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

Citi analyst Prashant Rao sees a “reprieve” for Canadian heavy oil as the firm remains bullish on oil prices “well into” 2021, however he warns he’s “selective” on equities tied to it.

“The market looks to be pricing in negative 1.6-per-cent terminal growth for oil equities at large,” he said. “But Canadian heavy oil assets that sit lower on the cost-curve (i.e. developed SAGD) should first see demand growth into 2022, driven by share gains in U.S. refining & higher oil price. Barrels supplied should come from the existing asset base; equity should continue to discourage new asset growth. The combination of these factors brings down target prices across the group.”

“It seems longer than 9 months ago to many (including us) but prior to COVID-19 demand impacts on refining, Canadian heavy barrels were on target to fill the 700 mbpd net void left by the end of Venezuelan supply to the USGC. The underlying dynamics that drove this opportunity for WCS barrels are unchanged – on pause in the current environment. Looking ahead, as USGC demand recovers, we expect limited competition for these barrels from other sources. Canadian producers could capture more than 75-per-cent share of the incremental demand – an anomalous pocket of growth in a gradually receding global upstream.”

In a research report released on Wednesday, Mr. Rao lowered his funds from operations per share projections for the third quarter, fourth quarter and 2021 to 15 per cent, 20 per cent and 21 per cent, respectively, due to the firm’s commodity price forecasts, expectation for negative growth and operational assumptions.

With those changes, he lowered his rating for Suncor Energy Inc. (SU-T) to “neutral” from “buy” based on new valuation assumptions, seeing its risk-reward proposition as “fair at current trading levels.”

“Suncor has long been one of our top picks within our Canadian Oil coverage given its strong management team, solid balance sheet, and highly integrated model,” he said. “While these positive factors likely remain intact longer-term, the balance sheet is relatively more stressed in this downturn (2.1 times end-2021 estimated net debt to CFFO, 2nd highest in the group), and integration value is limited in a world of rising oil price and lagging refining margins. Longer-term, our new terminal growth framework points to negative 0.3 per cent for Suncor on high light/upgraded production. This drives valuation to imply more balanced risk/reward at current share price levels, and therefore, our decision to downgrade shares to Neutral.”

Mr. Rao cut his target for Suncor shares to $16 from $31. The current average target on the Street is $26.53, according to Refinitiv data.

His other target price changes were:

  • Cenvous Energy Inc. (CVE-T, “buy”) to $8 from $9. Average: $7.36.
  • Imperial Oil Ltd. (IMO-T, “neutral”) to $18 from $23. Average: $21.13.

He maintained a $4 target for Husky Energy Inc. (HSE-T, “neutral”), which falls 24 cents below the consensus.

“CVE’s and IMO’s high production mix of heavy crude should drive modest long-term growth for the companies,” said Mr. Rao. “CVE’s low operating costs and sustaining capex should allow the company to conserve cash if needed, while offering best leverage to a better WCS environment. While the merger with HSE would dilute this somewhat, the core opportunity remains. IMO is best positioned to continue repurchasing shares while maintaining its dividend, on limited intermediate-term growth capex; returning cash to shareholders and limiting growth should be viewed favorably by the market.”

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In a research report previewing third-quarter earnings for renewable power producers titled A Difficult Choice: Sector Momentum or Attractive Value?, Raymond James analyst David Quezada advises investors to maintain exposure in the sector despite a recent jump in prices, noting “uncertainty remains regarding the degree multiples could continue to expand among these topical names.”

“With renewable IPPs up an average of 26 per cent year-to-date, and an eye-popping 74 per cent from March lows, the sector undeniably has the wind at its back as ESG related fund flows have driven EV/EBITDA multiples to the high end of historical valuation ranges (and in some cases higher),” he said. “As such, we see relative value favouring the regulated utilities in our coverage universe where we believe ultra low bond rates and valuations materially below historical peaks, represent a compelling combination.”

Following this rally benefitting from an ESG tailwind, Mr. Quezada did say “remaining opportunities are limited.”

“However, we do see a handful of instances where stocks with a rising proportion of renewable generation and/or attractive sustainability attributes, have not yet enjoyed a corresponding valuation lift," the analyst said. "Specifically, we highlight two names which, while not strictly renewable power, have a strong runway from an ESG perspective with significant room to reduce GHG emissions. These include Strong Buy rated Algonquin (where generation from gas is expected to decline to 25 per cent by 2023 from 45 per cent currently) and Outperform rated Capital Power which is not only increasing its renewable exposure (from 20 per cent to 30 per cent by 2023 as per our estimates), but also transitioning away from coal. Outside of the IPPs, we also continue to highlight Xebec Adsorption as a top pick with ESG friendly attributes and robust growth.”

Mr. Quezada made a series of target price changes to stocks in his coverage universe. They are:

  • Algonquin Power & Utilities Corp. (AQN-N/AQN-T, “strong buy”) to US$18.50 from US$18. The average on the Street is US$15.75.
  • Xebec Adsorption Inc. (XBC-X, “strong buy”) to $7 from $6. Average: $5.76.
  • Boralex Inc. (BLX-T, “strong buy”) to $45 from $40. Average: $41.61.
  • Innergex Renewable Energy Inc. (INE-T, “outperform”) to $28 from $25. Average: $25.36.
  • Northland Power Inc. (NPI-T, “market perform”) to $45 from $38. Average: $42.92.
  • TransAlta Renewables Inc. (RNW-T, “market perform”) to $18 from $16.50. Average: $16.92.

“We maintain a favourable disposition towards the regulated utilities in our coverage universe including Hydro One, Fortis and Emera — each rated Outperform," he said. "Unlike the IPPs discussed above, these stable, low risk names remain reasonable from a valuation perspective while maintaining solid EPS growth, in our view. Consistent with our recent upgrade, we like Hydro One’s attractive regulatory attributes/outlook, solid rate base growth and lengthy runway of organic investment opportunities. We also note we expect asset monetizations at Outperform rated Altagas will represent a material catalyst in our view; supporting the company’s ongoing deleveraging. As for Emera, our constructive view is a function of the company’s significant rate base growth driven by opportunities in Florida which we believe is among the most attractive utility jurisdictions in the US. We also continue to regard Fortis as a core holding on its sector-leading diversification, renewable opportunities in Arizona and high quality asset base.”

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Following an “impressive” third-quarter, RBC Dominion Securities analyst Matt Logan said Colliers International Group Inc. (CIGI-Q, CIGI-T) is “evolving differently,” seeing the potential for recurring EBITDA to reach 65-70 per cent over the next 2-3 years.

On Tuesday, the Toronto-based commercial real estate services provider reported adjusted earnings before interest, taxes, depreciation and amortization of US$92-million for the quarter, exceeding the US$64-million projection of both Mr. Logan and the Street.

“Relative to our forecast, better-than-expected results were driven by the Sales and Lease Brokerage business, which saw revenues decline 17 per cent and 22 per cent compared with our expectations for a decline of 40–45 per cent, aided by disciplined cost control across all regions,” the analyst said. “With resilient performance and modest growth from the Outsourcing, Advisory, and Investment Management segments, we continue to believe recurring revenues provide meaningful downside support in 2020 and position the company for a strong recovery, as transaction volumes normalize in 2021 and 2022.”

Concurrently, Colliers raised its full-year EBITDA by 8 per cent to a range of US$306-$324-million, which Mr. Logan said “implies modest, but positive, growth from recurring services and declines of roughly 20–30 per cent for Sales and Lease brokerage.”

Mr. Logan noted Colliers now derives almost 60 per cent of its EBITDA from recurring services, which he expects to hold steady through 2022 with a rebound in Sales and Lease Brokerage revenues.

“Commenting on the flow of Colliers business, CEO Jay Hennick noted on the Q3 earnings call that he could envision recurring EBITDA potentially reaching 65–70 per cent in 2–3 years,” he said. "While we don’t believe this comment was intended as any sort of a formal target, we believe it provides insight into the general direction of the company and how management is thinking about growth in recurring services.

“With this backdrop, we highlight that our forecast reflects 0.5 times of deleveraging to 1.0 times by year-end 2021, excluding the convertible debentures (which are currently in the money and not treated as debt under CIGI’s debt covenants). In our view, this provides sufficient balance sheet capacity for Colliers to complete a more sizable M&A transaction in the range of $400–600 million. This would increase D/EBITDA by about 0.6–0.9 times to 1.6–1.9 times and increase 2022 recurring EBITDA to roughly 65–67 per cent.”

After raising his revenue and earnings projections through 2022, Mr. Logan hiked his target for Colliers shares to US$96 from US$85, keeping an “outperform” rating with a “high conviction” designation. The average target is $82.50.

“We believe our valuation methodology reflects the company’s global platform, a growing proportion of recurring earnings, Management’s 20-plis year public market track record, significant insider ownership, strong balance sheet, ample liquidity, and Colliers' overall franchise value,” he said. “Based on our riskadjusted return expectations relative to peers, we rate CIGI’s shares Outperform.”

Elsewhere, Raymond James analyst Frederic Bastien increased his target to US$90 from US$75, keeping an “outperform” rating.

“CIGI’s resilient 3Q20 results were further proof the company is better equipped to navigate periods of economic uncertainty than ever before,” he said. “It is also worth noting that when we compare all professional services stocks in our coverage universe, the line between Colliers and WSP Global is getting increasingly blurry. Both firms share many attractive investment characteristics — a globally diversified and multidisciplinary platform, an enterprising culture, a proven roll-up strategy, healthy margins and FCF conversion, and low leverage. And where CIGI trails WSP in stability, it arguably makes up for with higher insider ownership. Based on this, it should only be fair both stocks should command similar multiples, correct? That is the rationale behind our increased Colliers valuation.”

Scotia Capital’s George Doumet raised his target to $86 from $76 with a “sector outperform” rating, while TD Securities' Daryl Young raised his target to US$83 from US$80 with a “buy” recommendation.

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Seeing a “discounted” valuation as it undertakes a significant transformation, Raymond James analyst Stephen Boland initiated coverage of Canadian Western Bank (CWB-T) with an “outperform” rating.

“CWB, after several years of implementing of a new core banking system is about to switch to a new capital approach named Advanced Internal Risk Based (AIRB) model within the next 12 months,” he said. "This is replacing the Standardized capital model.

“Only the large banks in Canada use AIRB which allows a bank to recalculate its risk-weighted assets (RWA). The recalculation allows more segmentation by assets and loans. The result is a reduction in RWA which in turn provides higher excess capital. This would allow for higher organic growth or a return of capital.”

Mr. Boland called it a “material” changes for the bank, however if it is unable to achieve higher loan growth because of market conditions, he suggested it could turn to a normal course issuer bid, substantial issuer bid or special dividend. He called all positive for shareholders.

“Another reason for the Outperform rating is valuation," he said. "Over the past 10 years, CWB has traded at an average 1.50 times price to book multiple and typically has traded above 1.0 times. Currently, the stock is trading at 0.8 times. Although there is some uncertainty with market conditions, we believe that CWB is undervalued. Even if the stock moves only to 2021 ending book value of $34.92 this is a sizable return for shareholders. Over the long term, this stock does not remain below BV for considerable periods of time.”

Mr. Boland set a target of $34 per share. The average is $29.40.

“We believe this is an opportune time for investors to take advantage of the current valuation,” he said.

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Desjardins Securities analyst Chris Li thinks investors are already prepared to see a “meaningful” year-over-year decline in results when Gildan Activewear Inc. (GIL-N, GIL-T) reports its third-quarter results on Thursday.

Instead, he expects the focus to be on potential insights hinting at the Street’s expectation for sales to recover to 75-80 per cent of pre-COVID-19 levels by next year.

“While we expect trading to be volatile in the near term as visibility remains limited, we believe there is long-term value, with GIL trading at only 12 times pre-COVID-19 EPS, supported by solid FCF [free cash flow],” Mr. Li said.

For the quarter, the analyst expects U.S. point-of-sales (POS) for its imprintables segment to drop 20-25 per cent year-over-year, improving from a 50-per-cent drop in the precious quarter.

“Improvement was driven by demand for work-from-home casualwear (online and retail) and share gains as GIL leverages its low-cost advantage, offering distributors discounts that are not fully matched by its smaller competitors,” he said. "The second wave has likely stalled the POS recovery in 4Q. Our 3Q activewear sales forecast implies 70 per cent of 2019 levels. For 2021, we expect sales to be 73 per cent of 2019 levels vs GIL’s expectation of 80–85 per cent. A better line of sight to GIL’s target could provide upside to our estimates — but we won’t know for at least a couple of quarters.

“We expect continued strong growth in private label men’s underwear (shelf space gains at Walmart U.S.), offset by lower sock sales (lower industry demand and retail store closures).”

Expecting to see sequential improvement in Gildan’s gross margin, Mr. Li raised his full-year earnings per share projection to a loss of 75 US cents from a loss of US$1.08 previously.

Keeping a “buy” rating, he increased his target for its shares to US$31 from US$27 after moving his valuation to 2022 estimates, which he calls " more representative of GIL’s earnings power. The average on the Street is US$20.78.

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Touting its “unique” business model that drives cash flow per share growth, Canaccord Genuity analyst Brendon Abrams initiated coverage of Calgary-based Mainstreet Equity Corp. (MEQ-T) with a “buy” rating on Wednesday.

“Since its initial listing on the TSX in 2000, the company has achieved substantial growth in its asset base and has been one of the best performing real estate stocks on the TSX (compound annual growth rate since inception of 15 per cent) by executing its differentiated business strategy,” he said. "The company is led by an entrepreneurial and highly aligned management team including its founder and CEO, Bob Dhillon, who alone owns 46 per cent of shares outstanding.

“We acknowledge the company’s exposure to resource-reliant provinces (AB and SK represent 70 per cent of net operating income) and higher leverage (14.5 times D/EBITDA vs peer average of 10.7 times) slightly elevates its risk profile relative to many of its apartment peers. However, in our view, Mainstreet represents an attractive opportunity for investors to gain exposure to Canada’s stable and defensive multi-family sector through a high-growth company.”

In justifying his investment thesis, Mr. Abrams emphasized its “differentiated” business strategy of acquiring mid-market and value-add properties in Western Canada, which has brought sector-leading cash flow per share growth. He also pointed to its “significant” liquidity position providing capital to “consolidate its market niche, diversify its portfolio away from Alberta and Saskatchewan, and drive material increases in FFO per share.”

Mr. Abram set a $91 target for Mainstreet shares. The average is $90.75.

“We believe Mainstreet is an attractive vehicle for investors seeking long-term capital appreciation (the company does not pay a dividend) and growing cash flow per share,” he said.

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Calling it an “exciting” Volcanogenic Massive Sulphide (VMS) gold-copper exploration play, Paradigm Capital analyst Don MacLean initiated coverage of Vancouver-based Sun Peak Metals Corp. (PEAK-X) with a “speculative buy” rating on Wednesday.

“Over the years, we have learned that the most important ingredients for a successful exploration equity are a strong exploration team; promising property package; good backing; and luck,” he said. “Sun Peak Metals is a promising new gold-copper VMS exploration play in Northern Ethiopia. Led by an experienced geological team, Sun Peak’s large Shire project has the same geology and physical terrain as the VMS region of Eritrea just to the north, where the team was involved with two major VMS discoveries. Yet, the southern extension of this region, in Ethiopia, has seen little exploration. Sun Peak has identified 24 priority targets thus far. The first drill program was quite promising but cut short by COVID-19. An 18-kilometre drill program began in October. We should have a good sense of the potential within 6–9 months. Grassroots exploration like this is high risk, but the odds are strongly in Sun Peak’s favour.”

Currently the lone analyst on the Street covering the stock, Mr. MacLean set a target of $2 per share.

“We believe the property package, with its many targets, proximity to Eritrea’s VMS discoveries, the large new drill program and experienced team make Sun Peak’s odds of success excellent,” the analyst said. “Sun Peak is one of the best exploration stories we follow and is included in our Dirt Dozen, our favourites among the more than 90 explorers we monitor."

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In other analyst actions:

* Berenberg analyst Brian McNamara initiated coverage of Canada Goose Holdings Inc. (GOOS-N, GOOS-T) with a “buy” rating and US$43 target. The average is US$30.43.

* Raymond James' Brian MacArthur raised his target for Teck Resources Ltd. (TECK.B-T) to $23.50 from $23 with an “outperform” rating. The average is $22.98

“We believe Teck offers good exposure to coal, copper, and zinc, and is able to convert EBITDA from its Canadian operations efficiently given its large Canadian tax pools,” he said. “Given Teck’s long life, low jurisdictional risk, diversified asset base, and valuation, we rate the shares Outperform.”

TD Securities' Greg Barnes cut his target for Teck to $24 from $25 with an “action list buy” rating, while BMO’s Jackie Przybylowski moved her target to $21 from $23 with a “market perform” rating.

* Credit Suisse analyst Lauren Silberman raised his target for Restaurant Brands International Inc. (QSR-N, QSR-T) to US$63 from US$59. Cowen and Co.'s Andrew Charles cut his target to US$64 from US$67 and Piper Sandler’s Nicole Miller Regan lowered her target to US$62 from US$65. The average is US$65.88.

“While [Tim Hortons] underperformance continues to weigh on shares, we’re encouraged TH is gaining share near-term, & believe the implementation of on-trend initiatives are well positioning the brand long-term,” said Ms. Silberman. “TH is pursuing a ‘back-to-basics’ approach enabled by digital, with investments to be concentrated in improving the quality of core platforms, modernizing the brand & menu innovation to support the core. RBI expects to roll out digital menu boards across all drive-thrus by 2021, which should benefit top & bottom lines. We expect the rewards program to be a multi-year growth driver, with personalized offers contributing an incremental 100bps to SSS in 3Q, underscoring the strength of current capabilities, which should continue to build as TH adds more customers to its database. Recent sustainability initiatives, plans to roll out Dark Roast at the beginning of 2021 & opportunities to build other dayparts also support the strategy.”

* RBC’s Paul Quinn raised his target for West Fraser Timber Co Ltd. (WFT-T, “outperform”) to $90 from $85. The average is $85.50.

* Cormark Securities analyst David Ocampo increased his target for Airboss of America Corp. (BOS-T, “buy”) to $34 from $32. The average is $31.17.

C* ormark bumped its target to Kuya Silver Corp. (KUYA-CN) to $2.35 from $2.25.

* CIBC World Markets analyst Mark Petrie slashed his target for Maple Leaf Foods Inc. (MFI-T) to $35 from $40 with an “outperformer” rating, while Scotia Capital’s George Doumet lowered his target to $34 from $35.50 with a “sector outperform” rating. The current average is $34.38.

“Q3 results were shy of moderated expectations in a disappointing quarter, though underlying trends remain positive. Meat Protein results were solid, albeit shy of forecast in a volatile period. Execution and cash drain are a concern in Plant Protein, but POS still grew 31 per cent. Overall, we continue to view MFI’s platform as robust through a cycle with significant growth potential. We also see valuation as attractive even after reducing target multiples on account of noise and inconsistency,” said Mr. Petrie.

* TD Securities analyst Mario Mendonca raised his target for Element Fleet Management Corp. (EFN-T, “buy”) to $15.50 from $13.50, while BMO Nesbitt Burns' Tom MacKinnon moved his target to $17 from $13 with an “outperform” rating. The average is $15.40.

* TD’s Menno Hulshof cut his MEG Energy Corp. (MEG-T, “hold”) target to $3 from $3.25. The average is $4.

* National Bank Financial analyst Adam Shine raised his target for Stingray Group Inc. (RAY.A-T, “outperform”) to $7.50 from $7, exceeding the $7.36 average..

* National Bank’s Zachary Evershed increased his target for Savaria Corp. (SIS-T, “outperform”) to $17 from $15.50. The average is $17.47.

* Stifel analyst W. Andrew Carter slashed its target for Aurora Cannabis Inc. (ACB-T) to $3.60 from $10.50 with a “hold” rating. The average is $9.33.

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