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

ARC Resources Ltd.’s (ARX-T) $8.1-billion merger with Seven Generations Energy Ltd. creates a “premier low-cost, Montney producer that should be able to recognize substantial cost savings going forward,” according to iA Capital Markets analyst Michael Charlton.

Following Tuesday’s close of the combination of Alberta-based producers, Mr. Charlton thinks ARC “has no shortage of runway ahead” with more than 1 million acres in the Montney Formation to develop as “the dominant condensate producer in Canada, the third-largest natural gas producer, and sixth-largest upstreamer.”

“With the closing complete, watch for ARC to integrate the two entities’ operations with a focus on cost savings estimated at $160-million annually, including $50-million in interest cost savings with the retirement of the Seven Generations notes,” the analyst said. “ARC will now work to reduce debt levels to 1.0-1.5 times net debt to annualized FFO [funds from operations]; once that has been reached (exit 2021) ARC looks to invest in the highly prospective Attachie area that looks to drive the next increment of return to shareholders.”

He added: “ARC’s combination closing looks to have occurred as expected, with a bright future ahead as it looks to realize on interest cost savings almost immediately following its issuance of notes and consequent repayment of higher interest notes outstanding from Seven Generations. With exceptional governance and strong ESG commitments, we anticipate the experienced, blended management teams from ARC and Seven Gen will continue to optimize assets and shift developments between several diverse core projects to maximize shareholder value. With a plan to reduce debt in the coming months and invest in Attachie, we believe patient shareholders will benefit from ARC’s experience and assets for years to come. Look for updated guidance from ARC on the combined entity with the release of its Q1/21 results on May 5.”

With the close of the deal and “a relatively strong commodity price outlook,” Mr. Charlton raised his target price for Arc shares to $12 from $10, keeping a “buy” recommendation. The average target on the Street is $11.36, according to Refinitiv data.

“We continue to believe the Company’s reserves are not being fully valued in the market, nor is the near-term upside of its six core development areas that offer high impact opportunity and have been largely de-risked at this time,” he said. “ARC is well-positioned to continue delivering best-in-class operational performance with top-tier economics, as it is able to move between core development areas to capture the strongest commodity prices, fuelling corporate success and natural gas-driven shareholder returns including dividends, sustainable production growth, and free cash flow.”

Elsewhere, CIBC World Markets’ Jamie Kubik raised his target for Arc shares to $11 from $9 with an “outperformer” rating.

“We are reinstating our estimates and view following the completion of ARC’s business combination with Seven Generations,” said Mr. Kubik. “Given we favored the qualitative and quantitative aspects of these businesses individually, we are favorably biased towards the characteristics the combined enterprise offers. The depth of liquids-rich inventory and scale of infrastructure ownership result in in the emergence of a Montney heavyweight for investors, and also one that is likely to carry broader appeal to ESG-focused investors given the track record of both companies prior to the combination. The stock is also appealing, with the pro forma business trading at 3.5 times 2022 estimated EV/DACF [enterprise value to debt-adjusted cash flow] on strip pricing, generating a FCF yield of 12 per cent, and D/CF [debt-to-cash flow] at 0.6 times, all of which are competitive metrics versus large-cap and small-/mid-cap peers.”


Though he expects near-term industry headwinds to weigh on its sales through the first half of the year, Desjardins Securities analyst John Chu thinks Rubicon Organics Inc.’s (ROMJ-X) “positioning remains strong.”

“COVID-19-related restrictions (eg store closures/curbside pick-up) have been reinitiated across parts of the country, which should negatively impact sales,” he said. “This also likely has a higher proportionate impact on the sale of premium products as these are generally in-store purchases with the assistance of a budtender. As such, management expects this to impact 1Q and 2Q sales, with hopes that the recent inventory restocking by provincial wholesalers and broad distribution of the vaccine will help alleviate sales pressure heading into 2H.

“While these catalysts are unlikely to offset the industry headwinds for 1Q as noted above, they may help mitigate the impact of these headwinds in 2Q and help set up the company for strong growth in 2H21 and 2022. Ramp-ups in new provinces and markets, new product launches and new SKUs should help offset some of the headwinds. The industry is also entering a seasonally strong spring period and should be boosted by what is generally peak summer season too.”

In a research note following Tuesday’s release of its fourth-quarter 2020 results, Mr. Chu dropped his 2021 sales projections “meaningfully” based on the lower-than-expected sales expectations. He’s now estimated $32.4-million in sales, down from $56.8-million previously. That led to a decline in his adjusted EBITDA forecast to $2.6-million from $12.8-million. His 2022 estimates slid to $72.5-million and $25.6-million, respectively, from $82.3-million and $28-million.

“We expect sales to ramp up in 2H21 and to reflect more normalized market dynamics in 2022. We forecast Rubicon to reach positive EBITDA by 3Q21, a quarter later than the 2Q timeline management has provided,” he said.

Keeping a “buy” rating for the Vancouver-based company’s shares, he trimmed his target to $4.75 from $5. The current average is $4.81.


RBC Dominion Securities’ Mark Dwelle lowered his first-quarter financial projections for Fairfax Financial Holdings Ltd. (FFH-T, FFH.U-T) largely to account for the impact of the storms in Texas.

The analyst is now estimating earnings per share of US$7.56, down from US$10.78 due to a rise in his catastrophe loss projection (to US$225-million from US$115-million previously). That pushed his full-year estimate down to US$40.79 from US$44.

“The first quarter includes a number of moving pieces including the sale of Riverstone Barbados, the sale of a portion of Brit, the repayment of bank lines and the issuance of debt,” said Mr. Dwelle. “We expect Operating results to reflect strong pricing power and continued favorable reserve development though the recording of additional levels of Covid-19 losses and the actual level of cat losses in an elevated cat loss quarter remain uncertain. We expect the company will comment further on its investment positioning, its non-insurance subsidiary operations and further capital management and financing.”

Citing “improving multiples across the P&C sector as rate increases earn into results and economic visibility improves,” he raised his target for Fairfax shares to $650 (Canadian) from $585 with an “outperform” recommendation (unchanged). The average on the Street is $604.63.


Raymond James analyst Daryl Swetlishoff expects first-quarter 2021 results for North American building materials producers to be “staggering” for the third consecutive quarter with the earnings alone “representing a typical good year for many.”

“What’s more, 2Q21 is starting stronger and barring a June collapse looks to be on pace for another record,” he said. “With net debt levels increasingly negative we see increased potential for share buy backs and even dividends. There will be a time to trim exposure to the Tree sector, however, this is premature in our view.”

“Is it a lot to ask an investor to buy a building materials stock when lumber is trading over US$1,000 per thousand board feet?. In our view, not when stocks are already pricing in a 50-60-per-cent drop in lumber prices with the next move in the commodity decidedly higher. With robust global demand and tight inventories, traders are reporting producer order files now extending into May with WSPF lumber prices testing the US$1,100 level!”

In a research note released Wednesday titled Lumber Super Cycle - It Aint Over’ Till it’s Over, Mr. Swetlishoff raised his 2021 spruce-pine-fir forecast to US$750 per thousand board feet from US$550, a move he calls “conservative as this assumes SPF pricing of US$550 for 2H21 – in line with forecast 4Q21 BC cash costs.

With that view, he raised his target prices for companies in his coverage universe. His changes were:

  • Acadian Timber Corp. (ADN-T, “outperform”) to $21 from $18. The average on the Street is $17.10.
  • Canfor Corp. (CFP-T, “strong buy”) to $46 from $40. Average: $36.50.
  • Conifex Timber Inc. (CFF-T, “outperform”) to $3 from $2.60. Average: $2.70.
  • Interfor Corp. (IFP-T, “strong buy”) to $47 from $40. Average: $37.17.
  • Western Forest Products Inc. (WEF-T, “outperform”) to $2.35 from $1.85. Average: $2.10.
  • West Fraser Timber Co. Ltd. (WFG-T, “strong buy”) to $145 from $130. Average: $109.87.
  • Canfor Pulp Products Inc. (CFX-T, “outperform”) to $14.50 from $13.50. Average: $11.30.
  • Domtar Corp. (UFS-N/UFS-T, “market perform”) to US$38 from US$34. Average: US$40.11.

Pointing to “positive pulp and ESG momentum,” he upgraded Mercer International Inc. (MERC-Q) to “strong buy” from “outperform” with a US$24 target, up from US$18 and exceeding the US$17.30 average.

“Our top building materials pick is Strong Buy rated West Fraser (featured on our Analysts Current Favourites list) however we also highlight Strong Buy rated Canfor and Interfor both trading at less-than 2.0 times 2021 and less than 3.0 times 2022 EBITDA!,” he said.


Scotia Capital analyst Benoit Laprade also raised his targets for a series of lumber stocks in his coverage universe.

  • Canfor Corp. (CFP-T, “sector outperform”) to $37 from $33. The average on the Street is $36.50.
  • Canfor Pulp Products Inc. (CFX-T, “sector perform”) to $10 from $8. Average: $11.30.
  • Interfor Corp. (IFP-T, “sector outperform”) to $40 from $37. Average: $37.17.
  • West Fraser Timber Co Ltd. (WFG-T, “sector outperform”) to $120 from $106. Average: $109.87


CubicFarm Systems Corp.’s (CUB-X) “milestone” deal to sell 12 of its HydroGreen grow systems and associated feed production to Burnett Land & Livestock Ltd. “offers compelling validation” and “significant” long-term benefits for the Vancouver-based company, according to Raymond James analyst Steve Hansen.

“While the immediate financial impact of this agreement is expected to be modest, we still view it as a watershed milestone that carries several positive takeaways, including: 1) it offers compelling validation of HydroGreen’s proprietary, fully-automated feed technology; 2) it comes with large scale medium and long-term order optionality; 3) it sets the stage for a rigorous scientific analysis of the animal health benefits associated with Hydrogreen’s nutritious fresh feed; 4) it demonstrates the capabilities of HydroGreen’s new distribution partner Total Dairy Solutions (TDS); and 5) finally, we believe the collective benefit of these agreement attributes will ultimately help accelerate future HyrdroGreen sales cycles, positioning the company to further disrupt the global animal feed industry,” he said.

Reiterating a “strong buy” rating, Mr. Hansen, currently the lone analyst on the Street covering the stock, raised his target to $2.50 from $2.25.

“We continue to believe Cubic is poised to demonstrate outsized revenue growth over the next several years, largely underpinned by the firm’s proprietary portfolio of automated growing systems (Fresh & HydroGreen), robust backlog, accomplished management team, and accelerating sales momentum,” he said.


PyroGenesis Canada Inc. (PYR-T) is “a true environmental theme pure play,” according to LodeRock Research analyst Greg MacDonald, who expects ESG themes to “dominate investor attention” moving forward.

In a research report released Wednesday, he initiated coverage of Montreal-based company, emphasizing its “commercial solutions that can make it a market leader in four industrial verticals.”

“PYR is a concept stock with exposure to multiple structural themes,” said Mr. MacDonald. “PyroGenesis has taken years to build its technology and credibility, although is in the early stages of commercializing its products with multi-billion dollar clients. It therefore should be valued more on market potential than current results. We believe the company can take meaningful share of addressable markets collectively worth more than $13-billion, with upside on new markets as plasma tech commercialization evolves. Given certain margin and share assumptions this could support an equity value of more than $15 per share. Investors should expect volatility, though also support from near term operating announcements. Considering risk and reward inputs we are constructive on PYR.”

The analyst did not specify a rating or target price for its shares.


In other analyst actions:

* UBS analyst Jay Sole upgraded Gildan Activewear Inc. (GIL-T) to “buy” from “neutral”

* Scotia Capital analyst Ovais Habib raised his First Majestic Silver Corp. (AG-N, FR-T) target to US$13 from US$11.25, keeping a “sector perform” rating. The average is US$17.70.

* Scotia’s Konark Gupta increased his target for Chorus Aviation Inc. (CHR-T) to $5 from $4.75 with a “sector perform” recommendation. The average is $5.44.

* TD Securities analyst Sean Steuart cut his Cascades Inc. (CAS-T) target to $17.50 from $18, reiterating a “hold” recommendation. The average on the Street is $19.57.

* TD Securities’ Greg Barnes raised his Ivanhoe Mines Ltd. (IVN-T) target to $9.50 from $9 with a “buy” rating. The average is $8.94.

* National Bank Financial analyst Adam Shine increased his target for Cogeco Communications Inc. (CCA-T) to $130 from $126 with an “outperform” rating. The average is $125.10.

* National Bank’s Vishal Shreehar raised his MTY Food Group Inc. (MTY-T) target to $55 from $52, keeping a “sector perform” recommendation. The average is $54.88.

* Berenberg analyst Jonathan Guy cut his target for Endeavour Mining Corp. (EDV-T) to $42 from $49 with a “buy” rating. The average is currently $45.64.

* Mr. Guy cut his Yamana Gold Inc. (AUY-N, YRI-T) target to US$7 from US$8.40 with a “buy” recommendation. The average is $7.06.

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