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

Citing uncertain profitability due to “severely depressed” passenger volumes stemming the COVID-19 pandemic and related government restrictions on travel, Citi analyst Stephen Trent initiated coverage of Air Canada (AC-T) with a “neutral” rating.

“Air Canada boasts a number of attractive investment characteristics, including (A) having more than a 50-per-cent share of its home market, which features a relatively wealthy population and high enplanements per capita, (B) maintaining international travel anchors on its own network both directly and through its Star Alliance partners, and (C) operating Air Canada Rouge, a discount airline subsidiary that has opened new markets for the carrier,” he said.

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“The carrier also went a long way in shedding its margin and financial leverage disadvantages through the reintegration of its Aeroplan loyalty program subsidiary on January 10, 2019, which had followed this subsidiary’s spinoff years earlier. In addition to the carrier now incorporating strong loyalty program margins and cash flows, additional development opportunities are possible in conjunction with the program’s credit card partners.”

However, despite this “positive backdrop,” he noted Air Canada’s profitability, financial leverage and trading liquidity “somewhat lag its U.S. peers.” He also pointed to the airline’s exposure to international long haul flights, which is “materially” higher than North American peers.

“Going forward, structural changes in the nature of business travel for at least some industries, along with the potential for a more gradual recovery of business travel, versus tourism- and visiting friends and relatives (VFR) passenger flow, means that Air Canada could remain under pressure for a protracted period,” he said.

“We take no view regarding whether multiple, independent efforts to develop COVID-19 vaccines succeed or fail, to what extent the public raises concerns about a vaccine’s efficacy/safety or whether various governing bodies eventually take a long time to inoculate their constituents. Nevertheless, it is hard to ignore the possibility that the development of a COVID-19 vaccine, along with reliable, rapid testing, could be transformational events for the global aviation industry.”

Mr. Trent set a target price of $16 for Air Canada shares. The current average target on the Street is $22.08.

“Air Canada’s shares had been on a roll prior to the COVID-19 pandemic, with ... the company’s shares rising 77 per cent in U.S. dollar terms from January 2019 through the end of January 2020, versus the Bloomberg Americas Airlines XAL index’s gain of 17 per cent over the same period,” he said. “On the other hand, Air Canada’s shares have declined 69 per cent in U.S. dollars from its 2020 peak vs. the XAL’s decline of 51 per cent Overall, relatively defensive competitors in the sector with a greater focus on domestic markets and less exposure to business travel have fared a little better.”

“Valuation looks full, in our view, relative to recent historical trading levels and compared to its large US network carrier peers. Given the higher uncertainty in North American aviation markets, we prefer to have more earnings visibility before getting more aggressive with Air Canada shares.”

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Gibson Energy Inc. (GEI-T) delivered “solid” second-quarter results despite a “challenging” macro backdrop, said Industrial Alliance Securities analyst Elias Foscolos.

On Tuesday after the bell, the Calgary-based company reported earnings before interest, taxes, depreciation and amortization (EBITDA) of $143-million, exceeding the $101-million projection of both Mr. Foscolos and the Street. Adjusting for the impacts of FX and financial instruments, he estimated the result to be $125-million, which he said “remains a solid beat.”

Mr. Foscolos called the results, which included better-than-expected results from both its Infrastructure and Marketing segments, “a positive surprise.”

“On Gibson’s Q1/20 call, we were guided to Infrastructure profit of $80-85-million, with the beat highlighting the resiliency of GEI’s business model,” he said. “For marketing, we were guided to $20-30-million of profit with upside contingent on monetizing certain positions.”

“We continue to expect that GEI will sanction additional tankage at Hardisty before year-end. The additional tankage had been accounted for in our model. Also, we now believe the odds are tilting in favour of expanding the diluent recover unit (DRU), and an announcement of a second phase would be a very positive catalyst which we believe is not built into most investors’ outlook.”

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Maintaining a “hold” rating for Gibson shares , Mr. Foscolos increased his target by a loonie to $24. The average on the Street is $24.53.


In response to “light” second-quarter results and following “impressive” share price appreciation, Raymond James analyst David Quezada lowered Innergex Renewable Energy Inc. (INE-T) to “outperform” and “strong buy” on Wednesday.

"Having appreciated 37 per cent year-to-date, and an impressive 59 per cent from March 23 lows (versus the TSX down 4 per cent year-to-date and up 46 per cent since March 23), shares of INE have pushed new highs in recent trading sessions," the analyst said.

"We attribute this to: 1) the company's alliance with Hydro Quebec — which provides low cost capital — and we expect will drive accelerated growth; 2) INE's strong ESG attributes; and 3) the low bond rate environment which has lifted valuations across the sector. While we continue to see potential upside in INE's substantial development pipeline, recent strength in the stock and reduced upside to our target price prompts our move."

On Tuesday, Quebec-based Innergex reported adjusted EBITDA of $140-million, falling short of Mr. Quezada's $158-million estimate. The miss was due in part to an $11-million non-recurring charge from hydro curtailment in British Columbia.

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Despite the miss, the analyst said the company's development pipeline is "looking strong."

“INE currently maintains eight projects in advanced development, of which three are currently under construction — the 200 MW Hillcrest Solar (37-per-cent complete), 7.5 MW Inavik Hydro, and 7 MW Yonne Wind in France,” he said. “With the accelerated development of the 226 MW Griffin Trail Wind, INE saw a boost to its wind development pipeline from the extension of the safe harbor period for the Wind PTC. INE also has numerous solar projects in development including four solar+storage developments in Hawaii (which bring INE close to 90 MW of solar+storage globally), 600 MW of solar in development in Texas, and two projects of at least 100 MW each in the PJM territory and Ohio, respectively. The company also continues to pursue the 109 MW Frontera hydro in Chile and numerous smaller projects in France.We believe this represents over 1.0 GW of potential capacity and implies significant growth over 18-24 months that, despite recent strength, is not fully reflected in the stock.”

Mr. Quezada maintained a target price of $25 per share. The average on the Street is $22.94.

“With the company in the early stages of realizing the benefits of its alliance with Hydro Quebec, while also sporting anenviable development pipeline, we continue to see much to like in Innergex and maintain our constructive stance,” he said. “However, while we acknowledge the potential for the ESG attributes of pure-play renewable companies like INE to push valuations into new territory, we believe the rally year-to-date and a 2021 estimated EV/EBITDA towards the high end of the historical range (at 13.5 times) means remaining upside falls short of warranting our top rating.”


When Canadian Tire Corporation Ltd. (CTC.A-T) reports its second-quarter financial results on Wednesday before market open, Canaccord Genuity analyst Derek Dley expects “weak” results from both its Mark’s and SportChek stores.

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While he expects a same-store sales increase of 5 per cent at its flagship Canadian Tire locations driven by “robust” outdoor and sporting goods demand, the analyst is projecting a decline of 30 per cent for both chains amid “challenged” retail conditions.

“The company saw national CTR sales decline 1.8 per cent in April despite the closure of its Ontario stores, which make up approximately 40 per cent of Canadian Tire’s national network,” said Mr. Dley. “We expect that the banner saw improvement in SSS as stay-at-home orders were gradually lifted across Canada. We believe CTR will report strength in the outdoor living and sporting goods categories.

“Conversely, we expect SSS at Mark’s and SportChek will remain challenged in Q2/20. As a reminder, both banners closed their physical locations on March 18, with the company noting consolidated retail sales were down 19 per cent in Q2/20 to date as of its Q1/20 earnings call on May 7. Given the 1.8-per-cent decline at CTR described above, we believe this implies significant weakness at both Mark’s and SportChek.”

Overall, Mr. Dley is projecting revenue of $3.7-billion, down 4 per cent year-over-year but higher than the consensus estimate of $3.1-billion. His EBITDA and earnings per share estimates of $256-million and 2 cents also exceed the Street ($243-billion and a 10-cent loss).

Keeping a “hold” rating for Canadian Tire shares, he increased his target to $110 from $106. The average on the Street is $132.89.


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Though Turquoise Hill Resources Ltd. (TRQ-N, TRQ-T) is making progress on the re-design of the underground development at its Oyu Tolgoi copper-gold mine in Mongolia, RBC Dominion Securities analyst Sam Crittenden said “it’s still a long game.”

“TRQ recently tightened the capital range to $6.6–7.1-billion, with sustainable first production in October 2022 to June 2023,” he said. “We have moved to the upper bounds, as both TRQ and RIO acknowledged potential for an additional impact from COVID-19, particularly around travel restrictions and getting specialized contractors to site.”

"We have also flattened the production rampup by about 10 per cent versus company guidance, as we believe the panels added to the mine design, while providing more flexibility, could slow the production ramp-up. We expect an updated production and cost schedule in the technical report due later this year."

Expecting the Montreal-based miner’s focus to turn to financing, he trimmed his target for its shares to US$1.25, matching the consensus on the Street from US$1.50.

His rating remains “sector perform.”

“We continue to use 0.8 times NAVPS [net asset value per share], which is in line with development-stage peers,” he said. “TRQ shares are trading at 0.62 times our NAV estimate, which in our view reflects the risks associated with ramp-up, funding, and operating in Mongolia. However, we think there is value that could be unlocked for longer-term investors, as we believe Oyu Tolgoi has potential to grow into one of the largest, lowest-cost copper mines globally.”


Founders Advantage Capital Corp. (FCF-X) appears to be on the “road to recovery,” according to Desjardins Securities analyst Gary Ho.

Though he expects “messy” second-quarter results when the Calgary-based investment company reports on Aug. 24, Mr. Ho predicts a recovery in the second half of 2020 as Canadian housing activity rebounds and it reopens its Club16 fitness chain locations.

That prompted him to raise his rating for its shares to “buy” from “hold.”

Mr. Ho is projecting EBITDA for the quarter of $3.9-million, sliding from $5.8-million in the previous quarter. That includes a loss of $0.6-million from Club16.

“We expect noisy 2Q20 results given the disruptions from the pandemic (lower housing activity and gym location closures),” he said. “That said, we are looking through the trough and expect some positive tailwinds in 2H20 and beyond.”

Mr. Ho increased his target for Founders shares to $1.25 from $1. The average is currently $1.50.

“Our positive thesis is predicated on: (1) the rebound in housing activity bodes well for DLC in 2H20 (jewel within the FCF group of companies); (2) Club16 stands to benefit from a struggling competitor; (3) a renewed focus on DLC’s operations supports a valuation re-rate over the medium term; and (4) potential cash flow benefit from the refinancing of Sagard debt,” he said.


Canaccord Genuity analyst Luke Hannan sees an improving Canadian market setting up a “favourable” second half of 2020 for AutoCanada Inc. (ACQ-T).

“The environment for new car sales in Canada was extremely challenging toward the end of Q1/20 and in the early part of Q2/20, according to Desrosiers data, attributable to COVID-19 related temporary dealership closures,” said Mr. Hannan in a research note previewing the release of its second-quarter results on Aug. 11.

“Having said that, we note both the industry and AutoCanada have witnessed robust sequential improvement from the April lows in sales of new and used cars, with ACQ realizing year-over-year unit volume increases of 28 per cent in the first half of June, a dramatic improvement from the 49-per-cent decline seen in April. The sequential improvement during the quarter reinforces our view that AutoCanada has made it through what we expect to be the most challenging portion of the year, and leaves the company well positioned to execute in the back half of 2020.”

For the second quarter, Mr. Hannan is forecasting EBITDA of $19-million, exceeding the Street’s $16-million estimate but well below the $32-million result of the same period a year ago. His earnings per share projection of a 14-cent loss falls below the consensus of a 12-cent deficit.

After raising his full-year 2020 and 2021 earnings expectations, he hiked his target to $16.50 from $12, keeping a “buy” rating. The average on the Street is $13.01.

“We believe the realignment of AutoCanada’s business following the implementation of the Go Forward Plan to focus on developing the higher-margin and economically resilient operating segments will reward investors with stable earnings growth,” said Mr. Hannan. “Although we expect this to be somewhat challenged in the near term due to COVID-19, we believe the company’s relatively clean balance sheet will help navigate uncertainty moving forward.”


In other analyst actions:

* Credit Suise analyst Douglas Mitchelson said Walt Disney Co.‘s (DIS-N) new streaming strategy “supplants” a slow recovery from the impact of COVID-19, leading him to upgrade its stock to “outperform” from “neutral.”

“We believe our streaming valuation well supported by Disney+‘s performance, likely growth from the 100 million new homes being launched the next few months, the announcement of an international general entertainment streaming service launching in 2021 (under the Star brand, using owned content and leveraging Disney+‘s subscriber base & overhead), and mgmt announcing another streaming analyst day in a few months (new Disney+ guide, Star strategy/budgets; ESPN’s path to over-the-top),” he said. “Overall, with new CEO Mr. Bob Chapek now indicating an “innovative and bold” further pivot to streaming, we expect Disney shares to be even more aggressively positioned as a streaming growth story (where investors have limited investment vehicles), and eventual COVID recovery play.”

His target rose to US$146 from US$116. The average is US$129.43.

* Goldman Sachs analyst Wamsi Mohan lowered Apple Inc. (AAPL-Q) to “neutral” from “buy” with a target of US$470, rising from US$420. The average on the Street is US$418.13.

* BoA Securities raised Kinross Gold Corp. (KGC-N, K-T) to “buy” from “neutral”

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