Inside the Market’s roundup of some of today’s key analyst actions
A series of macroeconomic obstacles continue to affect both volumes and costs for North American railway companies, according to RBC Dominion Securities analyst Walter Spracklin, who lowered his third-quarter earnings expectations for the sector on Tuesday.
“Overall, volumes continue to trend down across the group due to lower intermodal carloads resulting from inventory destocking and weak consumer demand,” he said in a research report. “The Canadian rails have underperformed the group on a volume basis quarter-to-date, driven by lower intermodal carloads due to a labour disruption at the Canadian West Coast ports in July. ... The U.S. rails, while still ending the quarter down on a carload basis, outperformed on intermodal versus Canadian peers as they were not affected by the Canadian West Coast labour disruption.
In reducing his projections, Mr. Spracklin pointed to three main areas of focus ahead of earnings season: the volume outlook given “weak trends” in intermodal; “negative lag impact” from higher fuel prices and cost inflation stemming from recent union negotiations.
For Canadian National Railway Co. (CNR-T), the analyst cut his earnings per share projection for the quarter to $1.73 from $1.83, which is the current consensus on the Street, citing “fuel surcharge pass through lag and lower than anticipated volumes.”
“Our 2023 EPS growth estimate of negative 0.9 per cent moves to the lower end of management guidance of flat to slightly negative.” he said. “Our 2024 estimate goes to $8.51 (from $8.58), above consensus $8.29; and our 2025 estimate goes to $9.59 (from $9.68), also above consensus $9.33.”
With that new 2025 estimate, Mr. Spracklin lowered his target for CN shares to $163, below the $164.08 average, from $165 with a “sector perform” rating.
“Our Sector Perform rating is based on favourable network dynamics as well as GDP plus growth opportunities and potential for meaningful margin improvement; offset by macro headwinds and expected fund flows out of CN and into UNP,” he said.
For Canadian Pacific Kansas City Ltd. (CP-T), Mr. Spracklin is now forecasting EPS of 93 cents, down from $1.01 and below the 97-cent consensus, “due to softer than expected Grain and Energy, Chemicals & Plastics RTMs [revenue ton miles].”
“In addition, we expect O/R [operating ratio] to come in worse versus our prior expectations reflecting the impact of fuel surcharge lag,” he said. “Our 2023 estimate represents year-over-year EPS growth of 4 per cent, in line with guidance for EPS up mid-single digit.”
He maintained an “outperform” recommendation and $133 target for CP shares. The current average is $118.93.
“Our positive view on CP centers on a best-in-class railroad ahead of a transformative acquisition, which we believe will set the stage for significant growth and a material upward valuation re-rate,” he said.
Despite also lowering his earnings estimate for Union Pacific Corp. (UNP-N), Mr. Spracklin named it his “top recommendation” in the sector. He maintained an “outperform” rating for its shares with a US$282 target, exceeding the US$249.62 average.
“Following the announcement that Jim Vena will be UNP’s CEO, we expect that his strong operating philosophy will result in a marked turnaround in operating performance, which we expect will drive O/R and service more toward PSR peers,” he said. “While cadence of the improvement will be of focus, we have assumed this turnaround is achieved by 2025, resulting in mid-teen EPS CAGR [earnings per share compound annual growth rate] (with risk to the upside in our view) out to 2025. We also believe that UNP’s competitive dynamics – unparalleled access to Mexico and the chemicals sector in the U.S. Gulf Coast – provide favourable growth prospects in the long run relative to peers. With valuation, in our view, not fully reflecting the opportunity for a step function improvement in O/R, we see an attractive investment opportunity at current share price levels.”
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With methanol prices “lifting off” their bottom and a seasonal window “fast approaching,” Raymond James analyst Steve Hansen upgraded Methanex Corp. (MEOH-Q, MX-T) to “outperform” from “market perform” on Tuesday.
“After a protracted 18-month slide, global methanol prices are now firmly on the rise, in our view, lifting off their multi-year lows in response to a bevvy of demand-side forces including: 1) surging energy/Brent oil prices (up 23 per cent last 3 months) — a key leading indicator & driver of methanol blending demand; 2) increasing MTO operating rates, including the recent restart of Jiangsu Sailboat’s flagship facility (830 tons per year capacity); and 3) the prospects for sustained China stimulus and an improved economic outlook (off depressed levels),” he said. “For context, global spot prices have risen 16 per cent off their Jun/Jul lows (global avg.), with the recovery led by China (up 21 per cent), but also extending to Europe (up 14 per cent) and N.America (up 14 per cent). We see further gains ahead.”
“Methanol’s strongest seasonal period is also rapidly approaching (Oct → Feb), a window typically influenced by large supply outages as key governments (China, Iran) divert gas away from methanol production hubs to heat domestic homes. As documented in past missives (see here & here), this corresponding loss of supply is a frequent contributor to outsized winter ‘fly-up’ events in methanol pricing.”
Mr. Hansen also expects the company’s US$1.3-billion G3 facility to be commissioned in the fourth quarter after “a tumultuous four-year build.”
“Representing one of the company’s most efficient (lowest-cost) production sites, we expect G3 to provide a significant boost to 2024 production (up 23 per cent year-over-year) and EBITDA (more than $200-million),” he said. “With no subsequent growth projects planned, we also foresee a commensurate surge in FCF and thereby expect stock buybacks to return in earnest in 2024 as a longstanding capital allocation tool.”
Believing the Street’s estimates are “too low, still washed out from the prior trend” and seeing its shares as “solid value at current levels,” Mr. Hansen hiked his target to US$60 from US$50. The average is US$49.64.
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National Bank Financial analyst Tal Woolley raised his financial forecast for Chartwell Retirement Residences (CSH.UN-T) following last week’s release of a bullish occupancy report.
“CSH reported August occupancy of 81.1 per cent, a 10 basis points upward revision since CSH’s last update,” he said. “CSH now forecasts September occupancy to rise to 82.0 per cent (up 90 basis points month-over-month), an upward revision to its prior forecast of a 30 basis points increase. CSH introduced its October forecast, now expecting occupancy of 82.7 per cent (up 70 basis points month-over-month, up 410 basis points year-over-year).
“We have raised our occupancy expectations for 2024 based on the momentum seen this year: we anticipate CSH seeing occupancy in the mid-80′s range by the end of 2024. While there is natural leverage in NOI margins from higher occupancy, we also note that we anticipate rents will firm up as occupancy rises too.”
Also incorporating the impact of last week’s completion of the sale of its ownership of 16 Ontario Long Term Care (OLTC) homes for net proceeds of $149-million, Mr. Woolley increased his funds from operations per unit forecast for 2023 by 1 per cent and 2024 by 4 per cent.
“We have also adjusted numbers to include one more asset disposition (an LTC redevelopment under a forward sale contract, as part of the original LTC disposition) and an expected acquisition from its Batimo pipeline agreement in Q4,” he said.
“Our 2024 forecast now sees CSH fully covering its distribution for the first time since COVID (2024 AFFO payout ratio estimated at 97 per cent). Given the strong momentum, we expect we could see further upward estimate revisions ahead, as the high operating and financial leverage that worked against CSH during COVID now works in its favour.”
Maintaining an “outperform” recommendation for Chartwell units, Mr. Woolley bumped his target to $12, matching the average on the Street, from $11.50.
“We believe our $12 target is warranted given CSH’s relative growth prospects, platform value, and operating risks,” he said.
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Desjardins Securities analyst Lorne Kalmar sees StorageVault Canada Inc.’s (SVI-T) current share price as “a rare opportunity to acquire a high-quality name with peer-leading forecast FFOPS [funds from operations per share] growth and a track record of outperformance at an excessively discounted valuation.”
Touting its “robust” fundamentals and its “strong” management platform, he initiated coverage with a “buy” recommendation on Tuesday.
“As the lone publicly listed Canadian self-storage vehicle, SVI represents the only way for investors to gain exposure to the country’s self-storage industry, which is benefiting from strong underlying demand fundamentals and limited new supply,” said Mr. Kalmar. “SVI is the largest Canadian self-storage owner and operator and has established itself as a consolidator of the space with a track record of peer-leading FFOPS and NAVPS [net asset value per share] growth. SVI has typically traded at a material valuation premium to both the Canadian REIT peers and its US self-storage peers.
“However, its year-to-date underperformance (total return of negative 19.7 per cent vs the S&P Capped REIT Index at up 2.7 per cent and U.S. peers at down 1.5 per cent ) — which, in our view, overly discounts what we expect to be a temporary deceleration in demand following exceptionally strong results in 2021 and 2022—has resulted in SVI trading near historic lows on both P/NAV and P/FFO. While the slowdown in housing activity and the corresponding impact on demand, in addition to what we expect to be a temporary lull in acquisition activity, could limit the stock’s near-term upside, we view the current price as a rare opportunity to acquire a high-quality name with a 14-per-cent forecast FFOPS CAGR [compound annual growth rate] at a heavily discounted valuation.”
In a “highly fragmented” market, Mr. Kalmar thinks StorageVault could see significant benefits from acquisitions, pointing to the earnings accretion it has historically achieved. He thinks they “should be well-received by investors and serve as a catalyst for the share price, although some patience may be required in view of the current transaction environment.”
“We are confident that as the Canadian self-storage industry continues to evolve, SVI, as the dominant owner/operator in the market, should see SPNOI growth reaccelerate, which should in turn benefit valuation,” he added.
Seeing a “long runway” for organic growth with population growth acting as an “important catalyst,” Mr. Kalmar set a target of $6 for the Toronto-based company’s shares. The average on the Street is $6.39.
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Scotia Capital analyst Orest Wowkodaw raised his net asset value projection for Hudbay Minerals Inc. (HBM-T) following to reflect the preliminary feasibility study results for its 100-per-cent-owned Copper World project in Arizona.
“With improved project economics, including materially lower initial capex and a reduced technical risk profile from the planned deferral of the concentrate leaching circuit, we view the update as positive for the shares. However, given the company’s near-term deleveraging focus and future partner search, we do not anticipate development of Copper World to begin before 2026,” he said in a research note titled Copper World Provides an Attractive Medium-Term Growth Option; Could Valuation Disconnect Drive M&A?
Mr. Wowkodaw’s NAV per share estimate rose to $7.96 from $7.70, leading him to increase his target price for Hudbay shares to $10.50 from $10. The average target on the Street is $9.96.
“We rate HBM shares Sector Outperform based on an attractive valuation, significant leverage to higher Cu-Au prices, and takeover optionality,” he said. “Our revised 12-month target ... is based on a 50/50 weighting of 5.0 times our average 2024E-2025 estimated EV/EBITDA and 1.1 times our updated 8-per-cent NAVPS estimate. Given the significant valuation disconnect with peers, we believe HBM could be vulnerable to an opportunistic takeover, particularly from a mid-cap gold company looking for increased long-life Cu exposure.”
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Calling it “the next royalty king,” PI Financial analyst Devin Schilling initiated coverage of Altius Renewable Royalties Corp. (ARR-T) with a “buy” rating.
“We believe there is strong upside potential in ARR shares given the Company’s first mover advantage in the renewable energy royalty segment, robust growth profile, and discounted valuation,” he said. “With ARR trading at an almost 40-per-cent discount to its peers we see the potential for an imminent re-rating as the Company further builds-out of its renewable energy royalty platform.”
Mr. Schilling predicts “significant” EBITDA upside is “on the horizon” for the St. John’s-based company through its 50-per-cent joint venture stake in Great Bay Renewables with Apollo Global Management.
“GBR is executing on a robust growth strategy that we expect will generate US$46-million of royalty revenue once the current project portfolio is fully operational,” he said. “This equates to US$23-million of royalty revenue attributable to ARR given it’s 50-per-cent stake in the GBR joint venture. With limited overhead costs we forecast the current royalty pool capable of generating US$19-million of EBITDA attributable to ARR by 2030. Furthermore, we see the Company deploying US$100-million annually into new royalty investments which provides another US$8-12-million of EBITDA upside potential per year.”
The analyst set a target of $14, exceeding the average on the Street of $12.36.
“We view ARR as an attractive renewable energy company that provides investors with a unique mix of defensive cash flow generation while also balancing a robust growth profile. We believe shares are significantly undervalued and anticipate a re-rate opportunity as the portfolio of royalty generating projects continue to grow helping to derisk our financial forecasts,” said Mr. Schilling.
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National Bank Financial analyst Mike Parkin thinks Hecla Mining Co.’s (HL-N) “FCF [free cash flow] inflection investment thesis remains intact” despite Monday’s announcement that it has suspended operations at its Lucky Friday mine in Idaho for the remainder of 2023 as it recovers from a recent fire.
Hecla lowered its full-year 2023 silver production forecast to between 14.5 million and 15.5 million ounces, compared with its earlier expectation of between 16 million and 17.5 million ounces. It does not expect a material change to its production guidance for 2024.
“While Lucky Friday remains offline, we expect a modest reliance on the existing RCF [revolving line of credit] over the 2H23 period, with repayment beginning in 2024 as we continue to see Hecla capable of transitioning to sustainable positive FCF in 1H24,” said Mr. Parkin. “It is worth noting that Hecla remains confident they will be able to develop the new Lucky Friday egress prior to 2024, and there will be no-to-little disruption to mining activities next year. As a result, we have only made slight tweaks to our 2024 estimates to assume a short ramp-up period back to prior operating levels. Additionally, we rejigged our LOM [life-of-mine] debt and expense assumptions to maintain a minimum cash balance of about US$100-million.”
Lowering his 2023 and 2024 estimates for earnings and cash flow, Mr. Parkin trimmed his target for shares of Hecla, which is the largest silver producer in the United States, to US$7 from US$7.25, maintaining an “outperform” recommendation. The current average is US$6.23.
“We continue to remain OP rated on Hecla as our investment thesis remains intact with an expectation that Hecla transitions to sustainable positive quarterly FCF in 1H24,” he said.
Elsewhere, other analysts making target adjustments include:
* H.C. Wainwright’s Heiko Ihle to US$9 from US$9.25 with a “buy” rating.
“Looking ahead, Hecla’s experienced management team remains focused on normalizing production at Lucky Friday. Importantly, the firm expects its property insurance (with a sublimit of $50-million) to cover most of the damage and business interruption at site. In addition, we consider the delay at the project to be a temporary issue as the firm maintains a pathway toward regaining normalized production rates at the asset,” said Mr. Ihle.
* TD Securities’ Steven Green to US$7 from US$7.50 with a “buy” rating.
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In other analyst actions:
* In response to the release of an updated mineral resource estimate for its Valeriano project in Chile, Desjardins Securities’ Jonathan Egilo increased his Atex Resources Inc. (ATX-X) target to $2.20 from $2.10 with a “buy” rating. The average is $2.42.
“In our view, continued growth of Valeriano’s high-grade core represents the largest upside at Valeriano,” he said.
* CIBC World Markets’ Scott Fletcher initiated coverage of Calian Group Ltd. (CGY-T) with an “outperformer” rating and $65 target. The average target on the Street is $77.
“Calian’s diverse set of offerings provides a variety of opportunities for organic and inorganic growth,” he said. “Calian is an active acquirer and recent deals have helped the company to expand geographically and outside of its historical focus on government work while also expanding consolidated gross and adjusted EBITDA margins.”
“Calian shares are trading at a 7.5 times EV/EBITDA (fiscal 2024 estimates) multiple, a discount to Calian’s own five-year average of 9.5 times and a larger discount to a group of IT Services peers at 11.2 times. A notable sell-off following disappointing Q3/F23 earnings offers a compelling entry point, particularly with the announced restructuring that should result in a quick rebound in EBITDA margins. With improving margins and an organic growth profile that should improve as supply chain issues are resolved and new growth areas gain traction, we foresee the potential for shares to re-rate to a multiple closer to 9.5 times two-year forward EBITDA. Shares also look attractive on free cash flow yield, trading at an 8.8-per-cent yield on our F2024 estimates.”
* RBC’s Geoffrey Kwan lowered his target for Chesswood Group Ltd. (CHW-T) to $6 from $8 with an “underperform” rating. The average is $8.25.
* Stifel’s Justin Keywood reduced his HLS Therapeutics Inc. (HLS-T) target to $12.25 from $15 with a “buy” rating. The average is $13.63.
“We provide an update on Vascepa Canada Rx data that shows continued progression in prescription count, growing at 91 per cent year-over-year for the month of August,” he said. “HLS has guided for Vascepa 2023 sales of $18-$20-million (22 per cent of total), up 35 per cent year-over-year at the midpoint and expects the drug to generate more than $100-million by 2028. The prescription data trends and a resetting of expectations by HLS’ new CEO, highlights still visibility of good growth for several years with above average margins. However, the inflection embedded in 2024 forecasts needs to be re-set to what is achievable, barring any new developments. As a result, our target price re-sets to $12.25 but still showing substantial upside. HLS is trading at 9 times/7 times our refined 2023/2024 forecasts, and very reasonable levels for the growth and margin profile ahead, along with defensive attributes embedded for healthcare assets.”
* With the results of a Definitive Feasibility Study for Phase 1A of its flagship Lanxess Project, Canaccord Genuity’s Katie Lachapelle trimmed her Standard Lithium Ltd. (SLI-X) target to $8 from $8.50, keeping a “speculative buy” rating. The average is $9.31.
“The capital and operating cost forecasts for Phase 1A came in higher than we had expected, despite having already inflated our estimates above the 2019 PEA (134 per cent and 20 per cent, respectively),” she said. “While we anticipate some synergies as SLI ramps up additional phases, we’ve updated our capex/opex assumptions for the remaining phases (1B, 2, and 3) to better reflect the results of the DFS. As a result of these changes, our project-level NAV8 (100-per-cent-basis) has declined 30 per cent to $1.17 billion, from US$1.65 billion previously, and our IRR has reduced from 29 per cent to 18 per cent at our long-term price deck of $22.5k/t Li2CO3.
“However, on a positive note, we view this update as a critical milestone towards a commercial scale construction decision, with all direct costs now accurately reflecting detailed engineering and/or vendor-supplied quotes. In our view, management has put considerable effort into de-risking Phase 1A through years of testing at its demonstration facility. Furthermore, the company now has a term sheet in place with its EPC contractor, which sets out construction performance and schedule guarantees, as well as guarantees related to the production of battery-quality Li2CO3. Therefore, if all goes to plan, and SLI makes a final investment decision (FID) in early 2024, we believe the company is well positioned to be one of the first new commercial suppliers of battery-grade lithium carbonate in the United States.”
David Leeder