Wednesday’s analyst upgrades and downgrades

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

With wood product prices sitting at record levels in what is normally the seasonally slowest period of the year, RBC Dominion Securities analyst Paul Quinn expects further gains to be on tap for 2021.

“While 2020 was one for the record books, we think 2021 could be even better due to very strong housing markets and limited capacity to increase production,” he said.

In a research report titled It feels good to be a Wood Product producer, Mr. Quinn pointed to five themes to watch for the next year, “1) Get ready for another year of record prices; 2) Expect heightened M&A activity; 3) Mass Timber should continue to grow; 4) Lumber and Plywood imports should rise; and 5) Expect to see more capacity additions.”

“Lumber markets have clearly been on a wild ride in 2020, with COVID-19 putting a temporary halt to construction, only to come roaring back as lockdown restrictions eased,” he said. “While new residential construction has been supported by record-low interest rates, the story of 2020 was the record level of repair & remodel demand, which strained supply to home centers and left the market short of more consumer-oriented products such as treated lumber.

“As we head into 2021, we have seen unprecedented pricing levels to close out 2020 with both SYP [southern yellow pine] and W. SPF [western spruce-pine-fir] prices moving higher following a pullback in October/November. With demand likely to get stronger as dealers get ready for what should be a very strong spring building season, we expect that prices will remain at a high level during the first half of the year.”

Mr. Quinn called West Fraser Timber Co. Ltd. (WFT-T) his “Top Idea” for 2021 in Canada.

“In addition to record lumber pricing, the company should benefit from the acquisition of Norbord sometime in Q1 and a U.S. stock listing, forming the world’s largest wood product company,” he said. “We think U.S. investors will see WFT as the best way to play this cycle. Our top Small Cap idea is Interfor (IFP-T), which should benefit from record lumber pricing, particularly in the U.S. South.”

He raised his target for West Fraser jumped to $110 from $90 with an “outperform” recommendation. The average on the Street is $94.33, according to Refinitiv data.

For U.S. companies, he pointed to Louisiana-Pacific Corp. (LPX-N).

“In addition to benefiting from record OSB prices, we think that the company’s growing (and highly profitable) siding business remains underappreciated by investors. We view LP as a growing free cash flow generator. Our favorite Timber REIT is Weyerhaeuser (WY-N) due to the company’s wood product exposure and high quality timberlands.”

His target for shares of Louisiana-Pacific jumped to US$50 from US$42 with an “outperform” rating. The average is US$39.38.

After raising his price forecasts for the remainder of 2020 through 2022, Mr. Quinn upgraded Western Forest Products Inc. (WEF-T) to “outperform” from “sector perform” to reflect the “increasingly positive” pricing outlook, which he said “more than offsets headwinds related to government regulatory pressure.”

His target for Western Forest Products shares rose to $1.50 from $1, exceeding the $1.30 average on the Street.

Mr. Quinn also made these target changes:

• Canfor Corp. (CFP-T, “outperform”) to $36 from $27. Average: $26.
• CanWel Building Materials Group Ltd. (CWX-T, “outperform”) to $10 from $8.50. Average: $8.19.
• Conifex Timber Inc. (CFF-T, “outperform”) to $2.50 from $2. Average: $2.12.
• Interfor Corp. (IFP-T, “outperform”) to $34 from $24. Average: $26.83.
• Norbord Inc. (OSB-T, “outperform”) to $75 from $60. Average: $55.49.
• CatchMark Timber Trust Inc. (CTT-N, “outperform”) to US$11 from US$10. Average: US$11.
• PotlatchDeltic Corp. (PCH-N, “outperform”) to US$58 from US$52. Average: US$51.33.
• Weyerhaeuser Co. (WY-N, “outperform”) to US$40 from US$35. Average: US$33.78.

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In reaction to a 5-per-cent drop in share price following a Dec. 11 downgrade, Industrial Alliance Securities analyst Elias Foscolos reversed course and raised his rating for AltaGas Ltd. (ALA-T) on Wednesday to “strong buy” from “buy.”

“No significant news on unchanged fundamentals have not changed our bullish outlook on the Company,” he said. “The Company’s recent capital guidance and business plan update reiterated its increasing utility-like characteristics which provide a steady regulated return. The update also included a 4-per-cent increase to ALA’s dividend.”

The initial downgrade came following the release of AltaGas’ 2021 business upgrade, which Mr. Foscolos thinks “highlighted its increasingly utility-like characteristics.”

“EBITDA for 2021 is forecasted at $1.45-billion,” he said. “Growth in the Utilities segment will come from expected rate base growth (8 per cent) and improvements in ROE (up to 140 basis points). Growth in the Midstream segment is projected to come from increasing utilization of its NE British Columbia assets, as well as integrating the Petrogas properties with its existing Prince Rupert Export Terminal (RIPET). ALA guided its self-funded 2021 CAPEX of $910-million. Approximately 82 per cent is allocated to Utilities, which will mostly be used for the Accelerated Pipe Replacement Programs (ARP). The remainder is allocated to Midstream, which will mainly be used for the Nig Creek Expansion.”

“Included with its guidance, ALA announced a 4-per-cent increase to its monthly dividend to $1.00 per share while simultaneously increasing EPS guidance and reducing its payout ratio.”

Mr. Foscolos maintained a $23 target for AltaGas shares. The current average on the Street is $21.94, according to Refinitiv data.

“The company is currently trading at a 10.1 times EV/EBITDA multiple which is below its utility/midstream peer average of 11 times, providing upside,” he said.

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After its acquisitions in the United States in 2020 “kicked into high gear,” Industrial Alliance Securities’ Mr. Foscolos is now projecting “substantially more growth than before” for Parkland Corp. (PKI-T) beyond next year.

“Over the last year and despite COVID-19, Parkland has supercharged its acquisition strategy in the USA by making five acquisitions,” he said in a research report. “By closely examining these acquisitions from a strategic and financial perspective, we have concluded that Parkland potentially has more mid-term growth than previously believed.”

“Post this deep dive, we maintain our previous conviction that Q4/20 and H1/21 will be more challenging than the current consensus outlook.”

Mr. Foscolos called the September acquisition of the license for the use of the On the Run trademark in the majority of U.S. state a “catalyst event.”

“When we look at PKI’s strategy, we can see that the Company is building a footprint down the northern plains, Rocky Mountain states, and Florida,” he said. “These regions have positive demographic trends and PKI can leverage its supply advantages, providing maximum return.”

“PKI’s acquisition strategy has been based on building regional scale in small incremental steps by consolidating fragmented markets. This allows PKI to leverage its supply advantage and add value through integration benefits without paying a higher multiple typically associated with larger acquisitions.”

The analyst thinks Parkland’s normalized EBITDA in 2021 and 2022 will allow it to invest $300-million 2021 and beyond in its U.S. segment for acquisitions that could initially contribute $40-million in EBITDA.

“When we fast forward to 2025, at this level of growth the USA segment will roughly equal the old Canadian Retail segment, giving PKI a more balanced segmented EBITDA, which should result in multiple expansion,” he said.

“We have made some minor forecast changes for Q4/20, 2021, and 2022. However, the material changes are in the 2023-2028 timeframe where we believe PKI can grow its EBITDA by 5 per cent annually using free cash flow (FCF) and incremental debt capacity from acquisitions, keeping leverage ratios constant. This analysis results in an increase in DCF valuation.”

Maintaining a “buy” rating, Mr. Foscolos raised his target for Parkland shares to $48 from $46. The average on the Street is $47.69.

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Mattel Inc. (MAT-Q) has “an optimal setup” heading into 2021, said DA Davison analyst Linda Bolton Weiser in response to findings from the firm’s annual Holiday Toy Survey.

“We found December online and in-store out-of-stocks were notably higher than last year, which is a clear positive, indicating that Mattel (MAT) and Hasbro (HAS) are likely to end the year with lean retail inventory (the opposite of last year),” she said. “Also, online pricing was less promotional than last year.”

For Mattel, Ms. Weiser said point-of-sales growth was up double digits year-over-year exiting the third quarter.

“MAT is chasing demand, which means the company is likely to end 2020 with lean retail inventory and healthy shipments in 1H21,” the analyst said. “The company guided to mid-single digit organic sales growth in 4Q20 (consensus up 7 per cent), lower than the 11 per cent reported in 3Q20, because the quantity of toys manufactured for Christmas was determined months ago. Our bullish survey results bear more on whether guidance for 1Q21 will be positive or negative than on the magnitude of upside in 4Q20, which is somewhat limited due to the long supply chain.

“Nevertheless, our 4Q20 estimated EPS of $0.25 exceeds consensus of $0.22,and we are comfortable buying MAT into the print.”

Reiterating a “buy” recommendation for Mattel shares, Ms. Weiser raised her target to US$21 from US$18. The average on the Street is US$16.06.

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Echelon Capital Markets analyst Andrew Semple sees “huge” upside potential for Ayr Strategies Inc. (AYR.A-CN) stemming from a pair of U.S. acquisitions.

On Tuesday, the Toronto-based U.S. multi-state cannabis operator announced a definitive agreement to acquire Liberty Health Science (LHS-CN) in Florida for $290-million and a binding agreement for Garden State Dispensaries, a privately owned company in New Jersey, for $101-million.

“These acquisitions allow Ayr to enter two excellent, sizeable limited-license markets with long runways for growth ahead,” he said. “We view both transactions positively.”

“We view the acquired assets to have a longer runway for growth than the Company’s existing asset base, implying that these assets deserve a premium multiple relative to Ayr’s current portfolio. However, we leave our DCF valuation parameters unchanged, which we believe positions our model even more conservatively than previously.”

Mr. Semple reiterated his “buy” rating and “Top Pick” status for Ayr’s shares, increasing his target to $53 from $43. The average on the Street is $41.67.

“Our target price increase is due to incorporating the pending acquisitions into our financial forecasts,” he said. “We continue to view our target price as conservatively positioned given the upside potential to our financial forecasts, spare cash at the ready for investment, and the conservative valuation parameters used in our DCF model. However, failure to close any of the six pending acquisitions could negatively impact our outlook.”

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In a separate note, Mr. Semple said Columbia Care Inc.’s (CCHW-CN) US$240-million acquisition of privately held Garden Leaf Medical is an “excellent geographic and strategic fit” for its business and deepens its operations in the “key” limited license medical cannabis markets of Pennsylvania, Maryland, Virginia and Ohio.

“We view this transaction positively. We are encouraged to see the Company significantly expand operations in some of America’s most attractive cannabis markets,” he said. “This is aligned with the Company’s renewed strategic focus on building meaningful scale in key markets, which we believe accelerates its profitability ramp.

“Management noted the acquisition represents a valuation multiple of 4.8 times its 2021 EBITDA estimate for the acquired assets. This is far lower than Columbia Care’s multiple of 17.5 times 2021 EBITDA pre-announcement (based on our forecasts). We believe this acquisition will be highly accretive to Columbia Care shareholders, with room for further upside to our model if industry demand continues to grow at a robust pace, or if adult-use sales are approved in any of these four states.”

After raising his financial projections for the New York-based company, Mr. Semple increased his target for its shares to $11.50 from $10, keeping a “speculative buy” rating. The average is currently $9.06.

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Bloom Burton analyst David Martin lowered his rating for CRH Medical Corp. (CRH-T) to “hold” from “buy” in response to news its largest customer, United Digestive does not plan to new its professional services agreement.

“UD is likely motivated by the cash flow potential of bringing the anesthesia business in-house,” he said. “However, CRH’s lead customer may also be playing hardball, with the ultimate intention of retaining CRH, but with some concessions. Employees of CRH (we suspect a material proportion of CRNAs working in the Atlanta region) are bound by non-compete agreements of up to 2 years, so it would be challenging for UD to recruit and transition an all new anesthesia staff.

“If this is a negotiating ploy on the part of UD, however, we are not aware of what concessions CRH will need to make (or can make) to renew the agreements. UD does not pay for CRH’s services (health insurers do), so CRH is not in a position to lower its prices to keep the business. Likewise, while CRH paid $61-million in 2014 to buy the business that serves the UD centers, CRH cannot now pay UD to keep the contracts.”

Mr. Taylor trimmed his target to US$3 from US$4. The average is $4.48 (Canadian).

“We believe that no other anesthesia business which CRH has acquired since 2014 represents more than 4 per cent of the company’s total revenues, so the potential impact of other single agreements going sideways is substantially lower,” he said.

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In other analyst actions:

TD Securities analyst Steven Green raised TMAC Resources Inc. (TMR-T) to “hold” from “tender” with a target of $1.25, up from $1.75. The average is $1.82.

Scotia Capital analyst Paul Steep lowered his target for Open Text Corp. (OTEX-Q, OTEX-T) to US$51 from US$52 with a “sector outperform” rating, while CIBC World Markets’ Stephanie Price increased her target to US$59.50 from US$57 with an “outperformer” recommendation. The average is $52.32.

Haywood Securities analyst Christopher Jones raised his target for Reconnaissance Energy Ltd. (RECO-X) to $4 from $2.50, keeping a “buy” rating.

Cormark Securities analyst Nicolas Dion increased his target for shares of Kuya Silver Corp. (KUYA-CN) to $2.90 from $2.80 with a “speculative buy” rating.

Canaccord Genuity analyst Doug Taylor cut his target for Drone Delivery Canada Corp. (FLT-X) to $1.30 from $1.40, keeping a “speculative buy” recommendation. The average is $1.48.

Canaccord’s Yuri Lynk raised his target for Neo Performance Materials Inc. (NEO-T) to $16 from $14 with a “buy” rating. The average is $14.83.

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