Inside the Market’s roundup of some of today’s key analyst actions
RBC Dominion Securities analyst Greg Pardy expects third-quarter financial results from Canadian energy producers to display “much stronger financial performance amid robust upstream-downstream commodity price tailwinds along with an ongoing commitment to capital discipline, net debt reduction and shareholder return.”
“Under our recut base outlook for 2024, we peg shareholder returns — dividends and buybacks — across the oil sands weighted majors below at a hefty $30-billion,” he said.
“We estimate that Canada’s oil sands weighted majors — Canadian Natural Resources, Suncor Energy, Cenovus Energy and Imperial Oil — generated free cash flow (before dividends and working capital movements) of $8.3-billion in the third-quarter (up 127 per cent sequentially), reduced net debt by $3.1-billion, repurchased $3.1-billion of their common shares (up 107 per cent sequentially as IMO resumed repurchases, including our estimate of Cenovus’ warrant repurchases) and paid/accrued cash taxes (to all jurisdictions) of about $2.2-billion (up 69 per cent sequentially).”
In a research report released Tuesday, Mr. Pardy upgraded his earnings and cash flow estimates to reflect commodity prices, share buybacks and other adjustments.
That led him to upgrade MEG Energy Corp. (MEG-T) to “outperform” from “sector perform” with a $31 target, up from $27 and above the $27.77 average on the Street, according to Refinitiv data.
“Our third-quarter outlook for MEG incorporates bitumen production of 102,000 barrels per day (vs. 98,000 bbl/d previously), up 19 per cent sequentially following planned turnaround activities at Christina Lake completed in the second quarter,” he said. “We peg MEG’s third-quarter bitumen realization at $98/bbl, with all-in operating costs at $8.28/bbl (excluding estimated power sales of $38-million) and royalty rate of 26 per cent (on net revenue). All said, our third-quarter operating cash flow estimate for MEG sits at $470-million ($1.65 per share) with estimated free cash flow of approximately $372 million in the context of $98-million of capital investment. We peg MEG’s net debt (company definition) at $1.0-billion (US$747-million) as of September 30 (before working capital movements)—down from $1.32-billion on June 30 — amid common share repurchases of $58 million. Our 2024 outlook for MEG factors in production of 105,000 bbl/d amid a $525 million capital spending program.”
Mr. Pardy also made a series of target price adjustments:
- Baytex Energy Corp. (BTE-T, “outperform”) to $8.50 from $8. Average: $7.35.
- Canadian Natural Resources Ltd. (CNQ-T, “outperform”) to $95 from $90. Average: $95.14.
- Cenovus Energy Inc. (CVE-T, “outperform”) to $30 from $27. Average: $31.38.
- Imperial Oil Ltd. (IMO-T, “sector perform”) to $80 from $77. Average: $83.33.
- Ovintiv Inc. (OVV-N/OVV-T, “sector perform”) to US$50 from US$47. Average: US$56.63.
- Suncor Energy Inc. (SU-T, “outperform”) to $51 from $49. Average: $51.86.
“Our favorite producer remains Canadian Natural Resources (Global Top 30 and Global Energy Best Ideas lists), with Suncor Energy (Global Energy Best Ideas list) remaining our favorite integrated over a one-year horizon,” said Mr. Pardy. “Enerplus Corporation remains our favorite intermediate producer. MEG Energy (recently upgraded to Outperform), Cenovus Energy and Baytex Energy round out our Outperform roster.”
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ATB Capital Markets analyst Amir Arif expects Canadian energy exploration and production companies to report “solid” third-quarter results, pointing to “the move up in WTI since late June and higher sequential production levels, with the second-quarter impact of wildfires and seasonal turnaround activity now behind us.”
“We expect key themes to include a more active quarter in terms of operational activity and well results relative to the seasonally slower Q2/23 activity levels, the timing efficiency of Q3 capex spend and potential impact on Q4 spend levels, the impact of the USD move, and the extent of hedges being layered in with the move in WTI,” he said. “On the operational front, we do expect key operational activity updates from several producers including BTE, CPG, CJ, IPO, and KEC.
“In terms of capex, given the efficiency of drilling and lack of disruptions in the quarter, Q3/23 spend levels should be slightly higher (we are 3.5 per cent above consensus on capex levels), suggesting companies will need to slow activity in Q4/23 or potentially increase full-year budgets slightly. Although the USD was fairly flat, on average, during the quarter relative to last quarter, the USD strengthened vs CAD, from 1.324 at end of Q2/23 to 1.358 at the end of Q3/23. This will have an impact on companies with meaningful USD-denominated debt (BTE, VET, CPG). On the hedging front, based on our conversations with producers, hedging activity had been picking up given the simultaneously stronger USD and higher WTI prices.”
While noting the pullback in share prices over the last week, Mr. Arif reiterated his “positive” outlook on the sector, citing “clean balance sheets, return of capital strategies, and 2024 FCF yield and EV/DACF valuations.”
“With the move up in WTI relative to H1/23, capital discipline in the industry will likely be in focus heading into 2024 guidance releases post quarter-end,” he added.
After modest multiple adjustments, the analyst made a group of target price adjustments. They are:
- Cardinal Energy Ltd. (CJ-T, “outperform”) to $9.50 from $10. Average: $9.
- Gear Energy Ltd. (GXE-T, “outperform”) to $1.25 from $1.50. Average: $1.27.
- International Petroleum Corp. (IPCO-T, “outperform”) to $16.50 from $18.50. Average: $17.10.
- InPlay Oil Corp. (IPO-T, “outperform”) to $4.25 from $4.50. Average: $5.06.
- Kiwetinohk Energy Corp. (KEC-T, “outperform”) to $24 from $26. Average: $20.83.
- Vermilion Energy Inc. (VET-T, “outperform”) to $27 from $29. Average: $25.39.
- Yangarra Resources Ltd. (YGR-T, “outperform”) to $2.75 from $3. Average: $3.
“On the large cap side, VET moves above BTE in our pecking order, though BTE remains a close second. On the midcap side, KEC remains a favorite name in light of upcoming catalysts. On the small cap side, HME remains our top idea,” said Mr. Arif.
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In response to recent share price weakness and its “historically high” valuation discount, TD Securities analyst Tim James upgraded Mullen Group Ltd. (MTL-T) to “buy” from “hold” on Tuesday.
“The current weighted average comp-group forward EBITDA multiple of 13.3 times compares with the pre-pandemic five-year average of 9.6 times and the comp group’s pre-pandemic peak multiples of approximately 12x times,” he noted. “This valuation, combined with the prolonged recovery in industry conditions and higher interest rates, suggests to us that there is an increasing risk of a broader sector pullback.
“We do not believe that Mullen would be immune to a sector pullback, but that its relative valuation, dividend, and prudent capital allocation would lead to share-price outperformance. We believe that Mullen’s recent, and unwarranted, valuation underperformance provides a relatively good opportunity for investors looking for exposure to the trucking sector during a period of economic uncertainty.”
Mr. James maintained a $18.50 target, exceeding the $17.43 average.
“We believe the recent share-price performance, Mullen’s current valuation multiples relative to its history and comp group, and our prudent forecast offset the current industry backdrop of negative year-over-year growth and supports a higher share price over the next 12 months,” he added.
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Expecting momentum for increased infrastructure spending south of the border to likely be “resilient for longer,” National Bank Financial analyst Maxim Sytchev raised his recommendation Stella-Jones Inc. (SJ-T) to “outperform” from “sector perform” on Tuesday, predicting “pole momentum should persist.”
“We were admittedly early to downgrade shares in January this year as they have rallied 33 per cent year-to-date (versus a decline of 1 per cent for the TSX) and 95 per cent since our bullish July 13th, 2022 note (Deep dive on value?) which highlighted the company’s inherent undervaluation when shares were trading at 8.0 times NTM [next 12-month] EV/EBITDA and general expectations were subdued,” he said. “Now the shares are trading at 9.1 times on our new 2025 estimated EBITDA and that excludes any contribution that might arise from the U.S. Infrastructure Bill spending (which is expected to flow through at greater momentum in 2024-25, as per commentary from SJ’s peer Koppers who held its own investor day recently ... - reiterating previously strong growth and highlighted resilient pricing that minimizes our forecasting risk).
“After the incorporation of 2025 guide in our estimates as well as tracking the upside in volume growth from the Bipartisan infrastructure bill (the U.S is racing to fortify its grid infrastructure against extreme weather supporting resilient volume and pricing growth beyond normal maintenance levels), we are likely to see further positive earnings revisions for SJ, pulling shares up in tandem. As such, we are upgrading SJ.”
In a research note released before the bell, Mr. Sytchev increased his financial projections for the Montreal-based manufacturer of pressure treated wood products to better reflect the company’s guidance. He’s now expecting 2023 and 2024 revenue of $3.294-billion and $3.544-billion, respectively, up from $3.269-billion and $3.463-billion previously. His adjusted diluted earnings per share estimates jumped to $4.74 and $5 from $4.64 and $4.86.
“We are imputing 6-per-cent CAGR [compound annual growth rate] from 2022 onwards at 16-per-cent EBITDA margin, in line with guidance (with poles vertical at 15-per-cent CAGR),” he said. “Lumber is another lagging sub-vertical at negative 5-per-cent CAGR (guide of $600-$650-million by 2025; NBF estimate at $637-million). The above dynamics results in 2025 EPS estimate of $5.50 per share (a 16-per-cent increase from 2023E). These numbers do not include any potential M&A although that materiality is lessened by consolidated nature of poles/ties verticals, unless management pushes into adjacencies; hopes for actual extra spending that should drive up volumes (Poles 15-per-cent CAGR guide is pricing-driven) is minimal in our forecasts.”
Also introducing his 2025 projections, Mr. Sytchev raised his target for Stella-Jones shares to $83 from $73. The average target on the Street is $78.14.
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Mr. Sytchev’s rating change for Stella-Jones coincided with the release of a research report on his Industrial Products coverage universe in which he reiterating his preference for “quality, clean balance sheets, and exposure to GDP-agnostic thematic tailwinds” given the inversion in the U.S. treasury yield curve.
“While the curve is still well into inverted territory, we wanted to take a highlevel look on what happens once an ‘un-inversion’ dynamic occurs; since 1976, this ‘normalization’ occurred 4 times, the last time in early June 2007,” he said. “Key findings: industrials do not provide a good hiding place (except ag + automation); copper did not fare well while gold did (+ staples).”
Mr. Sytchev maintained his thematic positioning from equities, emphasizing the lingering “macro uncertainty.”
“Automation, reshoring, and historic infrastructure investment are structural trends still in their early innings,” he said. “The effects of these tailwinds are most pronounced in the U.S., and STN remains our top pick in the E&C space given its 50-per-cent-plus topline exposure to this market in addition to the company’s expertise in the water and environmental services vertical. Among equipment distributors, we remain bullish on RBA (attractive valuation + volume growth on normalizing equipment supply) and TIH (net cash balance sheet + strong management team), which should at least partially shelter investors amid a broader market dislocation. Food (in)security is a growing political, social, and economic concern for governments around the world in the midst of rising global geopolitical tension. As such, we also reiterate our positive stance on AFN, especially given a highly attractive 6.5 times EV/2024 estimated EBITDA multiple ... Lastly, CIGI’s modest valuation (10.0 times EV/2024E EBITDA), highly flexible operating cost structure, and growing high-margin recurring IM revenue make the company a compelling pick for risk-tolerant, value-oriented investors with a 24-month time horizon. Recent discussions with management have further reinforced our confidence in the above names. We have also elected to upgrade Stella Jones shares (see corresponding note) as the same themes around re-shoring productive capacity towards the U.S. and only now-inflecting engineering backlogs suggest that the positive utility demand trends driving the Poles business are likely to stay; an undemanding 12.9 times 2024 estimated P/E valuation also helps protect the downside.”
Mr. Sytchev made a series of target price changes:
* Ag Growth International Inc. (AFN-T, “outperform”) to $73 from $74. The average is $76.85.
Analyst: “There have been a lot of discussions about the ag cycle duration, especially as interest rates have jumped, putting pressure on equipment affordability. Company’s execution however has been materially stronger than expected due to mix and cost containment (hence AFN’s guide for 18-per-cent EBITDA margin in 2023E from 16.7 per cent in Q1/23). We are monitoring dry weather conditions in U.S. and Canada (explains 16-per-cent downdraft in shares in Sept) but company’s much more diversified revenue generation and better execution still gives us confidence in structural re-rating. Our positive thesis on AFN is fully predicated on self-help/virtuous cycle dynamic of margin improvement, working capital efficiency, debt repayment = higher ROIC dynamic = higher trading multiple (over time). Rapidly growing product transfer initiatives and international markets of India and Brazil (24 per cent of top line for both and expected to grow by double-digits) are therefore bound to take over the baton. AFN remains one of our top picks as deleveraging and ROIC improvements should both contribute to multiple rerating.”
* AtkinsRéalis (ATRL-T, “outperform”) to $53 from $46. Average: $47.27.
Analyst: “The timing of AtkinsRéalis’ (formerly SNC) name change coincides well with its turnaround profile that remains attractive despite shares up 88 per cent year-to-date vs. flat for the TSX; that being said, “easy” money is likely behind us as FCF/Engineering execution is the primary focus for investors. Despite the YTD gains, shares have only recently crested the same absolute levels from the past 10 years, while the likes of WSP / STN have gone up by a factor of 6.7 times and 6.1 times, respectively, over the same timeframe (TSX up 56 per cent). FCF generation still will be our anchor for performance (on an annual basis, this year of course should be better than 2022A but at this point it’s hard to say whether positive OCF is realistic even though H2/23 is expected to be positive). Based on our numbers, the biggest positive lever for SNC’s valuation is engineering margins improvement and corresponding multiple expansion. The business outlook in Engineering/Nuclear remains robust, something that we hear from the majority of our engineering consulting cohort.”
* Stelco Holdings Inc. (STLC-T, “sector perform”) to $43 from $45. Average: $45.08.
Analyst: “After experiencing upside at the beginning of 2023, HRC pricing continues to compress downward, hovering around $700/st vs. above $800/st at the end of Q2/23 and an intermittent peak of $1,200 in Q1/23. HRC directionality is all that matters when it comes to calling STLC shares. The Auto OEM strikes make HRC pricing a headwind for Stelco as revenue is highly levered to auto customers who are anticipated to scale back production till a resolution is reached. Overall, we are not convinced that being long a hyper-cyclical now is the right place to be (even a well executing one). We remain on the sidelines given STLC’s inherently cyclical exposure at a time of significant macro uncertainty. "
* Stantec Inc. (STN-T, “outperform”) to $105 from $96. Average: $97.55.
Analyst: “STN’s Water expertise and U.S. skew will continue to benefit the co in H2/23E. 38-per-cent year-to-date share price increase vs. flat for TSX is putting a hurdle ahead of Q3/23 as shares have had a tendency to sell off post prints. We would be using any downdraft opportunity to add as the market will be focusing on next strategic plan to be unveiled in early Dec 2023. M&A provides another capital deployment optionality over the forecast horizon with leverage now sitting below 1.8 times. Speaking with management, margin expansion momentum will be driven by higher demand for Environmental Services (20 per cent of revenue) and being more selective when it comes to projects, apart from wage pressures largely being behind us (4-per-cent to 4.5-per-cent increases expected in 2023).”
* WSP Global Inc. (WSP-T, “outperform”) to $212 from $205. Average: $205.29.
Analyst: “WSP remains a core holding in our coverage universe (despite shares up 22 per cent year-to-date vs 12 per cent for the S&P). With record backlog intake and only 18 per cent of IIJA funds having been allocated (US$220-billion out of a total US1.2-trillion as of mid-May, as per the White House), we believe WSP’s prospects for the next several years remain bright. We also fully expect the company to be opportunistic when it comes to more M&A; M&A of last year (almost 8,000 personnel) has started to contribute to company’s momentum (9-per-cent organic growth year-to-date should be maintained as Q2 and Q3 are generally the strongest). With guidance having been raised post Q2/23 we do not expect any material updates re numbers.”
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In a research note titled Higher Rates, Longer Wait, Scotia Capital analyst Michael Doumet lowered his full-year EBITDA projection for Colliers International Group Inc. (CIGI-Q, CIGI-T) to below the company’s guidance.
“Following its better-than-feared 2Q23, CIGI maintained its 2023 EBITDA guide – but higher interest rates and tighter credit markets since are likely to push out any expectations for a normalization/recovery in the transactional business and, we believe, fundraising for IM, such that we trimmed our 2023 EBITDA to $650-million, below the $670-million to $720-million guide,” he said. “In fact, we believe its transactional business (Capital Markets [CM] and Leasing) will slump further – and forecast incremental revenue declines in CM of 8 per cent to 10 per cent from 4Q23 through 2Q24 (as it cycles the 40-per-cent declines that started in September 2022) – until a recovery in the 2H24.”
Keeping a “sector outperform” recommendation, Mr. Doumet trimmed his target for its shares to US$122.50 from US$130. The average is US$130.90.
“As we believe near-term risks are well reflected in the share price, we remain relatively positive on the name,” he said. “We would become incrementally bullish as visibility improves on what we expect to be an eventual (multi-year) recovery in the CM/Leasing and a re-acceleration in IM fundraising, both of which would drive higher EBITDA/multiple expansion.”
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After hosting Adentra Inc.’s (ADN-T) executive team for meetings with institutional investors last week, National Bank Financial analyst Zachary Evershed “emphatically” reiterated his “outperform” recommendation for its shares, pointing to a bullish outlook on long-term demand and management execution.
“Within ADENTRA’s step function outlining the path to 2026 objectives, the company had baked in a $200-million headwind to account for the post-pandemic normalization of demand,” he said. “Management notes the divot was actually somewhat deeper than expected, but that based on commentary from large channel partners and their own outlook, we appear to have touched bottom and should resume low-single digit growth in 2024. With just over 3 years remaining to reach $3.5 billion in run-rate revenue, management remains committed to the 2026 goals.”
“As the company minted FCF and rationalized inventory, it has been able to repay $240-million in debt over the past six quarters, keeping leverage below 3.0 times after rent even as Adj. EBITDA margins normalized and pressured the Net Debt/EBITDA denominator. Management’s comfort level remains in the 2-3 times range, and we forecast continued debt reduction to 2.7 times exiting 2024 supported by $60-75-million in FCF after leases and interest annually. As the company gradually delevers and lofty seller expectations adjust to postpandemic valuations, we expect ADEN will become more active on the tuck-in front toward H2/24.”
Mr. Everhsed is projecting continued negative organic growth for Langley, B.C.-based company, formerly known as Hardwoods Distribution Inc., in the second half of 2023 (down 7.5 per cent year-over-year). He then sees a “gradual” recovery in 2024 (up 2 per cent) into 2025 (up 4 per cent).
“With a creeping return to growth, we expect operating leverage to provide a tailwind to profitability, complementing gradual improvements in gross margin driven by favourable mix shift and rising digital platform penetration,” he said.
“We raise our finance cost assumptions going forward given the current macroeconomic climate calling for higher-for-longer rates. We no longer rely on a cut to rates in our modeling, and maintain this conservative approach in our 2025 estimates, leaving room for a positive surprise.”
Maintaining his “outperform” recommendation, Mr. Evershed cut his Street-high target to $56 from $61. The average is $44.33.
Elsewhere, Stifel’s Ian Gillies reduced his target to $35 from $45 with a “buy” recommendation.
“Negative macro data points related to the North American consumer and housing are piling up, which we now believe will lead to a year of muted EBITDA growth in 2024 for ADEN,” he said. “We expect a 11.9-per-cent year-over-year contraction in 2024 revenue to be partially offset by an improvement in margins from continued strong cost management. Positively, the company is very well run, M&A remains a potential catalyst and the stock’s valuation is inexpensive. We are lowering our target price ... as we apply something closer to a peak multiple on significantly weaker EPS. We retain our BUY rating given the attractive current 2024E valuation (11.4 times P/E, 0.9 times P/Book).”
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Eight Capital analyst Ralph Profiti called Foran Mining Corp.’s (FOM-T) McIlvenna Bay copper-zinc-gold-silver project in eastern Saskatchewan “a regional anchor in a district of new significance” after a recent site visit.
“During our initial dinner with senior Foran management, we were joined by a provincial government delegation that included the Honourable Donna Harpauer (Deputy Premier and Minister of Finance), the Honourable Christine Tell (Minister of Environment), and the Honourable Bronwyn Eyre (Minister of Justice & Attorney General), all of whom endorsed McIlvenna Bay as a significant driver of economic growth, job creation, and sustainable development in the Province,” he said. “As Saskatchewan ranks #3 globally according to the Fraser Institute’s jurisdiction-based Investment Attractiveness Index, we believe this will benefit Foran’s strategic vision to grow in scale, maintain timelines of permitting milestones, and continue a strong social license to operate.”
Expressing “greater confidence in the potential for future step changes in the scale of mining, the prospects for total resource growth as McIlvenna Bay and Tesla deposits remain open in all directions down-plunge, and the ability to leverage exploration success towards other regional targets,” Mr. Profiti increased his target for Foran shares to $6 from $5.25, keeping a “buy” rating. The average on the Street is $4.71.
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In other analyst actions:
* RBC Capital Markets’s Greg Pardy initiated coverage of Strathcona Resources Ltd. (SCR-T) with a “sector perform” rating and $35 target. The average target on the Street is $43.99.
* In a fall preview for engineering, construction and heavy equipment companies, CIBC’s Jacob Bout raised his Bird Construction Inc. (BDT-T) target to $12.50 from $12 with an “outperformer” rating. The average is $12.97.
* Mr. Bout cut his Westshore Terminals Investment Corp. (WTE-T) target to $29 from $31 with a “neutral” rating. The average is $28.
“Despite the current macroeconomic environment uncertainty, we view the engineers (WSP, STN, ATRL) positively given their growing backlogs, high exposure to resilient transportation, environment/water (and/or nuclear) end markets, strong balance sheet positions, and ability to protect/grow margins,” he said. “While valuation levels for WSP/STN remain above historical levels, we believe this is justified given their record backlog, continued growth and margin expansion prospects beyond 2023. Within construction, we continue to prefer BDT (raising estimates, little P3 project exposure) over ARE (potential near-term headwinds from legacy fixed-price contracts) in the near-term. Amongst the equipment names, we continue to prefer FTT over TIH given valuation, both from a relative and historical perspective.”
* Scotia Capital’s Michael Doumet lowered his targets for GFL Environmental Inc. (GFL-T, “sector outperform”) to $51 from $55 and Waste Connections Inc. (WCN-N/WCN-T, “sector perform”) to US$145 from US$155. The averages are $50.25 and US$159.38, respectively.
“Wastecos provide investors with attractive/predictable FCF growth prospects in an uncertain macro: price/cost is set to expand through 2H23 and into 2024, OCC/RIN prices rebounded from recent lows, RNG FCF should ramp in 2024 (and beyond),” he said. “However, when yields rise, equity multiples often compress. The wastecos have not escaped this financial gravity year-to-date – and given the sharp rise in 10-year rates, we see a risk of further multiple compression.”
* JP Morgan’s Jeremy Tonet cut his Gibson Energy Inc. (GEI-T) target to $25, matching the average on the Street, from $27 with an “overweight” rating.
* Resuming coverage after coming off research restriction following an update to its strategic review process, Scotia Capital’s Himanshu Gupta cut his NorthWest Healthcare Properties REIT (NWH.UN-T) target to $6.50 from $8 with a “sector perform” rating. The average is $6.79.
“We think NWH should appeal to ‘Value’ investors as risk-reward profile has improved,” said Mr. Gupta. “NWH unit price is down almost 25 per cent since beginning of Sep’23, and we are almost running out of bad news now.”
* CIBC’s Hamir Patel reduced his Richelieu Hardware Ltd. (RCH-T) target by $1 to $44, below the $45.75 average, with a “neutral” rating.
* Stifel’s Stephen Soock lowered his Steppe Gold Ltd. (STGO-T) target to $2.40 from $2.60 with a “buy” rating. The average is $2.43.
* CIBC’s Mark Jarvi lowered his target for TransAlta Corp. (TA-T) to $17.50 from $18.50 with an “outperformer” rating. The average is $16.40.
“We believe the completed buyout of TransAlta Renewables (RNW) is a key step to making TA a more investable stock and puts TA on a path to achieving a higher trading multiple,” said Mr. Jarvi. “Not only does taking out RNW clean up the structure, but the deal is also accretive, with more retained cash flow to allocate to key priorities. In the near term, prices/forwards in the Alberta power market are softening, but TA is still on track to drive over $900-million of FCF this year, which enhances an already solid balance sheet. Continued execution on growth and a shift to a more stable, higher-valued asset mix coupled with ongoing return of capital should drive a higher valuation and share price. TA is not immune to some of the pressure on the power and utility sector, and we’ve adjusted our valuation accordingly.”
David Leeder