Inside the Market’s roundup of some of today’s key analyst actions
Analysts at RBC Dominion Securities are seeing a more “constructive” outlook for gold equities after raising both their short- and long-term price assumptions for the precious metal on Tuesday.
“Restrictive monetary policy has the potential to continue to weigh on gold near-term, but thereafter we forecast that slowing growth and a turning point in monetary policy will support higher gold prices,” they said in a research report titled Turning the corner. “Gold equities are supported by reasonable valuations and declining margin pressures, plus potential gold price upside.”
The firm’s gold price assumption for 2023 rose by 4 per cent to US$1,921 per ounce from US$1,854. Its 2024, 2025 and 2026 projections jumped by 15 per cent, 16 per cent and 15 per cent, respectively, to US$1,960, US$1,975 and US$1,900.
“Our forecasts have been developed in conjunction with a revised RBC Elements gold price model that now also assesses relative changes in our underlying model feature set, rather than solely the absolute level of these features,” they said. This approach results in greater near-term model accuracy, although longer-term model estimate errors accumulate as these forecasts rely on prior period forecasts. We also update our long-term gold price forecast to $1,700 per ounce (up 6 per centvs. prior $1,600/oz) and have increased our base discount rate assumptions for producers to 8 per cent from the conventional 5 per cent, in our view more appropriately reflecting higher prevailing risk-free rates, plus mining risks. The net impact of these changes has resulted in our median NAV changing by negative 2 per cent and our median EBITDA over 2023-25 changing by a gain of 23 per cent.
“The foundation for an easing of restrictive monetary policy is emerging — a positive for gold prices. Fed actions and commentary have firmly supported restrictive policy remaining in place, pending a clear decline in inflation. Early indications are that inflation is now slowing, but sustained containment to targets is not yet clear and supports existing policy conditions being maintained. Our view is that these conditions present a degree of further headwinds for gold near-term. However, gold prices thereafter stand to benefit from future easing in a growth slowdown. Broadly, our base case forecasts reflect a mild recession developing later in 2024. Our revised RBC Elements model indicates that deeper recession conditions could result in average gold prices of $2,200-$2,300 per ounce in 2024, while a soft landing and sustained firm monetary conditions would result in downside to average prices of $1,800-$1,900 per ounce.”
While they see gold equities as fair valued currently relative to historical ranges, the analysts thinks companies appear poised to benefit from potential gold price strength and margin improvement.
“Gold producers have been challenged by considerable cost inflation and margin pressures, with senior producer costs rising 10 per cent in 2022 and a further 8 per cent in 2023,” they said. “We forecast declining headwinds into 2024, with RBC estimating senior producer costs forecast to decline 2 per cent year-over-year, but we note these estimates are currently 5 per cent above consensus. Within our coverage universe, we view the senior producer group more constructively than our original 2023 negative outlook following a reset in expectations and valuation contraction, plus 2H forecast improvements that support favourable cash generation. Our top picks include Agnico Eagle, Barrick Gold, De Grey Mining, Gold Fields, Hochschild Mining, Northern Star, OceanaGold, Pan American Silver, and Royal Gold.”
Given the bullish view of the sector, analyst Wayne Lam upgraded a pair of stocks:
They are:
* Equinox Gold Corp. (EQX-T) to “sector perform” from “underperform” with a $7.25 target, up from $5. The average target on the Street is $8.28.
“We upgrade EQX shares to Sector Perform (from Underperform) as near-term operational risks appear to have moderated with our recent site visit to Greenstone confirming advanced stage progress as the project enters the home stretch,” he said. “Our PT increases ... driven by our higher gold price forecast along with updated estimates as EQX approaches completion of construction. While we maintain a cautious outlook given levered balance sheet and remaining portfolio of higher cost assets, we anticipate improved momentum for EQX ahead as its flagship asset comes online in H1/24.”
* K92 Mining Inc. (KNT-T) to “outperform” from “sector perform” with a $10 target, up from $9.50. Average: $11.58.
“In our view, risk/reward for shares is at an attractive level with upcoming de-risking elements that could serve as potential catalysts,” he said. “Overall, we view KNT as providing substantial growth via lower-capital Stage 3 & 4 expansions alongside an aggressive exploration program that could continue to unlock upside in the months ahead.”
Conversely, he lowered Osisko Development Corp. (ODV-X) to “sector perform” from “outperform” with a $6 target, down from $7 but above the US$5.74 average.
“We downgrade ODV shares to Sector Perform (from Outperform) and maintain our Speculative Risk qualifier, with price target to $6 (from $7) reflecting greater dilution via funding requirements,” he said. “We anticipate investor focus on improved visibility to advancement of the project pipeline, with potential for an increase in financing headwinds ahead. As such, we view greater caution for ODV shares as the market awaits clarity on company strategy in the path forward.
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Concurrent with RBC’s gold report, analyst Wayne Lam raised the firm’s recommendation for Iamgold Corp. (IAG-N, IMG-T) to “sector perform” from “underperform” upon assuming coverage, pointing to “subsiding” risk as its Côté project in northeastern Ontario “moves to forefront.”
“In our view, construction risks at Côté have moderated following the recent funding agreement with Sumitomo ($340-million) and recent $400-million term loan financing, helping to bolster the balance sheet as the project approaches completion,” he said. “Impending output at Côté is expected to transform the production profile for IAG, providing lower-cost output in Ontario, which we estimate at 393,000 ounces per year annually (100-per-cent basis) at mine-site AISC of $1,163 per ounce. We estimate this to provide IAG 30-per-cent-plus production growth into 2024 at 15 per cent lower AISC, helping to offset rising geopolitical risk at Essakane and higher-cost output at Westwood as emphasis begins to shift toward bringing online a new flagship asset.
“Looking ahead, we anticipate emphasis to centre around ramp-up of Côté following first gold in early 2024, with the balance sheet able to support the project through advancement to steady-state capacity. Additionally, we expect focus on upcoming LOM updates at Essakane and Westwood by year-end, which are expected to outline the strategy for optimizing production and cost profiles for both assets.”
Expecting the company’s focus to be on delevering as its financial leverage “remains elevated,” Mr. Lam set a target of US$2.75, seeing its valuation at a discount to peers and a “potential re-rating ahead.” The average target on the Street is US$4.86.
“We estimate that IAG is trading at approximately 0.7 times spot NAV and 2.4 times spot 3-yr EV/ EBITDA — a 20-per-cent and 45-per-cent discount to Intermediate peers, respectively,” he said. “In our view, this reflects elevated financial leverage and operational missteps the last few years amidst Côté Gold construction. With visibility to first gold ahead and steps taken to manage the balance sheet, we are more constructive on the near-term outlook but remain cautious given execution risks ahead.”
In a separate report, Mr. Lam assumed coverage of B2Gold Corp. (BTG-A, BTO-T) with a “sector perform” rating and US$4.25 (unchanged). The average is US$4.86.
“BTG is moving through an investment phase setting up the company for future growth, and we remain cautious on shares given potential execution risk via construction of Back River and rising geopolitical risk in Mali. On the latter, we also see potential for re-evaluation of the Fekola Regional standalone project following proposed change in government ownership structure. Overall, we are constructive on longer-term growth potential but are cautious around elevated near-term geopolitical/operational risk,” he said.
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Desjardins Securities analyst John Sclodnick thinks Kinross Gold Corp. (K-T, KGC-N) should hit new peak trading multiples “after rationalizing the portfolio last year and upgrading the jurisdictional risk profile by swapping its Russian and Ghanaian assets for the world-class Great Bear project in Ontario.”
In a research report titled Great Bear makes Kinross a great bull, he initiated coverage with a “buy” recommendation on Tuesday.
“The company has guided to production of at least 2.0 million ounces Aueq [gold equivalent] through 2025 and we model AISC [all-in sustaining costs] below US$1,300/oz over that period, enabling significant free cash flow generation over that timeframe, which should help to delever its balance sheet,” he said. “We like the company’s Americas-focused production base, and with recent consolidation bolstering the production profiles of Newmont and Agnico, Kinross could be an attractive M&A target. A merger of equals might enable it to fill the gap in market cap and production between the three largest gold producers and the next largest producer group, which includes Kinross.
“The potential return to target above 20 per cent supports our Buy rating, and we see upside to our NAV estimate, which does not factor in certain projects that have the potential to extend the mine lives of the U.S. operations, for example. We also like the potential for future NAV accretion and our base-case expectations, which would see lower-cost production from Great Bear replace lower-margin production from the U.S.. We view Great Bear as a world-class development project, and it currently represents 18 per cent of our NAV; however, as we move closer to production and capex-intensive quarters begin to drop off from the NPV calculation, it will grow in NAV contribution. We believe that the company can trade at new peak P/NAV multiples with the upgraded jurisdictional risk profile after transitioning to a more Americas-focused portfolio last year. On an EV/EBITDA basis, we believe that Kinross should trade near peak multiples and at a more significant premium to the peer group, which may come as the balance sheet is deleveraged.”
Mr. Sclodnick set a target of $8.50 per share. The average is $8.82.
“Kinross currently trades at 1.02 times NAV and 4.8 times EV/FY1 EBITDA vs producer peers at an average of 0.78 times and 4.9 times, respectively,” he said. “However, with a larger production base including two tier 1 assets (Tasiast and Paracatu), a world-class development project which continues to grow and an upgraded jurisdictional profile, we believe that Kinross merits a meaningful premium to peers on both metrics.”
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Following off-road vehicle channel checks, second-quarter earning season and an examination of powersports inventories, Citi analyst James Hardiman upgraded BRP Inc. (DOO-T) to “buy” from “neutral” previously, seeing it continue to secure market share gains from rival Polaris Inc. (PII-N).
“Based on our conversations with ORV [off-road vehicle] dealers, we estimate that PII North American ORV retail sales in 3Q to date have slowed meaningfully from the 14 per cent reported by the company, with strong 3Q growth no longer a certainty,” he said. “Conversely, despite the ups and downs of the ORV industry, BRP appears to have absorbed PII’s best shot earlier in the year and continues to see consistent share gains throughout. Additionally, BRP appears to be seeing better pricing and is less promotional than PII with our initial look at MY24′s.
“We are significantly more comfortable with DOO’s inventory strategy, as the company continues to chase demand, as opposed to a much more aggressive stance taken by PII, who appears to be punting the $750-million replenishment headwind into 2024 — Separately, we conducted a deep dive on powersports inventories, and after taking their medicine in the second half of this year, BRP is well positioned to go after its FY25 targets, despite broad investor skepticism/disbelief.”
While Mr. Hardiman expects both stocks to “trade on near-term retail trends,” he opened a pair trade between the two, going “overweight” on BRP and “underweight” on Polaris.
“The sizable valuation premium accorded to Polaris does not mirror the performance of these two companies, and we would not only expect BRP to outgrow Polaris going forward, but we would also expect this valuation delta to close over time,” he said.
The analyst pointed to three factors in justifying his trade: “1. Despite taking PII’s best shot during the first half of the year, we believe that BRP is continuing to take share in the ORV space, and is the best bet to take share going forward; 2.We are significantly more comfortable with DOO’s inventory strategy, as the company continues to chase demand, as opposed to a much more aggressive stance taken by PII, who appears to be kicking the $750-million replenishment headwind into 2024; 3. DOO trades at a significant (2-plus) P/E discount to PII, which is down from the early-summer peak but nonetheless towards the high-end of the trading range over the past three years. We would also note that DOO benefits from arguably the best share and growth dynamics in our coverage, and should arguably trade at a premium to PII in our estimation.”
In response to last week’s second-quarter earnings release, Mr. Hardiman raised his target for BRP shares to $128 from $111. The average target on the Street is $135.11.
“We rate BRP, Inc. shares a Buy,” he said. “There is a great deal to like about the BRP story, as the company’s powersports portfolio features both defensible leadership positions and substantial market share opportunities. In both cases, BRP’s long track record of high-quality products and consistent innovation should (in our view) allow it to gain share for the foreseeable future, even if the market itself is difficult to handicap.”
His target for Polaris fell to US$110 from US$138 with a “neutral” rating (unchanged). The average is US$128.17.
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Stifel analyst Ian Gillies remains “positive” on the organic revenue growth prospects for Canadian engineering and construction firms, believing the spending outlook for customers will bring “above-trend” gains through 2025.
“Growth for these companies moving forward is likely to be propelled by large sums of government infrastructure funding being released through multi-year funding programs across key OECD geographies,” he said. “More specifically, many of these government programs are expected to last half a decade or longer. Conversely, there are still uncertainties around a potential recession in 2024/2025, which could reduce private spending. The likelihood of a hard landing has receded from this time last year given better-than-expected macroeconomic data and E&C firms demonstrating robust backlogs. Therefore, we remain optimistic on the outlook for the companies in our coverage.
“Given the magnitude of the funding in the U.S., companies with meaningful U.S. exposure should generate higher organic growth in 2024/2025. Notably, we expect Badger to lead the group of companies in this report with low-double-digit organic growth (2024: 12.8 per cent; 2025: 11.1 per cent) given U.S. exposure of 85 per cent. For the engineering firms, we forecast STN’s 24/25 organic revenue growth at 8.1 per cent and 6.9 per cent and WSP at 6.8 per cent and 5.9 per cent. We expect organic revenue growth for the more volatile construction companies (Aecon and Bird) to fare better than engineering companies, but margin performance is much less certain.”
After updating his 2024 estimates and introducing his 2025 forecast, Mr. Gillies raised his targets for stocks in his coverage universe.
“Stantec remains our Top Pick, while we believe Badger remains a torquey and attractive way to play these trends,” he said.
Mr. Gillies’s changes are:
Aecon Group Inc. (ARE-T, “hold”) to $13 from $12. The average on the Street is $13.81.
Analyst: “We remain concerned over near-term issues for Aecon related to four large fixed-price contracts, with uncertain settlements on outstanding billings. Over the medium term, the company is very well positioned to benefit from Canadian infrastructure spending (23-25 EPS CAGR [compound annual growth rate]: 16.0 per cent). At this juncture, we remain on the sidelines.”
Badger Infrastructure Solutions Ltd. (BDGI-T, “buy”) to $52 from $48.50. Average: $38.71.
Analyst: “A business that is getting better by the quarter. Keys to growth include: (1) market share capture as it will drive revenue growth and reduce cost per unit; and (2) continued cost management at the COGS line to help drive margin enhancement. Offers a 23-25 EPS CAGR of 36.2 per cent.”
Bird Construction Inc. (BDT-T, “buy”) to $16 from $15. Average: $12.92.
Analyst: “Management is finally being recognized for executing a significant turnaround over the last three years with EBITDA margins rising from 2.3 per cent in 2019 to 4.7 per cent in 2023E. We are expecting more of the same over the next two years, and if delivered (23-25 EPS CAGR: 15.9 per cent), should continue to deliver a meaningful valuation re-rating (2024/2025 P/ E: 7.8 times/6.6 times).
Stantec Inc. (STN-T, “buy”) to $105 from $98. Average: $97.55.
Analyst: “High-quality earnings and top-tier management, while offering a 23-25E EPS CAGR of 14.4%. M&A remains a key component of the growth story, with spare capacity of $1,685 mm. Valuation is expensive at 19.6 times 2025 P/ E, but this should compress as M&A is announced. An investor day in early December 2023 could be a positive catalyst for the stock. Stantec remains on the Stifel Select List and should be a core holding.”
WSP Global Inc. (WSP-T, “buy”) to $210 from $200. Average: $204.21.
Analyst: “High-quality earnings and top-tier management, while offering a 23-25 EPS CAGR of 14.2 per cent. The company’s U.S. exposure is lower than Stantec, valuation is slightly more expensive (2025 P/E of 21.9 times) and ROE/ROCE slightly lower than Stantec.”
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Eight Capital analyst Ty Collin named Verano Holdings Corp. (VRNO-CN) a “top pick” in his U.S. cannabis sector coverage, pointing to its “diverse and catalyst-rich footprint, strong balance sheet, leading profitability, and meaningful free cash flow generation.”
“We place special emphasis on this last point – cash flow – given that U.S. cannabis companies face structural barriers to accessing capital, favouring operators that can fund their own growth sustainably,” he added. “Further, as potentially transformational sector catalysts like Rescheduling and SAFE Banking materialize, we expect that investors new to the sector will gravitate to profitable and cash-generating operators like VRNO as a first point of contact given their relative safety.
“Particularly given its valuation discount to other industry leaders, we view VRNO shares as an ideal vehicle for investors to gain U.S. cannabis exposure ahead of a catalyst-rich fall for the sector.”
In a research report released Tuesday, he initiated coverage of the Chicago-based multi-state operator with a “buy” recommendation, believing its “highly strategic footprint offers broad exposure to key federal and state-level catalysts.”
“Verano operates one of the largest and most diverse footprints among U.S. cannabis companies, with a presence in 13 U.S. states, of which the Company has vertical operations in 11,” he said. “VRNO has an established position in key growth markets such as NJ, CT, and MD, which respectively converted to adult use in April 2022, January 2023, and July 2023. Each of these markets has a long runway for growth as new retail stores are built, product selection grows, wholesale distribution expands, and incremental consumers are captured from the illicit market.
“The Company also enjoys a leading position in key catalyst markets such as FL, OH, and PA, which have the potential to flip to adult-use in the next 12-18 months. FL, OH, and PA currently represent a combined $4.6-billion in run-rate sales. Under an adult-use framework, we estimate that these states could be worth $12-billion combined, representing $7.4-billion of additional TAM [total addressable market] available to VRNO.”
Mr. Collin also touted Verano’s “sturdy” balance sheet with an ability to deleverage and reduce the cost of capital.
“The possibility of material debt reduction stands in contrast to many peers who, facing the dual adversities of challenging industry and capital market conditions, have racked up considerable leverage over the past two years,” he said. “Investors are leery of high leverage and burdensome debt servicing costs given difficult industry conditions, so we believe that VRNO’s strong and improving balance sheet will be seen as a discerning factor for new investors seeking U.S. cannabis exposure.
“Verano is further distinguished by the fact that it owns nearly all of its operating assets, whereas most of its peers have raised funds through pricey sale-leaseback transactions. This provides Verano with unique flexibility to raise incremental capital and lower its overall cost of debt by monetizing those assets through mortgage-type transactions. We note, for example, that VRNO entered into a $20-million mortgage at a 5.75-per-cent interest rate as recently as March 2023. The Company can use these transactions as an opportunistic source of growth capital or to effectively refinance its much more costly credit facility, which currently bears interest at 15 per cent.”
Seeing an “attractive” valuation versus its peers that is “unjustified,” Mr. Collin set a target of $14 per share, exceeding the $12.23 average on the Street.
“Setting aside some of these scars from its history, we believe the VRNO of today has all the markings of a Company deserving of a premium valuation, including industry-leading profitability, cash-generation, access to capital, and catalyst exposure,” he concluded. “We expect to see VRNO’s valuation gap close over time as these overhangs fade from memory, and believe the stock is due for a re-rate, potentially triggered by a major sector catalyst. We think that catalysts like Rescheduling or SAFE Banking could draw new investors into the cannabis sector, and we believe VRNO is an ideal first point of contact given its relative profitability and safety.”
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Credit Suisse analyst Joo Ho Kim further lowered his financial forecast for Canadian banks following weaker-than-expected third-quarter results that saw both core earnings per share share and pre-tax, pre-provision earnings fall short of his projections by 6 per cent and 4 per cent, respectively.
“Revenue came in slightly (1 per cent) higher than what we had forecast, reflecting in-line NII [net interest income] and better capital markets performance, while expenses were higher (5 per cent) than expected. Credit overshot the Street estimate and Credit Suisse estimate (by 8 per cent, due to higher performing PCLs), and we believe that investors will pay an even greater degree of attention on this line as we head into next year, given the balance of views on ‘soft landing’ for the economy, and the further adverse impact of higher rates on consumers and businesses.”
In a research note released Tuesday, Mr. Kim said the quarterly results “highlighted ongoing challenges faced by the sector, especially given the industry-wide miss on both headline and PTPP earnings.”
“Although that kind of softer performance for the second quarter in a row may suggest that forward estimates have been adequately lowered (down 10 per cent year-to-date), we continue to believe that there are more areas in the banks’ earnings drivers that could further weaken ahead (or that at the very least, estimation risk could remain high), despite the recent improvement in the macro outlook,” he said.
“The bottom line is, we modestly took down our estimates yet again on the back of these results through the Q3 earnings season, and were not able to find concrete enough evidence to suggest that an inflection point on the group’s earnings trajectory has been reached (especially given the lingering concerns around credit).”
Citing “a potentially challenging operating environment” across the sector next year, Mr. Kim thinks Toronto-Dominion Bank (TD-T) “stands in a unique position to deploy capital and earn through those challenges.”
He reiterated his “outperform” recommendation and $93 target for TD shares. The average target on the Street is $91.65.
The analyst said he also likes National Bank of Canada (NA-T), calling it his “defensive pick” due to “the conservatism embedded in its allowances and capital management but also given its more diversified business mix.” He reiterated his “outperform” rating and $108 target for its shares, which exceeds the $103.27 average.
His other “outperform”- related stocks are:
- Royal Bank of Canada (RY-T) with a $138 target. Average: $136.02.
- Bank of Montreal (BMO-T) with a $128 target. Average: $129.64.
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Following Quipt Home Medical Corp.’s (QIPT-T, QIPT-Q) acquisition of a business with operations in Mississippi, Texas and Louisiana, Echelon Partners analyst Stefan Quenneville reaffirmed his “top pick” recommendaiton for its shares, touting a “compelling” valuation.
The Cincinnati-based home medical equipment provider announced the deal with an undisclosed party on Monday for 10 locations across the three states that report unaudited annual revenues of approximately US$9-million with anticipated adjusted EBITDA of US$2-million post integration.
“While the price paid was not disclosed, presumably for competitive reasons, management highlighted that it was in-line with historical multiples it has paid for tuck-in acquisitions,” said Mr. Quenneville. “Therefore, we conservatively assume deal multiples approximately 0.9 times EV/Sales and 4.0 times EV/EBITDA (post-integration), consistent with the Company’s recent M&A track record, for a cash consideration of $8.0-million.
“Quipt continues to demonstrate that it remains in an M&A sweet spot, with ample opportunities to build regional scale in attractive markets such as Mississippi, Texas, and Louisiana as it consolidates the fragmented DME industry. With a healthy M&A pipeline and an attractive valuation relative to peers, we continue to view QIPT as a compelling opportunity for longer-term investors.”
Believing its balance sheet has room for additional details and its M&A pipeline “remains healthy,” he maintained a $11.75 target for Quipt shares. Thee average is $13.76.
“We view QIPT as a compelling opportunity for investors as it currently trades at 5.9 times versus its broader North American peer group currently at a median valuation of 10.7 times,” the analyst said.
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In other analyst actions:
* Canaccord Genuity’s Robert Young lowered his target for Tiny Ltd. (TINY-X) to $3.50 from $5 with a “hold” rating. The average is $4.75.
“Tiny is a consolidator that operates a variety of businesses across diverse sectors including digital agency, internet/ecommerce, and consumer products along with an 20-per-cent ownership position in a US$150-million PE fund whose holdings are less transparent,” he said. “Tiny’s operating businesses, including Beam and Dribbble, are exposed to headwinds from a slowdown in start-up and private tech funding, which was visible in its adj. EBITDA (excl. WeCommerce) decline of 75 per cent in Q1/23. We believe WeCommerce’s growth is likely to remain steady while margins remain strong (30 per cent plus), a notable positive. Chairman Andrew Wilkinson and Co-CEO Chris Sparling jointly own 81 per cent of shares outstanding with the float limited at sub 20 per cent. Within the float, Table Holdings (Bill Ackman) and Freemark Partners (Howard Marks) own 36 per cent of the minority. While we do see potential for Tiny to return to double-digit top-line growth in 2024, we expect margins to remain compressed vs. historical levels, particularly as Beam executes a transition to enterprise customers which leads to low visibility in forecasts. Cost reductions in H2/23 could potentially benefit margins in 2024 although the scope of reductions is unknown. Valuation at current levels appears elevated at 17.9 times EV/2024 estimated EBITDA or 3.1 times EV/2024 estimated Sales vs. peers at 14-15 times EBITDA.”
David Leeder