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

Following the release of “mixed” first-quarter financial results, Industrial Alliance Securities analyst Naji Baydoun now expects a “more muted” performance from TransAlta Corp. (TA-T, TAC-N) in 2020.

Pointing to the headwinds facing Alberta’s power market, Mr. Baydoun is projecting the Calgary-based utility to end up closer to the low end of its 2020 financial guidance, prompting him to reduce his expectations to reflect a weaker near-term outlook.

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That led him to take a “more neutral stance” on TransAlta, lowering his rating for its stock to “hold” from “buy.”

"Due to a combination of (1) Alberta’s COVID-19 related provincial lockdown in March 2020, and (2) commodity price declines (and associated economic activity slowdown), power prices in Alberta have significantly dropped and recently averaged $30-35/MWh, down from $56/MWh in Q2/19 (or 40 per cent lower year-over-year), 3). Power prices seem to have stabilized at these lower levels, and forward pricing currently indicates expectations for (1) $50/MWh throughout H2/20, and (2) $50-55/MWh on average in 2021, for now," he said.

"Although TA remains well hedged in 2020, we expect softer power prices to represent a headwind to financial performance this year, and more importantly in 2021 when more of TA’s Alberta fleet will be exposed to merchant power pricing. We have adjusted our financial estimates/valuation to reflect lower Alberta power prices, particularly in 2020-21, with minor adjustments to our long-term assumptions."

Before the bell on Tuesday, TransAlta reported earnings before interest, taxes, depreciation and amortization of $220-million for the first quarter, missing the expectations of both Mr. Baydoun ($240-million) and the Street ($220-million). Adjusted funds from operations of 62 cents missed his forecast by 5 cents, while free cash flow of 39 cents topped his estimate by 3 cents.

"TA reiterated its 2020 financial guidance for (1) EBITDA ($925-1,000-million), and (2) FCF ($325-375-million)," he said. "Based on Q1/20 results and the current outlook for the balance of the year, TA expects to be close to the mid-point of its 2020 FCF financial guidance. Given the previously discussed headwinds facing the Alberta power market, we expect TA to be closer to the low end of its overall 2020 financial guidance."

“Overall, TA’s growth initiatives remain largely unchanged and include (1) coal-to-gas (CTG) conversions, (2) renewable capacity additions, and (3) the Kaybob South No.3 cogeneration project. TA noted that it expects COD for some of its projects to be delayed due to construction slowdowns related to COVID-19. In our view, project delays could potentially lead to delays in drop-down transactions into RNW [TransAlta Renewables Inc.]. Elsewhere, in March 2020, TA announced (1) its intention to sell the Company’s stake in the Pioneer Pipeline, and (2) the acquisition of a 29MW cogeneration plant; taken together, we see these two developments as net neutral to the overall outlook for TA.”

With his downgrade, Mr. Baydoun trimmed his target for TransAlta shares by a loonie to $9. The average target on the Street is currently $10.19.

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“TA offers investors (1) a balanced mix of contracted and merchant power exposure, (2) improving balance sheet and cash flow fundamentals, and (3) a discounted relative valuation versus IPP peers (3 times discount on a FY2E EV/EBITDA basis). The fundamental outlook for TA remains healthy, and with Brookfield’s strategic investment agreement, we believe that TA will be able to surface additional value for shareholders over time. We have revised our estimates/valuation to reflect the weaker near-term outlook for the Alberta power market; as such, we are taking a more neutral stance on TA at this time as we wait for further strategic initiatives and/or a better entry point.”


Driven by higher provisions for credit losses and lower net interest margins, Desjardins Securities analyst Doug Young is projecting Canada’s Big 6 banks will see cash earnings per share plummet 44 per cent year-over-year in the second quarter.

“The focus with 2Q FY20 results will be on credit trends, in our opinion — more specifically, which banks can beef up coverage ratios, or allowances over loan balances, while maintaining a comfortable CET1 ratio,” he said. “And to be clear, in this case we view bulking up as good. Whoever tips the scale, and ends up being the one others are measured against, wins. TD and RY are in a good position to flex their muscles on both fronts. Otherwise, management commentary on quarterly calls will also be important.”

Mr. Young is forecasting an average PCL rate of 1.18 per cent for the group, up 0.81 per cent from the first quarter. He said the majority of the increase " relates to the build in allowances for performing loans as the banks are required to adjust their IFRS 9 models to factor in a more pessimistic outlook."

However, in a research note released Wednesday, Mr. Young said estimating PCL rates and earnings per share is "like throwing darts."

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“While interesting, we don’t expect the coverage ratios for Canadian banks to be on par with those of U.S. peers given the difference in business mix and slight nuances between IFRS 9 and CECL,” the analyst said. " In our opinion, the banks are in a ‘damned if they do, damned if they don’t’ position. Report PCLs and allowances that are too low and the market will be skeptical and will likely assume that more hits will come in future quarters. Record sizeable increases and some may wonder what management sees behind the scenes. We would suggest erring on the latter outcome."

After also cutting his earnings expectations, Mr. Young lowered the target prices for several banks in his coverage universe. His changes were:

  • Bank of Nova Scotia (BNS-T, “buy”) to $64 from $65. The average on the Street is $63.75.
  • Toronto-Dominion Bank (TD-T, “buy”) to $66 from $67. Average: $64.38.
  • Royal Bank of Canada (RY-T, “hold”) to $94 from $95. Average: $98.23.
  • Canadian Imperial Bank of Commerce (CM-T, “hold”) to $92 from $93. Average: $93.29
  • Bank of Montreal (BMO-T, “hold”) to $78 from $82. Average: $83.83.
  • Laurentian Bank of Canada (LB-T, “hold”) to $31 from $32. Average: $32.80.

He maintained the following targets:

  • Canadian Western Bank (CWB-T, “buy”) at $26. Average: $26.09.
  • National Bank of Canada (NA-T, “hold”) at $58. Average: $60.75.

“Canadian bank stock prices decreased 21.5 per cent on average during 2Q FY20, outperforming the Canadian lifeco average, U.S. lifeco average and US bank index, but underperforming the S&P/TSX,” said Mr. Young. "RY was the best performing Canadian bank (down 18.1 per cent) while CWB underperformed (down 32.7 per cent).

“The Big 6 Canadian banks are trading below their 20-year historical average P/4QF EPS multiples. However, given the unprecedented economic conditions, comparing against historical averages may have shortcomings. The Canadian banks face a few headwinds in the near term: (1) a drastic reduction in BoC and U.S. fed funds rates will put pressure on the top line; (2) an increase in expected and actual credit losses due to the economic shutdown; and (3) a weaker energy sector. That said, the Canadian banks have navigated well through past periods of distress. Capital levels remain comfortable, and it appears that the banks and OSFI are on the same page to preserve that.”


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Canaccord Genuity analyst Robert Young raised his financial expectations for Docebo Inc. (DCBO-T) in the wake of “strong” first-quarter results that saw it benefit from the surge in remote working.

Before the bell on Tuesday, the Canadian-Italian employee-training software firm reported annual recurring revenue growth of 55.5 per cent, exceeding expectations on the Street .

"With a more uncertain backdrop, Docebo is shifting its growth strategy to prudent from aggressive," said Mr. Young. "That said, we think current trends are very encouraging. Docebo reported continued strong momentum and ARR growth trends in January and February with a marked acceleration in March. In general, we expect that companies are grappling with the need to activate business continuity plans and new work from home policies and protocols. As part of this, we expect the LMS to take a high priority in the enterprise software stack with purchase decisions pulled forward. We anticipate a disproportionate benefit for Docebo as customers look for vendors that offer simple, intuitive and easily integrated platforms. We continue to be confident that Docebo can meet or beat its 35-40-per-cent revenue growth target shared on the IPO."

To reflect the quarterly beat and jump in ARR, Mr. Young raised his 2020 and 2021 revenue projections to $59.5-million and $80.3-million, respectively, from $58.2-million and $78.8-million. His earnings per share expectations jumped to losses of 16 cents and 3 cents, respectively, from losses of 22 cents and 11 cents.

Keeping a “buy” rating, Mr. Young hiked his target to $28 from $20. The average on the Street is $22.36.

“Docebo currently trades at 5.3 times 2021 estimated enterprise value-to-sales, a significant discount to relevant SaaS [software as a service] peers,” he said. “Canadian SaaS comps trade at 12.5 times 2021 estimated EV/Sales and comparable US SaaS comps trade at 10.9 times 2021 estimated EV/Sales. Docebo trades at a premium to the North American LMS [Learning Management System] peer average; however, we believe that the growth is warranted given the company’s impressive growth trajectory compared to a slate of more mature, less agile competitors. An offset to this is Docebo’s relative size and float, as well as the impact of an increasingly competitive LMS market.”

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RBC Dominion Securities analyst Scot Ciccarelli expects Walmart Inc. (WMT-N) to be “a net winner in a recessionary/slow recovery scenario” and thinks the growth of its online grocery business is likely to fuel higher sales results.

In a research note released early Wednesday, the analyst “significantly” raised his comparable same-store sales growth forecast for its U.S. stores to 12 per cent from 2 per cent, citing a Wall Street Journal story that indicated sales were up 20 per cent in March and its e-commerce segment saw a 30-per-cent increase in February and March.

“While we have also raised our 2020/2021 EPS estimates to $5.15/$5.45 from $5.05/ $5.35, we are assuming only modest earnings flow through due to an expected negative merchandise mix shift (more food/consumables and a higher penetration of e-comm sales, especially for food),” he said.

"We would also expect higher operating expenses, due to a significant increase in cleaning/sanitation and labor bonuses/hazard pay. For example, Walmart paid $365-million in special cash bonuses on April 2 ($300/$150 for FT/PT hourly workers), issued $180-million in early 1Q bonus payouts on April 30 and just announced another $390-million in $300/$150 cash bonuses to be paid on June 25."

Calling it one of the firm's "top defensive names," Mr. Ciccarelli raised his target for Walmart shares to US$129 from US$126, maintaining a "sector perform" rating. The average on the Street is US$131.06.

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“We continue to expect WMT to be a net winner if we indeed go through a slower recovery process and think that its grocery e-comm business has made a step-function change in penetration,” he said. “While we expect that to yield better sales growth (basket sizes are usually 2 times-plus), it will likely remain a lower margin category, limiting incremental earnings flow through.”


Citing “heightened” liquidity concerns following a “turbulent” first quarter, Paradigm Capital analyst Jeff Woolley downgraded Trevali Mining Corp. (TV-T) to “speculative buy” from “buy” ahead of the release of its results after the bell.

“Q1 has been a tumultuous period for the company with the rapid and dramatic drop in zinc prices having far exceeded the pace at which Trevali can deliver on its previously announced cost-cutting and optimization programs,” he said. “Consequently, the status of ongoing negotiations underway with Trevali’s debt providers is the key item to monitor.”

With the drop in zinc prices, Mr. Woolley thinks Trevali will need to draw "substantially" on its credit lines in the near future. "

“Trevali had drawn $67-million on its revolving credit facility (RCF) as at Dec. 31, and we anticipate an additional $25–$50-million of drawdowns will be required by June 30,” he said. “This increased debt need combined with declining EBITDA throws Trevali’s leverage covenants into question. Discussions have been initiated with the lending syndicate and a temporary agreement is in place which reduces the maximum RCF borrowing capacity to $125-million (from $275-million) while the borrowing covenants have been waived until May 30. A longer-term agreement has not been announced however, and management has since announced a strategic review process.”

He kept a 30-cent target for Trevali shares, which exceeds the consensus by 8 cents.

“The acquisition of the Rosh Pinah and Perkoa mines from Glencore in 2017 more than doubled the company’s size and pushed production up to 400Mlb Zn,” said Mr. Woolley. “While several operations subsequently stumbled in 2018, the full management team has been changed and a company-wide optimization program is in the works targeting a decline in the AISC to 90-cents per pound Zn by year-end. Trevali provides exceptional leverage to zinc prices if it can weather the current depressed market conditions exacerbated by COVID-19.”


In response to its share reaching his target price, BMO Nesbitt Burns analyst Ben Pham lowered TC Energy Corp. (TRP-T) to “market perform” from “outperform."

“TRP shares have reached valuation levels (13 times 2021 estimated EBITDA) above those of all of its Canadian midstream and pipeline peers and even many of the utility and renewable infrastructure alternatives we cover,” he said.

“Risks and rewards are now balanced rather than tilted to the upside, in our view, and we are changing our investment recommendation.”

He maintained a $65 target, which falls short of the $71.20 average.


Seeing a less “compelling” valuation on the heels of a first-quarter earnings beat, Scotia’s Konark Gupta lowered Andlauer Healthcare Group Inc. (AND-T) to “sector perform” from “sector outperform."

He raised his target to $30 from $24. The average is $29.33.

“AND reported another solid quarter and a beat, once again led by transportation,” he said.. While the quarter benefited from demand pull-forward due to the COVID-19 panic, it would have still exceeded expectations on a normalized basis. Management expects relatively slower growth in Q2 as a result but maintains long-term targets. Our estimates have increased as we have grown more comfortable with the growth story, driving our target higher to $30 from $24 along with multiple expansion.

“We are, however, downgrading the stock to Sector Perform from Sector Outperform on valuation. Stock has almost doubled from the IPO price of $15 per share in five months (albeit for valid reasons) and forward valuations appear rich on our revised estimates (14 times 2021 EBITDA and 2.9-per-cent FCF yield, net of leases). We think the risk/reward is balanced here with stronger 2H organic growth from the new GTA facility and long-term secular tailwinds offset by rich valuation and potential for insider selling once the 180-day lock-up expires in June.”

Elsewhere, CIBC World Markets’ Kevin Chiang lowered Andlauer to “neutral” from “outperformer” with a $32 target, up from $27.50.

“We are downgrading AND ... on price appreciation, while our long-term view remains positive. AND reported Q1 results that came in above our and consensus expectations,” he said. “We believe the impact Covid-19 is having on the economy has helped prove how well-insulated AND’s business model is to external shocks, particularly when combined with its strong organic growth and cost-plus pricing.”


In other analyst actions:

* Citing a “a constructive natural gas thesis, organic dry gas catalysts, latent infrastructure value, and attractive valuation,” Scotia Capital analyst Patrick Bryden raised Peyto Exploration & Development Corp. (PEY-T) to “sector outperform” from “sector perform” with a $4 target, rising from $2.50. The average on the Street is $2.76.

“While our call is contrarian (13 of 15 pre-upgrade FactSet analyst ratings of stock were either neutral or negative), and there are interim debt covenant and hedging considerations to work through, we believe PEY will ultimately stand well positioned as a survivor with attractive value creation opportunities and potentially beneficial secular tailwinds ahead as we survey industry landscape 12 months out and onward," he said.

* BMO Nesbitt Burns analyst Rene Cartier initiated coverage of Trilogy Metals Inc. (TMQ-N, TMQ-T) with an “outperform” rating and US$2.25 target. The average on the Street is US$4.

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