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

In response to recent share price appreciation, Industrial Alliance Securities analyst Elias Foscolos downgraded Inter Pipeline Ltd. (IPL-T) on Wednesday, calling its second-quarter results “solid” but believing the market has been “capitalizing” on its catalysts.

“When we upgraded IPL in June, the company was in the middle of a challenging quarter in its Conventional Pipeline segment and its Natural Gas Processing business,” he said in a research note. “With the release of the Q2/20 results last week, IPL, as expected, had soft performance in those two segments. Resiliency in the company’s Oil Sands Pipeline business and European Bulk Liquids Storage (BLS) segment kept corporate results solid. From a purely financial perspective, IPL is trading at premium to its peers.

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“In our view, IPL is taking the right approach to its Propane Dehydrogenation/Polypropylene (PDH/PP) plant and BLS strategy. Last Friday, the market reacted negatively. However, the sector also suffered so it is difficult to pin the reaction solely on IPL. The Company has reconfirmed that its top priority is to secure a JV partner for the PDH/PP plant but no announcement is imminent and investors will likely have to wait until early 2021 for news. Additionally, IPL confirmed that its BLS segment is not a core asset, and at some point it will be divested although a sale is not actively being pursued. With ample liquidity, we believe this patient approach is prudent for both projects. The market is now appears to be capitalizing some of the above upside (as we believe it should) into IPL’s valuation.”

Mr. Foscolos said Inter Pipeline stock has performed “very well” since he upgraded the stock on June 15, rising 19 per cent. During that span, the TSX has returned 8 per cent and similar midstream peers have gained between 5-19 per cent.

That gain prompted him to return his rating to “hold” from “buy.”

At the same time, he raised his target for Inter shares to $16.50 from $16 “as a result of increased comparable multiples.” The average on the Street is $14.08, according to Refinitiv data.

“Due to the strong price appreciation in the past few days on no news, we believe it is time to move to the sidelines and as a result, we are reducing our rating,” said Mr. Foscolos.


Citing its current valuation, Canaccord Genuity analyst Carey MacRury raised his rating for Barrick Gold Corp. (ABX-T, GOLD-N) to “buy” from “hold.”

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"In our view, Barrick has a steady production profile of 5 million ounces through 2026, strong FCF [free cash flow] generation (8-per-cent 2021 estimated FCF yield at spot prices) and we expect the company to achieve a net cash position in 2021," he said.

Mr. MacRury views Barrick's second-quarter financial results, released before the bell on Monday, as largely in line with his expectations. Adjusted earnings per share of 23 cents topped the 18-cent projection of both the analyst and the Street due to lower-than-anticipated taxes.

Also noting the company is tracking toward the mid-point of its 2020 guidance, he maintained a $47 target for its shares. The average on the Street is $41.85.


Raymond James analyst Rahul Sarugaser thinks headwinds in the cannabis sector are likely to weigh on The Valens Co.‘s (VLNS-T) revenue for at least the remainder of 2020, leading him to lower his rating for its stock to “market perform” from “outperform.”

"In our analysis of The Valens Company's 2Q20 earnings, we viewed the company's prior 1Q20 as a local stand-out quarter and 2Q20 as a local minimum," he said. "We further prognosticated that VLNS should approach a revenue quantum similar to 1Q20 by 2Q-3Q21, posting steady upticks quarter-to-quarter until then.

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"More recently, we have seen flat quarter-over-quarter adult-use cannabis revenue from several of VLNS' larger customers including, Canopy Growth, Organigram, Tilray; as well as other industry bellwethers such as Aphria, and Cronos Group. Clearly, the cannabis sector is facing revenue headwinds— which we expect to directly impact VLNS — so we take this opportunity to update our estimates and valuation of VLNS."

Mr. Sarugaset now expects flat revenue in 2020 and 2021, projecting $89.4-million and $83.1-million, respectively. He then sees a gradual climb to $101.9-million in 2022.

He trimmed his target to $3.50 from $4. The average is $5.


RBC Dominion Securities analyst Kate Fitzsimons said she’s looking past Canada Goose Holdings Inc.‘s (GOOS-T) weaker-than-anticipated first-quarter toward potential “recovery rebuilding” for the crucial holiday season.

“We see a favorable risk/reward on GOOS, as the business recovers off of 1QF21′s negative 63-per-cent revenue bottom led by a recovery in Mainland China and ecommerce, while tightly controlling inventories at wholesale,” she said. “At 22 times, we see sentiment as washed out for still a rare global growth story in consumer discretionary today.”

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Ms. Fitzsimons said the company’s gross margin miss of almost 20 basis points can be attributed to factory overhead costs related to COVID-19 shutdowns. With reopening, she thinks those pressures will have dissipated.

However, she doesn’t think a complete turnaround is imminent.

“2Q sales are expected down ‘significantly,’ as wholesale sell-ins are managed very conservatively, while Direct demand slowly recovers especially in China,” she said. “Into 2Q, we see the team managing brand heat appropriately - managing tightly wholesale sales to control pricing integrity and emphasizing inventory/production flexibility (projected down 1/3 of FY20 levels by YE21) into the peak demand season. We model wholesale revenues down 45 per cent in 2Q. Into fall, we expect category momentum to build with cooler weather and as consumers opt to spend more time outside in a WFH world. To that end, we expect GOOS’s emphasis on quality, function, and newness to reap dividends as these customers begin to look for outerwear.”

Forecasting a second-quarter sales drop of 40 per cent year-over-year and also expressing concern about tourism headwinds in China remaining in the near term, Ms. Fitzsimons lowered her full-year 2021 and 2022 earnings per share projections to 70 US cents and US$1.40, respectively, from 86 US cents and US$1.55.

Keeping an “outperform” rating for Canada Goose shares, she trimmed her target to $43 (Canadian) from $47. The average on the Street is $36.14.

“Prior to COVID, the biggest pushback we got on GOOS was valuation in that “what are you going to pay for a slowing growth story?,” Ms. Fitzsimons said. “With COVID-related sales and profitability disruptions, GOOS strikes us as a recovery story here, with realistically brand heat and momentum headed into COVID (FY20 was on target to do 20-per-cent-plus top line growth). To that end, we see the moves the team is making on China, ecommerce, the Direct channel, and wholesale health as the right strategic moves to allow for a return to a 20-per-cent-plus top line profile over time. To that end, with the stock trading 22 times FY2 PE, we expect valuation does not fully reflect GOOS’s growth prospects over time, with our 30 times derived target reasonable still for a rare growth story in consumer today.”

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Pointing to the “inability” of Xebec Adsorption Inc.‘s (XBC-X) earnings maintaining the pace of its revenue growth, H.C. Wainwright analyst Amit Dayal lowered his rating for the Quebec-based renewable gas company to “neutral” from “buy” following the release of second-quarter results that fell in line with his expectations.

“We had previously highlighted this potential issue in our April 16 note on the company where we indicated that tightening margins may prevent any meaningful leverage to materialize in the near term,” said Mr. Dayal. “In its 2Q20 earnings call, Xebec withdrew its previous guidance of net earnings of 7-9 per cent and EBITDA margins of 11-13 per cent (but did maintain its 2020 guidance for revenues to range between $80-90-million).”

Pointing to lower gross margin and EBITDA expectations, he trimmed his 2020 and 2021 earnings per share projections to nil and 10 cents, respectively, from 6 cents and 18 cents previously.

“We believe the company’s revenue drivers remain healthy, including demand for hydrogen and renewable natural gas (RNG) deployments,” said Mr. Dayal. “The company also has lined up a significant carbon capture opportunity associated with NYC building emissions, that could support future growth. These drivers and management’s efforts with respect to margin improvements should allow earnings growth to re-emerge in the near future. We plan to revisit our rating on the company based on meaningful execution on this front.”

Mr. Dayal has not specified a target price for Xebec shares. The average on the Street is $5.23.

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Headwater Exploration Inc. (HWX-T) and Spartan Delta Corp. (SDE-X) are “poised to quickly emerge” as two of the leading Canadian oil and gas producers within the small- and mid-cap space, according to Desjardins Securities analyst Chris MacCulloch.

In separate research notes released Wednesday, he initiated coverage of the stocks with “buy” ratings.

Mr. MacCulloch sees Calgary-based Headwater’s McCully gas field in New Brunswick providing a “solid foundation of free cash flow from which management can pursue a transformative acquisition where it can put the significant cash balance — and its expertise—to work.”

“The management team has outlined ambitions to build a sustainable company with foundational pillars grounded in shareholder returns through dividends and/or share buybacks and rigorous ESG standards,” the analyst said. “Following the successful recapitalization of Corridor Resources, which unlocked a significant cash balance and a free cash flow generating asset, the next step is to execute a transformative acquisition. Although the company has yet to land a deal, we are comforted by management’s disciplined approach to acquisitions, noting that several highly attractive assets will likely shake loose with the passage of time, and at increasingly attractive terms as more companies struggle with liquidity. Prudent balance sheet management has always been a central tenet of the Headwater team with its previous three companies, and we expect nothing less with this iteration, with a targeted D/CF [debt-to-cash flow] ceiling of 1.0 times on the back of future acquisitions.”

Mr. MacCulloch set a target price of $2 for Headwater shares per share, matching the current consensus on the Street.

For Spartan Delta, he thinks it has “established a significant foothold in central Alberta on extremely attractive terms through the Bellatrix asset acquisition, providing a springboard for future consolidation close to where management built its first two highly successful publicly traded entities.”

“The company has outlined ambitious growth plans, targeting more than 100,000 barrels of oil equivalent per day within the next 24–36 months, primarily through acquisitions, and we believe the management team has both the technical pedigree and capital markets credibility to execute this strategy,” said Mr. MacCulloch. “Maintaining a strong balance sheet has always been a central tenet of the Spartan franchise and Spartan Delta is already following the same playbook, with the modest debt absorbed from the Bellatrix Exploration Ltd. asset acquisition poised to be paid down over the next 12–18 months. Sustainability is another key focus, particularly with respect to decline rates as the company ultimately plans to pay a modest dividend yield. On that note, the Bellatrix asset acquisition provides a strong foundation for Spartan Delta with a 19-per-cent decline rate, which should help to drive significant free cash flow to fund future acquisitions.”

He set a target of $6 for Spartan Delta shares, which exceeds the consensus of $5.12.


In other analyst actions:

* TD Securities analyst Greg Barnes raised Hudbay Minerals Inc. (HBM-T) to “buy” from “hold” and raised his target by a loonie to $6.50. The current average on the Street is $5.31.

* TD’s Linda Ezergailis cut Hydro One Ltd. (H-T) to “hold” from “buy” with a $28 target, which falls 50 cents below the consensus.

* After a “strong” second-quarter beat, CIBC World Markets analyst Daine Biluk upgraded Total Energy Services Inc. (TOT-T) to “outperformer” from “neutral” with a $4 target, up from $3.50. The average on the Street is $3.32.

“Although the current oilfield environment is uninspiring, we view Total as a solid candidate to benefit from M&A consolidation and a recovery, once that does occur, all while being priced at a very attractive entry point,” said Mr. Biluk. “Given all of this, we are also electing to dial-up our rating.”

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