lowered our target multiple to 5.5x from 7.0 times to reflect risk from potential divestitures and the overhang from a lengthy legal dispute.”

* CIBC’s Jamie Kubik to “neutral” from “outperformer” with an $8 target, down from $10.50.

“While SECURE intends to appeal the decision, management indicated the financial impact on the business “could be material” if not overturned. While a successful appeal by SECURE could reverse the ruling, and we are maintaining our EBITDA estimates at the current time pending the outcome of the appeal, we believe the stock will carry a more heavily discounted multiple to reflect the added earnings risk. As such we reduce our price target to $8.00/sh h (from $10.50/sh prior) and reduce our rating to Neutral from Outperformer prior,” said Mr. Kubik.

Elsewhere, BMO’s John Gibson cut his target to $8 from $11 with an “outperform” rating.

“Given the uncertainty ahead, we have left our EBITDA estimates relatively unchanged, but have lowered our target multiple to 5.5 times from 7.0 times to reflect risk from potential divestitures and the overhang from a lengthy legal dispute,” said Mr. Gibson.


In a research note reviewing earnings season for the Canadian banks titled The Beat Goes On, but The Music Is Getting Harder to Dance To, Scotia Capital Meny Grauman predicted the second quarter will be “tougher” across the sector “thanks to a combination of three fewer interest-earnings days, seasonally weaker trading results, more modest margin expansion, slower loan growth and higher PCL ratios.”

“We entered Q1 reporting season concerned that the recent rally in Canadian bank stocks has been too fast and gone too far given regulatory and macro headwinds,” he said. “As a result, we continued to recommend investors favor lifecos over banks, and now that reporting season is done we have even more conviction in that relative sector call. Although all the banks we cover beat Street expectations, in most cases that was helped by better-than-expected trading revenues that we cannot assume will repeat. Heading into reporting we identified a number of focus areas for the market including margins, capital and expenses, and on all three fronts the outlook appears to be more challenging over the coming quarters. Looking ahead to Q2 more specifically, we expect a tougher quarter.”

For the first quarter, core earnings per share for the industry came in at $2.40, up 7 per cent from the previous quarter but down 2 per cent year-over-year.

“All the Canadian banks (excluding BNS) beat Street expectations, but in most cases trading was the key driver of the upside surprise,” the analyst said. “On average, results from the Big 6 Banks came in 3 per cent above consensus and 5 per cent above us (again excluding BNS). Across the board the banks painted a picture of a more challenging operating environment in the quarters ahead. We may not have hit peak margins yet, but most banks are guiding to peak margin expansion as sequential increases get smaller. When it comes to capital, most of the large banks except for NA continue to build capital (helped by discounted DRIPs) as they drive their CET1 ratios up to 12.0 per cent by year-end, which implicitly assumes another 50 bps increase in OSFI’s DSB buffer. Finally, the expense story also looks tougher than previously thought, especially in the face of slowing revenue growth. We are not hearing talk of restructuring charges, but that could change as we head into F2024.”

“Among the large banks we cover, CM and NA put up the best results of the quarter. Although NA had the highest quality beat driven by the most Q/Q margin expansion, CM’s result was notable for finally putting lingering capital concerns to rest and helping allay fears of deeper structural problems after a 19-per-cent miss to consensus in Q4. Conversely, we would rank RY at the bottom of the pack this quarter. Although EPS there beat the Street by 5 per cent, that was almost exclusively driven by trading as both margins and operating leverage disappointed. Across the group trading revenues did a lot of the heavy lifting versus consensus this earnings season, with each of the large banks we cover beating us on this line with CM and RY delivering the strongest trading results (and record Capital Market segment earnings as well). Meanwhile, the credit picture was more mixed with both BMO, CM, and NA reporting lower-than-expected PCLs numbers and BNS, RY, and TD coming in above the Street among the Big 6.”

Following the quarter, Mr. Grauman reaffirmed Bank of Montreal (BMO-T) as his “top pick” in the sector, citing “the growth advantage it will have thanks to the recently closed Bank of the West acquisition that according to management will contribute US$2-billion in incremental PTPP earnings by the end of 2025.”

“TD is our second favorite name following our upgrade from Sector Perform to Sector Outperform this earnings season (our only ratings change during reporting),” he added. “We believe TD’s discount to the group provides investors with a unique entry point for a name that keeps outperforming on revenue growth (and operating leverage). We also believe that the risk/reward setup on capital and FHN is more positive that the market currently assumes. Alongside BMO and TD we also still have Sector Outperform ratings on RY and NA. Among the smaller banks EQB is our favorite name, and we leave earnings season with Sector Perform ratings on CWB and LB.”

His targets and ratings are currently:

  • Bank of Montreal (BMO-T) with a “sector outperform” rating and $151 target. The average on the Street is $143.74.
  • Canadian Imperial Bank of Commerce (CM-T) with a “sector perform” rating and $66 target. Average: $65.06.
  • Canadian Western Bank (CWB-T) with a “sector perform” rating and $28 target. Average: $31.21.
  • EQB Inc. (EQB-T) with a “sector outperform” rating and $82 target. Average: $85.
  • Laurentian Bank of Canada (LB-T) with a “sector perform” rating and $38 target. Average: $40.38.
  • National Bank of Canada (NA-T) with a “sector outperform” rating and $111 target. Average: $107.21.
  • Royal Bank of Canada (RY-T) with a “sector outperform” rating and $146 target. Average: $142.40.
  • Toronto-Dominion Bank (TD-T) with a “sector outperform” rating and $104 target. Average: $101.76.


Desjardins Securities analyst Chris Li blamed Gildan Activewear Inc.’s (GIL-N, GIL-T) struggling valuation on concerns about its ability to reach 2023 growth targets, which he called a “key catalyst” moving forward.

“Despite GIL’s strong share price performance (up 20 per cent year-to-date), it continues to trade at a depressed valuation of only 10.4 times forward P/E, well below its long-term average of 15–16 times and supported by a strong balance sheet and FCF,” he said. “We believe this mainly reflects investors’ cautious view toward management’s low-single-digit sales growth target for this year given ongoing macro uncertainties. We believe this is a valid concern.”

In a research report released Tuesday, Mr. Li reiterated his “positive long-term view” of the Quebec-based apparel manufacturer, seeing management’s sales targets as “reasonable, with risks skewed to 2H.”

“We believe 1H sales risks are relatively low,” he added. “We estimate management’s expectation for a 10 per cent and mid- to high-single-digit sales decline in 1Q and 2Q, respectively, assumes a low-double-digit decline in Activewear volume in 1H, partly offset by mid-single-digit pricing and improvement in International. We believe the magnitude of the volume decline is reasonable given tough year-ago comps and current market challenges. The bigger unknown is that based on management’s 2023 sales growth target of 1–3 per cent, we estimate this implies more than 10-per-cent sales growth in 2H, partly supported by new retail program wins, recovery in International, and market share gains in fleece and fashion basics. The key driver is high-single-digit growth in Activewear volume. While easier year-ago comps will help, demand visibility remains limited for now.”

While he made a modest increase to his 2023 earnings estimate, he maintained a “buy” recommendation and US$39 target for Gildan shares. The average is US$37.09.


In other analyst actions:

* BMO’s Phillip Jungwirth downgraded Ovintiv Inc. (OVV-N, OVV-T) to “market perform” from “outperform” and lowered his target to US$51 from US$56. The average on the Street is US$63.09.

“Our thesis has been that shares could re-rate as FCF and capital returns inflect higher in 2023+ following the hedge roll-off in 2022,” he said. “While FCF yield remains wide vs. peers, the gap has narrowed and absolute yield and capital returns look less attractive when considering portfolio depth.”

“Ovintiv has been our favorite deep value E&P, although we see less compelling upside now when considering asset depth and execution. While leverage has been reduced and capital returns increased to more than 50-per-cent FCF, we see better buyback/dividend potential and risk/reward in other producers. Hedges (down $2.6-billion in 2022) are no longer a drag, but a more gas-weighted portfolio, lower crude & condensate volumes, higher Montney royalties, weaker capital efficiency, bolt-on spend, and increased cash taxes have chipped away at our 2023-24 FCF expectations.”

* After a reduction to its dividend, CIBC’s Scott Fletcher cut his target for Corus Entertainment Inc. (CJR.B-T) to $2.50 from $2.75, keeping a “neutral” rating, while Canaccord Genuity’s Aravinda Galappatthige trimmed his target to $1.80 from $2 with a “hold” rating. The average is $2.77.

“We believe that the Corus investment thesis remains unexciting, with balance sheet leverage still very much a concern and the dividend cut having only a modest impact,” said Mr. Galappatthige. “Moreover, while management has indicated a slight sequential improvement in ad decline rates (compared to Q1), depending on the severity of an economic slowdown in H2/23, there could be additional pressure on EBITDA and FCF. The new dividend yield of 6.25 per cent is unlikely to attract investors in the current interest rate environment with many defensive large caps offering similar yields. Finally, while the company has indicated stepped-up cost rationalization programmes, we expect that the high programming inflation and investments around STACKTV and other digital initiatives would continue to pressure margins.”

* RBC’s Geoffrey Kwan raised his Element Fleet Management Corp. (EFN-T) target to $27 from $26, maintaining an “outperform” rating, while TD Securities’ Graham Ryding bumped his target to $23 from $22 with a “buy” rating. The average is $22.19.

“In his penultimate quarter as CEO, Jay Forbes presided over a major turnaround,” said Mr. Kwan. “EFN’s share price was just $4.64 when he was named CEO in May 2018. Almost 5 years later (including a pandemic), the stock is almost $20. EFN is delivering strong fundamentals winning new customers, cross-selling existing clients additional fleet services with 2023 results that should be further bolstered by finally having improved OEM production. EFN remains our #1 high-conviction best idea as it has a rare combination of significant growth potential, discount valuation, and substantial FCF generation that we expect to be used for share buybacks and dividend increases plus redemption of the remaining preferred shares and convertible debt issue (low capex requirements, M&A unlikely). At the same time, EFN shows strong defensive attributes and stands to benefit in a recession, high interest rate and/or high inflation environment.”

* Seeing the Cobre Panama negotiations “nearing conclusion,” National Bank Financial’s raised his First Quantum Minerals Ltd. (FM-T) target to $36 from $29, reiterating a “sector perform” rating. The average is $29.87.

“It’s our understanding that the two sides have come to an agreement on longer-term fiscal stability, which had become a major sticking point throughout negotiations,” he said.

“Since downgrading to Sector Perform on December 15, 2022, FM is down 3 per cent vs the S&P Global Base Metals Index up 18 per cent over the same period. The company’s efforts to reduce debt put the balance sheet in a strong position to weather a prolonged period of weak copper prices while continuing to deliver organic growth via the Cobre Panamá mill expansion, Enterprise and Kansanshi S3 projects.”

* Eight Capital’s Ralph Profiti raised his Foran Mining Corp. (FOM-X) target to $5.25 from $4.25, while BMO’s Rene Cartier bumped his target to $4.25 from $3.50 with an “outperform” rating and Scotia’s Eric Winmill moved his target to $4 from $3.50 with a “sector outperform” rating. The average is $3.91.

“Foran released two drill holes from the 2023 winter program at Tesla,” said Mr. Cartier. “Highlighted intersections continue to deliver grades above that contained in the McIlvenna Bay reserve. We view Tesla as a high value target, which remains open. A fourth drill has been added to accelerate development. Additional assays are pending.”

* Baird’s Mark Altschwager reduced his Lululemon Athletica Inc. (LULU-Q) target to US$410 from US$435, remaining above the US$377.27 average, with an “outperform” rating.

* CIBC’s Bryce Adams trimmed his Orezone Gold Corp. (ORE-T) target to $1.85 from $2.20 with an “outperformer” rating. The average is $2.33.

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