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

National Bank Financial analyst Gabriel Dechaine sees operational and leadership issues raising the risk of further credit downgrades for Laurentian Bank of Canada (LB-T), which he thinks could lead to additional pressure on funding costs.

Those concerns led him to lower his recommendation for its shares to “underperform” from “sector perform” previously.

“To recap, LB’s unsuccessful strategic review was followed by the departure of the bank’s CEO and Board Chair on October 2nd,” said Mr. Dechaine. “The departures also followed an IT outage on September 24th that led to customers being unable to access their funds or perform certain online transactions. In the wake of these disruptive events, credit rating agencies have taken notice. On October 12th, S&P revised its rating outlook on LB to “negative” from “stable”, while reaffirming the banks’ overall credit rating at BBB (one notch above speculative grade). The agency cited LB’s recent operational issues and executive turnover as potential risks to executing its long-term strategy. S&P also highlighted the potential for elevated technology/legal/regulatory costs. Separately, we understand that DBRS is undertaking a review of LB’s affairs in November, which could yield a similar outcome.”

Laurentian Bank board chair resigned to protest sudden firing of CEO

In a research note released Tuesday, Mr. Dechaine also cut his estimates for Laurentian, citing a “challenging” net interest margin (NIM) and non-interest expense (NIX) outlook.

“LB’s wholesale funding costs are rising in the wake of potential rating agency actions,” he said. “LB’s credit spreads have widened (e.g., Senior Unsecured by approximately 10 basis points). In the event of a downgrade, the bank’s wholesale funding costs could further increase. While subordinated debt represents a tiny proportion (i.e., less than 1 per cent) of LB’s funding stack, more may be required, particularly if the September IT outage leads to deposit outflows. LB typically pays more than its Big-6 peers on retail term deposits (e.g., 50 basis points-plus spread on 2-year GICs), which may widen to enhance competitiveness. Aside from making our NIM forecasts more conservative, we are also increasing our NIX forecasts, assuming that additional IT expenses will be required to fix recent issues. These ‘fixes’ could include both improved IT governance, along with efforts to retain client relationships.”

Pointing to its “heightened risk profile,” Mr. Dechaine cut his target for Laurentian shares to $27 from $32. The average on the Street is $35.45, according to Refinitiv data.

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While he reiterated his view of “strong underlying fundamentals” for Computer Modelling Group Ltd. (CMG-T), Canaccord Genuity analyst Doug Taylor downgraded its shares to “hold” from “buy” in response to recent price appreciation.

“A combination of robust energy prices and supportive industry sentiment, along with leading indicators such as normalized recurring revenue growth in recent quarters (up 11 per cent year-over-year in FQ1/24), suggest demand remains solid in CMG’s core end-market and with a rising share of energy transition business (22 per cent of FQ1 mix) showcasing management’s execution in expanding the TAM [total addressable market],” he said. “WTI now trades at almost US$88/bbl, up 9 per cent year-to-date though down from US$94 per barrel in late September as recent supply concerns were calmed by Saudi Arabia’s commitment to stabilize the market and amid inventory stockpiling progress.

" Our recommendation downgrade is therefore not a call on any material change to our near-term financial forecast nor the company’s broader outlook, which in our view remains sold.”

Mr. Young raised his target for the Calgary-based company’s shares to $10 from $8.75. The average target on the Street is $9.33.

“We await further upside to come from a sharper growth inflection and/ or confirmation of Bluware synergies,” he added.

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Lingering uncertainty surrounding the sale of Algonquin Power & Utilities Corp.’s (AQN-N, AQN-T) renewable energy business is likely to overshadow the release of “soft” third-quarter results, according to National Bank Financial’s Rupert Merer.

The analyst thinks the outlook for the Oakville, Ont.-based company is now almost solely dependent on the timing and sale price for the renewable energy portfolio, which had been a target of activist investors that wanted to transform Algonquin into a stand-alone utility that delivers electricity, water and natural gas.

“The process to sell AQN’s renewable assets is well underway, though we believe a transaction is unlikely in the near term,” said Mr. Merer, who believes the portfolio could be worth US$2.5-3.1-billion.

“A sale of its 42-per-cent stake in [Atlantica Sustainable Infrastructure. (AY-Q)] (Outperform, US$25 target) is also on the table, but also with limited visibility on timing. AQN should use the proceeds of asset sales to lower its leverage, targeting approximately 13 per cent FFO/debt, but the majority could go to share buybacks. The value of the asset sold and the buyback price would determine the level of EPS accretion. However, at this point, it is not certain that there will be a transaction or what the terms of the deal would be. We do not foresee a scenario that would significantly change our near-term earnings outlook, though we believe that AQN shares could benefit from a transaction that leads it to being a pure-play regulated utility with a clean balance sheet and visibility on growth.”

Mr. Merer reduced his quarterly projections for Algonquin to “account for weak wind in the U.S. and Canada.” His adjusted EBITDA estimate slid by approximately 5 per cent to US$291-million from US$304-million, below the US$303-million consensus forecast. His adjusted earnings per share forecast slid by a penny to 11 US cents, which is 2 US cents lower than the Street.

“There could be moving parts to estimates related to AQN’s off-balance sheet assets in Texas, with volatility in that market,” he said. “Our 2023 estimates also moves lower with our Q3 updates and revised interest forecasts, with EPS estimates falling to $0.52 per share (was $0.53 per share), below guidance at $0.55-0.61 per share. Investors are unlikely to focus on the quarterly results, but on the value of the renewable power portfolio and the potential for a sale in a tough market.”

He added: “On the regulated business, we will look for an update to the outlook for rate reviews and plans to invest up to $1 billion per year in rate base, as AQN targets 4-7-per-cent annual EPS growth per year once its renewables business is sold. On the renewables front, we should get updates on its 650 MW pipeline.”

To account for higher interest rate forecasts and “volatility,” Mr. Merer lowered his target for Algonquin shares to US$8.50 from US$9.50, maintaining a “sector perform” recommendation. The average on the Street is US$8.67.

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Tourmaline Oil Corp.’s (TOU-T) $1.45-billion acquisition of Bonavista Energy Corp. further bolsters and consolidates its position as the largest producer in Alberta’s Deep Basin, “adding decades of inventory, and becoming immediately accretive” to its free cash flow profile,” according to ATB Capital Markets analyst Patrick O’Rourke.

Shares of Calgary-based Tourmaline jumped 3.2 per cent on Monday following the premarket announcement of a deal for the privately held natural gas producer. It also announced another increase to quarterly dividend (to 28 cents per share) and a special dividend of $1 per share.

“Overall, we view the event as positive,” said Mr. O’Rourke. “[Monday’s] market prices agreed with that sentiment, with TOU outperforming the broader energy equity market, up 3.2 per cent vs the TSX Capped Energy Index at up 0.5 per cent (and the WTI crude oil benchmark down 1.2 per cent over the weekend). The purchase will include over 60.0 mboe/d [thousand barrels of oil equivalent per day] (36-per-cent liquids), 656.7 net locations, and 1.2 million net acres of land rights, with $450-million in cash flow expected per year over the next three years, based on current strip pricing. The reserves are valued at a 2P NPV10 of $3.3-billion and PDP NPV10 of $1.4-billion, based on total 2P and PDP reserves of 459 mmboe and 151 mmboe, respectively, and TOU’s proforma 2023e year-end production is now expected to exceed 600 mboe/d.

“The deal has fairly attractive and accretive metrics for TOU, valued at 1.0 times PDP, 3.2 times CF, or a 15.5-per-cent estimated 2024 FCF/EV yield, with potential further upside from capital and operational efficiencies in its highly-contiguous land base as well as $1.7-billion in tax pools ($900-million in non-capital loss pools) that further enhance the economics of the acquisition.”

Maintaining an “outperform” recommendation for Tourmaline shares, he raised his target to $92 from $90. The average is $83.03.

“TOU remains one of our preferred ways for investors to gain exposure to North American gas,” said Mr. O’Rourke. “Tourmaline is a well-managed producer, with assets in the Montney, Deep Basin and Charlie Lake. The Company provides gassy exposure (with a growing liquids presence) to investors seeking exposure to the potential longer-term impact that LNG will have on Canadian gas demand, in a highly liquid business with a strong capital structure.”

Elsewhere, other analysts making target adjustments include:

* National Bank’s Dan Payne to $80 from $75 with an “outperform” rating.

“A strong and accretive transaction for the company as it consolidates the Deep Basin fairway in support of material FCF accretion to the benefit of shareholder returns, while we also note the opportunistic & strategic pivot back to A&D (largest in seven years since its acquisition of Shell assets) as an indication of an orientation towards expanding its bias towards total return in support of long-term shareholder return of capital,” said Mr. Payne.

* Canaccord Genuity’s Mike Mueller to $78 from $75 with a “buy” rating.

“We expect TOU will focus on maintaining production from the acquired assets in the near term, while growth remains focused on its Conroy asset in NEBC,” said Mr. Mueller. “With the acquisition expected to close mid-November, the impact is more apparent in 2024. We have increased our 2024 production numbers by 11 per cent to 611,846 boe/d, increased capex by 11 per cent to $2.24-million, while CFPS increases 8 per cent to $11.9.”

* TD Securities’ Aaron Bilkoski to $79 from $77 with a “strong buy” rating.

“The consolidation of the Deep Basin (along with Montney) was a key strategy of Tourmaline’s in 2020, but was paused in part due commodity price strength and vendor expectations,” said Mr. Bilkoski. “This transaction was done at reasonable metrics that result in 5-per-cent 2024 estimated CFPS accretion to Tourmaline. Overall, it is likely that over time, Tourmaline will extract stronger capital/expense synergies from this asset than we have modeled.”

* CIBC’s Jamie Kubik to $82.50 from $77 with an “outperformer” rating.

“While the Bonavista assets are well known, we believe the price paid is attractive and we are intrigued by the free cash flow potential under Tourmaline’s ownership,” he said.

* RBC’s Michael Harvey to $86 from $84 with an “outperform” rating.

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Believing “industry pain has peaked,” Eight Capital analyst Ty Collin sees High Tide Inc. (HITI-X, HITI-W) poised to emerged as a leader in the growing retail cannabis market.

“After several years of retail oversaturation and resultant price wars, competition is finally beginning to recede, and leading retailers are starting to recapture margins and generate positive free cash flow,” he said. “We believe that the retail industry is at the beginning of a multi-year shakeout and consolidation cycle that will eventually result in the market being dominated by a handful of today’s leading operators, like High Tide.”

“We believe that investors overlook increasingly important scale advantages in cannabis retail that are allowing leading operators like HITI to pull away from smaller competitors inexorably. These include unmatched access to consumer data, the ability to operate highly-profitable data and private label programs, secure the most attractive real estate, and access growth capital, among others.”

Mr. Collin emphasized Calgary-based High Tide, which is currently the largest non-franchise cannabis retailer in Canada, is now generating positive free cash flow, which should help fund its growth strategy, and sees a “significant runway” through both organic initiatives and M&A.

“High Tide generated $4.1-million of free cash flow last quarter, or $16.4-million annualized, which represents a free cash flow yield of 11 per cent,” he said. “HITI reached this milestone five months ahead of guidance and is now one of the few operators across the entire Canadian cannabis value chain to be generating sustainable free cash flow. This provides a key growth advantage to loss-making competitors who are increasingly starved for capital.”

“We expect that HITI will maintain its position as a market share leader in a growing and consolidating Canadian cannabis industry. It has numerous avenues to drive organic growth and profitability improvement, including through the addition of up to 100 new stores, growth in its data services and paid membership programs, strategic price-taking, and longer-term through the expansion of its private label offering and into international markets.”

Mr. Collin set a target of $5 per share. The current average is $5.94.

“While Canadian cannabis growers continue to struggle with oversupply and onerous taxes, we view cannabis retail as a structurally more attractive part of the value chain, with a lower capital outlay and a direct relationship to consumers,” he concluded. “And while it is true that retailers continue to face oversaturation - particularly in major urban centers - we think few investors realize that the process of industry attrition and consolidation has already begun. With competition ebbing, industry leaders like HITI have seized the opportunity to reclaim product margin, and have begun to generate positive free cash flow. At the same time, the largest operators in the sector have begun to mature and have found ways to leverage their scale for higher profitability than their mom-and-pop competitors. We expect the highly-fragmented cannabis retail industry to eventually consolidate and become dominated by a handful of large players, and we believe that HITI will be among that group given its leading market share, profitability, and resources.”

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While Cargojet Inc.’s (CJT-T) end markets may be improving, National Bank Financial analyst Cameron Doerksen warned investors should expect “muted” results for the next few quarters.

“Based on commentary from air cargo and package & courier peers, there are some signs that end markets are stabilizing,” he said. “Of note, IATA recently reported that global demand for air freight was up 1.5 per cent year-over-year in August, the first year-over-year increase since February 2022, and down just 1.3 per cent versus August 2019. Air freight capacity is still up 12.2 per cent year-over-year, however, so the broader market remains oversupplied. Nevertheless, if end market conditions do stabilize, the downside for CJT shares is likely limited in our view, and we could see a positive inflection point for investor sentiment and the stock emerge in the first half of 2024.”

“We nevertheless continue to expect muted results from Cargojet in the next couple quarters which drives our short-term neutral view on the stock. We have trimmed our EBITDA and earnings forecasts for Cargojet. For Q2, the primary driver for lower EBITDA is a higher estimate for the fuel lag impact, which can impact near-term earnings. We have also lowered our core revenue forecast for the balance of 2023 and 2024 as we expect volumes to remain somewhat muted for longer.”

Ahead of the Nov. 7 release of its third-quarter results, Mr. Doerksen is now projecting revenue of $221-million, up from $219-million, with earnings per share falling to 78 cents from his previous 99-cent projection. For 2023 and 2024, his EPS forecast fell to $3.99 and $4.19, respectively, from $4.38 and $4.83.

Maintaining a “sector perform” recommendation, the analyst trimmed his target for the Mississauga-based company’s shares to $112 from $119. The average is currently $142.17.

“The downside for the stock is likely limited in our view and if the industry backdrop does improve, we could see a positive inflection point for investor sentiment and the stock emerge in the first half of 2024,” said Mr. Doerksen.

“Valuation remains reasonable with the stock currently trading at 7.0 times 2024 EV/EBITDA on our forecast, which is below the historical forward average for the stock of 11.3 times (which was skewed higher by lofty valuations during the pandemic period). However, the current valuation is slightly ahead of the air freight peer group average of 6.7 times 2024 EV/EBITDA, below UPS at 9.6 times, above FedEx at 6.5 times and well ahead of Air Transport Services Group (which has some similarities to CJT) which trades at 4.5 times.”

Elsewhere, ATB Capital Markets’ Chris Murray maintained an “outperform” rating and $130 target in his quarterly earnings preview.

“At Q2/23 reporting, management said it expected a modest sequential improvement in EBITDA margin; however, given the timing of fuel surcharges and fuel costs, we believe this is unlikely given the rapid move in fuel prices over the quarter,” he said. “Despite what is expected to be a soft year-over-year volume print, data is starting to point to improving year-over-year trends, with IATA noting some recent strength. We expect additional colour on the volume outlook (including the recent Prime Day impact) as well as a likely update on capital spending. We view CJT as an intriguing GARP opportunity, with an attractive risk/reward setup at current valuations.”

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In other analyst actions:

* JP Morgan’s Bill Peterson initiated coverage of Teck Resources Ltd. (TECK-N, TECK.B-T) with an “overweight” recommendation and $52 target, exceeding the average by $1.

* Mr. Peterson also initiated coverage of Ivanhoe Electric Inc. (IE-T) with an “overweight” rating and $24 target. The average is $19.94.

* Raymond James’ Savanthi Syth cut her Air Canada (AC-T) target to $28, below the $30.54 average, from $31, keeping an “outperform” rating.

* National Bank’s Rupert Merer lowered his target for Altius Renewable Royalties Corp. (ARR-T) to $10 from $10.75 with an “outperform” rating. The average is $12.47.

* Bernstein’s David Vernon cut his Canadian National Railway Co. (CNR-T) target by $1 to $171, exceeding the $164.42 average, with an “outperform” rating.

* While he expects “stronger” second-half operation results for base metals producers, National Bank Financial Shane Nagle cut his targets for these companies ahead of third-quarter earnings season: Capstone Copper Corp. (CS-T, “outperform”) to $6.75 from $7.25, Ero Copper Corp. (ERO-T, “sector perform”) to $26 from $30, Hudbay Minerals Inc. (HBM-T, “sector perform”) to $8.25 from $10.25, Lundin Mining Corp. (LUN-T, “sector perform”) to $11.25 from $11.50, Sherritt International Corp. (S-T, “sector perform”) to 60 cents from 65 cents, Taseko Mines Ltd. (TKO-T, “sector perform”) to $2.20 from $2.40. The averages are $7.90, $28.59, $9.87, $11.93, 90 cents and $2.87, respectively.

“Despite pressure on the copper price from increasing interest rates and recession fears, equities have maintained a fair valuation, suggesting the market has been looking through near-term price/earnings volatility towards the potential of a more favourable copper price environment given the anticipated copper deficit in the coming years and further M&A activity,” said Mr. Nagle. “There is the risk operational underperformance and/or any material impact to any growth initiatives could lead to volatility in share prices.”

* In response to its acquisition of the U.S. facility services business of France-based La Financière Atalian, Desjardins Securities’ Frederic Tremblay increased his target for GDI Integrated Facility Services Inc. (GDI-T) by $1 to $56 with a “buy” rating. The average is $52.08.

“We view the transaction positively as it will expand GDI’s U.S. footprint in janitorial and other services (New York City, Ohio and Missouri) and add substantial revenue (approximately $100-million),” he said. “We also believe that the purchase price was reasonable, in part due to the margin improvement efforts needed.”

* Seeing a “stable U.S. wholesale backdrop”, National Bank’s Vishal Shreedhar raised his target for Gildan Activewear Inc. (GIL-T) to $48 from $46, keeping an “outperform” rating, ahead of the Nov. 2 release of its third-quarter financial results. The average is $49.29.

“The outlook is uncertain; however, we believe that Gildan’s share price already reflects this,” he said. “Our review suggests that Gildan will grow EPS year-over-year in 2024 given continuation of new programs won in 2023 (approximately $60-million to sales), lower commodity costs ($0.25 to EPS), possible new retail wins in 2024, efficiency initiatives and ongoing share repurchases ($0.14 to EPS). Possible offsets include tepid market conditions, possible price reductions and possible introduction of higher taxes (we now model 15-per-cent tax rate in 2024; $0.30 to EPS).”

* Evercore ISI’s Chris McNally raised his Magna International Inc. (MGA-N, MG-T) target to US$75 from US$70 with an “outperform” rating. The average is US$66.

* In a note titled Stock has recovered nicely, but still more potential upside, National Bank’s Cameron Doerksen raised his NFI Group Inc. (NFI-T) target to $18 from $15 with an “outperform” rating. The average is $14.42.

“NFI is the best performing stock in our coverage universe so far in 2023, up 49 per cent year-to-date versus the TSX up 1 per cent,” he said. “With demand for buses continuing to be strong, we believe financial results will trend much more positively in the coming quarters, which we believe will support further upside to the share price.”

* BMO’s Thanos Moschopoulos cut his Open Text Corp. (OTEX-Q, OTEX-T) target to US$45 from US$50 with an “outperform” rating. The average is US$48.20.

* Scotia’s Orest Wowkodaw raised his Teck Resources Ltd. (TECK.B-T) target to $75, above the $68.66 average, from $69 with a “sector outperform” rating.

“We continue to anticipate Teck to announce a new simpler and more direct coal separation plan shortly. Given the materially higher HCC price environment (which appears structural), we now believe that the most likely separation scenario is a partial sale to a consortium of steelmakers (40-50 per cent) and a spin-out to shareholders (50-60 per cent),” said Mr. Wowkodaw.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 26/02/24 1:52pm EST.

SymbolName% changeLast
AC-T
Air Canada
+1.6%18.46
AQN-T
Algonquin Power and Utilities Corp
-3.23%7.8
ARR-T
Altius Renewable Royalties Corp
+1.25%8.11
CNR-T
Canadian National Railway Co.
+0.06%177.79
CS-T
Capstone Mining Corp
-2.46%7.14
CJT-T
Cargojet Inc
-3.02%113.51
CMG-T
Computer Modelling Group Ltd
-1.96%10
ERO-T
Ero Copper Corp
-3.48%21.65
GDI-T
Gdi Integrated Facility Services Inc
-0.81%39.01
GIL-T
Gildan Activewear Inc
-1.48%47.18
HITI-X
High Tide Inc
-2.07%2.37
HBM-T
Hudbay Minerals Inc
-0.66%7.5
IE-T
Ivanhoe Electric Inc
-1.83%10.21
LUN-T
Lundin Mining Corp
-2.1%10.71
MG-T
Magna International Inc
-1.85%72.01
NFI-T
Nfi Group Inc.
+1.97%12.4
OTEX-T
Open Text Corp
-0.54%51.96
S-T
Sherritt Intl Rv
-1.75%0.28
TKO-T
Taseko Mines Ltd
-0.49%2.02
TECK-B-T
Teck Resources Ltd Cl B
-2.04%52.41
TOU-T
Tourmaline Oil Corp
+0.49%59.6

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