Wednesday’s analyst upgrades and downgrades

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

The recent rise in bond yields has been reflected in a sell-off in Power sector, particularly renewable independent producers, according to iA Capital Markets analyst Naji Baydoun.

In a research report released Wednesday, he adjusted his valuation model for the sector to reflect the impact of “a potentially less accommodative monetary policy stance going forward,” leading him to trim his target prices for several stocks in his coverage universe.

“Rising rates have a broadly negative impact on the sector as (1) funds flow out of interest rate sensitive equities, and (2) valuation multiples compress (negative repercussions for cost of, and access to, capital),” he said.

“But bright spots remain. As noted in our 2021 outlook, we were more cautious going into the year as relative valuation multiples were elevated. The recent pullback in share prices has taken some of the excess out of valuations, and represents a buying opportunity for long-term investors, in our view. We continue to expect more pronounced return dispersions in 2021 compared to 2020, and highlight companies that we believe offer the most compelling potential risk-adjusted returns to shareholders.”

Seeing the near-term growth outlook largely priced into its shares, Mr. Baydoun downgraded Algonquin Power & Utilities Corp. (AQN-T, AQN-N) to “hold” from “buy,” awaiting a “better entry point or further strategic developments before accumulating the shares.”

His target slid to $21 from $23. The average target on the Street is $21.25.

“AQN offers investors a well-balanced mix of growth and income with (1) a diversified business model (regulated utilities & non-regulated power), (2) robust medium-term growth (8-10 per cent per year EPS and FCF/share growth through 2025), (3) attractive dividend profile (4-per-cent yield, 10 per cent per year growth through 2021, and 80-90-per-cent long-term Adj. EPS payout target), and (4) upside from additional growth initiatives (including M&A; not included in our estimates/valuation),” he said. “Despite unchanged long-term growth expectations, the relative growth gap between AQN and peers has narrowed (8-10 per cent per year EPS growth expected for AQN [unchanged] vs. 5-6 per cent per year for Canadian and U.S. regulated utility peers [compared to 4-5 per cent per year previously]). AQN is currently trading at 19 times FY2E P/E, which is (1) in line with its historical FY2E P/E average, and (2) at an 1-2 times premium to peers (in line with its historical premium, despite the narrowing growth gap).”

Mr. Baydoun trimmed his target for Northland Power Inc. (NPI-T), one of his two top picks, to $50 from $55 from with a “strong buy” rating. The average is $50.73.

“We believe that NPI’s significant leverage to the offshore wind theme will support strong long-term growth. The Company’s growth initiatives in onshore renewables should also support modest near-term growth, and the recent equity financing positions NPI extremely well to execute on its growth strategy,” he said.

The analyst maintained a US$60 target and “strong buy” recommendation for his other top pick, Brookfield Infrastructure Partners LP (BIP.UN-T, BIP-N). The average is US$61.33.

“We expect strong operational and financial performance from BIP in 2021-22 as the Company benefits from a strong economic recovery, and see the potential for growth to accelerate as capital recycling initiatives support further M&A on a largely self-funded basis,” he said.

Mr. Baydoun also made these target changes:

• Boralex Inc. (BLX-T, “buy”) to $48 from $53. The average is $50.60.
• Brookfield Renewable Partners LP (BEP.UN-T/BEP-N, “buy”) to US$48 from US$50. Average: US$42.97.
• H20 Innovation Inc. (HEO-X, “buy”) to $3.50 from $3.70. Average: $3.64.
• Innergex Renewable Energy Inc. (INE-T, “buy”) to $24 from $27. Average: $25.20.
• Polaris Infrastructure Inc. (PIF-T, “buy”) to $25 from $27.50. Average: $27.70.
• TransAlta Renewables Inc. (RNW-T, “hold”) to $20 from $22. Average: $20.19.

“Performance in the Power sector has been underwhelming so far in 2021, with most equities posting negative returns on a year-to-date basis (with exceptions), reflecting a shift in investor expectations following the recent upward move in interest rates; we note that this negative performance is despite (1) the resiliency of companies’ business models(supported by contracted cash flows, with no material impacts from the COVID-19 pandemic), (2) secular tailwinds that support long-term growth (accelerating global government and corporate decarbonization objectives), and (3) continued strong inflows into sustainable funds,” he said. “Meanwhile, equities in our Infrastructure coverage universe are faring better than IPPs, primarily due to (1) expectations for accelerating near-term growth (supported by a strong economic outlook), (2) weaker relative performance in 2020, and (3) their capital structure (lower sensitivity to interest rate movements compared with IPPs). Overall, companies across our coverage universe continue to exhibit solid underlying fundamentals and strong growth outlooks; as in past instances of sharp stock price declines, we believe that the current pullback in the Power sector represents an interesting buying opportunity for longer-term investors.”

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Desjardins Securities analyst Bill Cabel also adjusted his valuation model for Power and Utility stocks to align with the firm’s 12-month U.S. 10-year Treasury yield forecast of 2 per cent.

“As a result, we have increased our discount rates across the board by 50 basis points, which in our view should enable investors to focus on accelerating decarbonization and growth,” he said. “We remain extremely bullish on renewable energy, and while we believe all of our stocks should benefit from the global push to decarbonization.”

“Exiting 1Q21 reporting, we continue to favour the same three names — AQN, BLX and NPI,” he said. “However, in recent market action—pulling back on rate fears and the lack of perceived participation by IPPs in the reopening trade, which has shifted the focus away from the continued firming of the total addressable market and opportunities — NPI has emerged as a clear Top Pick, in our opinion.”

With that view, Mr. Cabel raised Northland Power Inc. (NPI-T) to a “top pick” rating from “buy,” citing his bullishness on offshore wind and its growth outlook. His target slid to $55 from $61. The average is $50.73.

“We remain extremely bullish on offshore wind as countries announce and increase offshore wind targets,” he said. “We believe it is a key technology for decarbonization with a lot of runway for future technological advancements and cost savings. We expect NPI to invest $10–14-billion building out 4–5GW of offshore wind that will come online by the mid–back half of the decade, which should more than double its EBITDA to $2.5-billion-plus.”

The analyst also made these target changes:

• Algonquin Power & Utilities Corp. (AQN-T, AQN-N, “buy”) to US$19 from US$20. Average: US$17.60.
• Brookfield Renewable Partners LP (BEP.UN-T, BEP-N, “hold”) to $53 from $61. Average: $53.11.
• Boralex Inc. (BLX-T, “buy”) to $50 from $54. Average: $50.60.
• Innergex Renewable Energy Inc. (INE-T, “hold”) to $23 from $25. Average: $25.20.
• TransAlta Renewables Inc. (RNW-T, “hold”) to $20 from $22. Average: $20.19.

“Total addressable market is massive, continues to grow and is the driver of why we believe investors need to own these names,” said Mr. Cabel. “The demand and global drive for renewable energy has never been stronger, in our view, with a huge focus on climate change and decarbonization. We have heard warnings from the UN that current efforts to build out renewable energy and other decarbonization programs are still not enough to prevent global warming—more needs to be done to prevent “catastrophic” global warming. We believe a number of global leaders heard the warning and understand that a greater emphasis on fighting climate change is needed, which led to many of them increasing their decarbonization targets at the recent Leaders Summit on Climate.”

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Though he sees a significant opportunity for growth when retail stores, particularly in Ontario, reopen from pandemic-related closures, Raymond James analyst Rahul Sarugaser lowered his rating for Rubicon Organics Inc. (ROMJ-X) after its first-quarter results fell short of expectations.

Before the bell on Tuesday, the Vancouver-based company reported revenue of $4.1-million, narrowly below both the analyst’s $4.3-million estimate and the consensus projection on the Street of $4.8-million. An EBITDA loss of $3.4-million missed forecasts (losses of $1.0-million and $1.5-million, respectively) by a wider margin.

“The Canadian cannabis sector’s 1Q21 (Jan. 1 to Mar. 31, 2021) sales were attenuated by significant COVID-19 retail store closures in many of Canada’s most important provincial cannabis markets,” said Mr. Sarugaser. “Total Canadian adult-use cannabis sales dropped 11 per cent between Dec. 2020 and Feb. 2021, then recovered through Mar. and Apr. 2021. Concomitantly, ROMJ’s revenue declined 15 per cent quarter-over-quarter, which does not come as a surprise given our view that retail shutdowns affect premium quality cannabis products more than those focused on deep value (see below). Given that Canadian lockdowns have persisted well into 2Q21, we anticipate ROMJ’s sales continuing to be light during the next 1-2 quarters; ROMJ management has proactively undergone some restructuring—achieving $2.6-million in annualized savings; realized 3Q21 onward—in light of this uncertainty and has pushed off previous guidance of achieving positive EBITDA in 2Q21 to 3Q21 (we estimate 4Q21, with the timing of store-openings being the x-factor).”

Mr. Sarugaser emphasized lockdowns have hurt results, however the issuance of new retail licenses has not slowed recently, noting 175 of 675 Ontario stores have yet to open their doors.

“There will be approximately 500 stores in ON that will shift from holding zero inventory to being fully stocked,” he said. “500 stores that have never ordered cannabis inventory before.”

“The bolus of orders from these brand-new retailers (via the OCS) will, in our view, be gigantic. Should ON re-open retail shopping in mid-June, the larger LPs—presumably receiving large orders — would need to begin their inventory packing now, risking having their products age out and being returned/rejected. Smaller, more agile LPs like ROMJ have the capacity to turn orders around quickly, and, importantly, to ensure the quality and freshness of its products. With so many new retail doors opening during the next few quarters in ON alone, a quality and fulfillment-conscious company like ROMJ that can nimbly serve the country’s largest cannabis market — during what will surely be a logistical nightmare for the OCS — has before it a gigantic opportunity to seize market share. We believe ROMJ is situated well to grab an outsize share of this oncoming sales bolus.”

Despite also pointed to its continued market share leadership of the premium cannabis segment, Mr. Sarugaser downgraded Rubicon shares to “outperform” from “strong buy” until lockdown measures ease. His target for its shares fell by $1 to $5, remaining higher than the $4.50 average on the Street.

Elsewhere, Desjardins Securities’ John Chu cut his target to $4.50 from $4.75, maintaining a “buy” rating.

“Despite soft 1Q sales (down 14 per cent quarter-over-quarter), ROMJ fared much better than most of its peers (down 20–30 per cent quarter-over-quarter), which we believe reflects its focus on the premium/super-premium segment as well as its high-quality products,” said Mr. Chu. “While we expect industry headwinds to continue to weigh on the sector, ROMJ should be better positioned to weather the storm and in a stronger position when the market rebounds.”

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After a “remarkable” run, CIBC World Markets analyst John Zamparo downgraded Alcanna Inc. (CLIQ-T) to “neutral” from “outperformer,” predicting “potential noise ahead” and thinking its valuation limits its upside.

“We see only modest upside in the medium term,” he said. “We forecast a year-over-year decline in Liquor EBITDA in 2022 (albeit from attractive levels). Furthermore, Cannabis is undergoing a serious overhaul that should result in a stronger business, but will require meaningful investment, and CLIQ’s majority stake may mean noisy results. Finally, the stock has already captured the benefit of several catalysts, including the SIB and accretive sale of low-volume stores, and few may remain in 2021. Though we believe the business is in great shape and management deserves credit for its strategy, we see limited upside in the stock for now.”

Mr. Zamparo trimmed his target to $7.75, down from $8.75 and below the $9.75 average.

“Since we upgraded CLIQ to Outperformer just under a year ago, it has outpaced the Canadian consumer staples index, up 125 per cent vs. 11 per cent,” he said. “We have moderated our EBITDA forecasts and shifted to 2022 as our basis for valuation, while maintaining our 10 times EBITDA multiple. We concede there is potential for Nova Cannabis to attain a valuation closer to peers, but for now we value NOVC at its market price.”

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Credit Suisse analyst Fahad Tariq raised his target prices for a group of gold stocks in his coverage universe.

His changes include:

• Agnico Eagle Mines Ltd. (AEM-N/AEM-T, “outperform”) to US$80 from US$76. The average on the Street is US$81.17.
• Barrick Gold Corp. (GOLD-N/ABX-T, “outperform”) to US$28 from US$25. Average: US$28.97.
• Centerra Gold Inc. (CG-T, “neutral”) to $9.50 from $9. Average: $9.93.
• Eldorado Gold Corp. (EGO-N/ELD-T, “underperform”) to US$12 from US$12.25. Average: US$13.50.
• Franco-Nevada Corp. (FNV-N/FNV-T, “neutral”) to US$145 from US$130. Average: US$168.57.
• Iamgold Corp. (IAG-N/IMG-T, “neutral”) to US$3.75 from US$3.50. Average: US$4.05.
• Kinross Gold Corp. (KGC-N/K-T, “neutral”) to US$8.50 from US$8.25. Average: US$10.93.
• Kirkland Lake Gold Ltd. (KL-N/KL-T, “neutral”) to US$44 from US$40. Average: US$42.67.
• Wheaton Precious Metals Corp. (WPM-T, “neutral”) to $60 from $55. Average: $59.32.
• Yamana Gold Inc. (AUY-N/YRI-T, “outperform”) to US$6.25 from US$6. Average: US$6.86.

Elsewhere, CIBC’s Anita Soni cut her Centerra Gold Inc. target to $9 from $10 with an “underperformer” rating and Kinross Gold Corp. to US$11.25 from US$11.50 with an “outperformer” recommendation.

Scotia Capital analyst Trevor Turnbul raised his Centerra target to $10.50 from $8 with a “sector perform” rating.

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Scotia Capital analyst Benoit Laprade made a series of his target adjustments for a group of forest and wood products stocks after the firm updates its commodity price and FX forecasts to reflect second-quarter prices as well as “recent market developments and the latest outlook.”

“. The key commodity price changes in the quarter are stronger-than-expected prices virtually across the board, including - again - lumber (both SYP and W.SPF) and OSB,” he said.

They include:

• Canfor Corp. (CFP-T, “sector outperform”) to $42 from $40. The average on the Street is $41.83.
• Canfor Pulp Products Inc. (CFX-T, “sector perform”) to $11 from $10.50. Average: $12.
• Cascades Inc. (CAS-T, “sector perform”) to $18.50 from $18.50. Average: $17.93.
• Western Forest Products Inc. (WEF-T, “sector perform”) to $2.75 from $2.50. Average: $2.78.
• West Fraser Timber Co. Ltd. (WFG-T, “sector outperform”) to $130 from $128. Average: $137.13.

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With the Tuesday after-market announcement of the completion of further consolidation of NEBC Montney assets, a group of equity analysts raised their targets for shares of Tourmaline Oil Corp. (TOU-T) .

They include:

* iA Capital Markets analyst Elias Foscolos to $37 from $35 with a “strong buy” rating. The average target on the Street is $36.03.

“As its Montney consolidation continues, TOU continues to exceed guidance and has updated its five-year plan. As such, we have adjusted 2021 and 2022 production and capex to align with the new plan, and as a result, we have increased our target,” said Mr. Foscolos.

* Raymond James’ Chris Cox to $33 from $32 with an “outperform” rating.

“The furtherance of Tourmaline’s consolidation activities within the NEBC Montney remain onpoint with the strategic moves the Company has made in recent years. In particular, we are encouraged by the improved near-term free cash flow profile and enhanced longer-term growth opportunities provided by the portfolio of transactions announced with this release, and the strategy to synchronize longer-term growth plans to line up with the start-up of LNG Canada,” said Mr. Cox.

* Canaccord Genuity’s Anthony Petrucci to $36 from $34 with a “buy” rating.

“In our view, these transactions further strengthen TOU’s dominant position in the natural gas complex in Canada. With the release, the company updated its five-year plan, which included a bump in spending and production expectations for this year. Despite share price strength over the last year, we believe TOU remains significantly undervalued,” said Mr. Petrucci.

* Stifel’s Robert Fitzmartyn to $42.25 from $38.75 with a “buy” rating.

“We expect market estimates to increase,” he said.

* Scotia Capital’s Cameron Bean to $42 from $41 with a “sector outperform” rating.

* BMO Nesbitt Burns’ Randy Ollenberger to $38 from $33 with an “outperform” rating.

* TD Securities’ Aaron Bilkoski to $35 from $34 with a “buy” rating.

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While Fairfax India Holdings Corp.’s (FIH.U-T) businesses continue to be disrupted by the impact of the COVID-19 pandemic, RBC Dominion Securities analyst Mark Dwelle sees them “well positioned for the upturn once vaccine distribution becomes more widely available in India and economic growth rebounds.”

Saying his long-term thesis remains “intact,” Mr. Dwelle raised his valuation for Fairfax India to reflect “strong appreciation within its financial-oriented investments and higher rebound assumptions from several of its other key businesses.”

In the wake of the April 30 release of first-quarter results that exceeded his expectations, Mr. Dwelle raised his 2021 earnings per share estimate to $1.42 from a loss of 40 cents to reflect that upside.

“Our new NAV estimate is significantly higher and reflects strong market appreciation in its IIFL securities as well as higher assumed valuations for key units like BIAL and Sanmar Chemicals,” he said. “Our NAV calculation uses a blend of company valuation data, discounted cash flow analysis, and market assumptions to arrive at a current value.”

Keeping an “outperform” rating for its shares, he raised his target for to US$16 from US$14 with an “outperform” rating. The average is US$17.50.

“Fairfax India Holdings Corporation is an investment holding company which seeks to acquire attractive stakes in well-positioned Indian businesses with good management and the opportunity to benefit from various reforms underway within India,” said Mr. Dwelle. “Management has over 20 years of experience in investing in India and has built a local network to source special situations that can benefit from Fairfax’s long-term investment approach. The opportunities acquired so far reflect a range of industries from chemicals and infrastructure to finance and food supplies and all share the attributes of being established businesses positioned to benefit from long-term growth within the Indian market. Our Outperform, Spec Risk rating reflects management’s skill in identifying and acquiring such well-positioned assets as well as our view that India can be an attractive emerging market over the long term.”

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In other analyst actions:

* Stifel initiated coverage of Endeavour Mining Corp. (EDV-T) with a “buy” rating and $45 target. The average on the Street is $43.91.

* In response to the blockages in Colombia, Stifel’s Cody Kwong cut his target for Parex Resources Inc. (PXT-T) by $1 to $32, maintaining a “buy” rating. The average is $30.39.

“Last week production averaged 31,000 boe/d but has since quickly recovered to 40,000 boe/d as progress in lifting blockades and restrictions unfolds and capital activities are allowed to proceed,” he said. “The net result of this impact is a 6-per-cent reduction to our 2021 production outlook and an 8-per-cent decrease in AFFO, while we have chosen to keep our 2022 view unchanged for now.”

* Ahead of the release of its fourth-quarter 2021 results on June 29, RBC Dominion Securities analyst Irene Nattel raised her target for Alimentation Couche-Tard Inc. (ATD.B-T) to $56 from $55 with an “outperform” rating. The current average is $47.32.

“Forecasting flat earnings per share year-over-year ... with strong inside store performance, contribution of Circle K HK, and translation tailwind of weaker USD, offset by normalizing U.S. fuel margins and higher opex, notably the impact of rising gas prices on credit card fees,” she said. “Looking further ahead, we remain highly constructive on the outlook, with meaningful earnings torque from the Circle K re-branding and deployment of Fresh Food, Fast not yet evident in financial results and notfully reflected in our forecasts.”

* Raymond James analyst Jeremy McCrea bumped up his target for PrairieSky Royalty Ltd. (PSK-T) to $17.50 from $17, topping the $15.35 average with an “outperform” rating.

“There is no other company quite like PrairieSky in our view,” he said. “Between its extremely low leverage position and its ability to see some of the highest ‘value creation’ in the mid-cap sector (given limited need for capital), there should be considerable long-term comfort for investors.

“The Investor day reinforced this theme, highlighting new plays across its royalty land, its top ranked ESG scorecard and overall, an increasingly optimistic outlook with increased drilling activity and commodity prices. Historically, these attributes would give PSK a premium valuation multiple, however as we highlight within, investor sentiment is among the lowest in the sector at the current moment. Yes, other names have more torque to rising commodity prices, but investor apathy today has them likely missing the long-term sustainability and value creation ability of the company. We believe as drilling activity picks up in future quarters, the dividend is increased (reflective of a historical payout), and/or investors take the time to review the asset play book and vast inventory within its portfolio, better sentiment (and share price) should follow.”

* Raymond James’ Farooq Hamed increased his target for Ivanhoe Mines Ltd. (IVN-T) to $12 from $10 with an “outperform” rating. The average is $9.63.

* CIBC World Markets analyst Todd Coupland initiated coverage of Thinkific Labs Inc. (THNC-T) with an “outperformer” rating and $20 target.

“The use of education as a tool and the rise of the creator economy are powerful secular trends that, we believe, support a multi-year outlook of high-double-digit growth for Thinkific,” he said. “Thinkific has proven itself as a highly efficient and competitive platform that is well positioned to execute and lead in this emerging market. Its durable business model and highly efficient go-to-market generate predictable and recurring revenue, raising confidence in our conservative forecast. With its recent IPO proceeds, Thinkific is investing to drive further growth to scale its business. We expect its competitive position, and this investment, will lead to revenue growth of 67 per cent annually (2021-2023).”

* Mr. Coupland cut his target for Sierra Wireless Inc. (SWIR-Q, SW-T) to US$14 from US$16 with an “underperformer” rating. The average is US$20.89.

“As the company moves to prove out its transition, investors are provided with an opportunity to assess the company’s progress before deciding to invest. We do not recommend buying Sierra’s shares at this time,” he said.

* CIBC’s Cosmos Chiu raised his Mag Silver Corp. (MAG-T) target to $29 from $27, keeping a “neutral” rating. The average is $28.39.

* Scotia Capital analyst George Doumet cut his High Liner Foods Inc. (HLF-T) target to $14 from $14.50, keeping a “sector perform” rating, while BMO’s Jonathan Lamers raised his target to $15 from $14.50 with a “market perform” rating. The average is $16.13.

“High Liner is set to benefit from resurgent foodservice demand, acknowledging demand through the smaller retail channel is now in decline,” said Mr. Lamers.

* BMO Nesbitt Burns analyst Stephen MacLeod raised his Colliers International Group Inc. (CIGI-Q, CIGI-T) target to US$136 from US$132 with an “outperform” rating. The average is US$130.43.

“Near term, Colliers is well-positioned to participate in a post-pandemic global recovery,” said Mr. MacLeod. “Longer term, we expect to see an ambitious five-year plan that will create a more recurring, higher-margin professional services firm over time.”

“We continue to see attractive risk-reward in the stock (our SOTP valuation pushes $126-146+) and believe Colliers will continue to be a multi-year compounder of shareholder value.”

* Canaccord Genuity analyst Matthew Lee trimmed his target for Spark Power Corp. (SPG-T) to $3 from $3.25 with a “speculative buy” rating. The average is $2.63.

“We maintain our Speculative Buy rating given our expectation of accelerating growth and improving margins throughout the year backed by strong underlying growth trends and pent-up demand,” said Mr. Lee.

* JP Morgan analyst Jeremy Tonet raised his target for shares of Pembina Pipeline Corp. (PPL-T) to $44 from $42 with an “overweight” rating. The average is $39.40.

* Mr. Tonet increased his AltaGas Ltd. (ALA-T) target to $25, exceeding the $24.97 average, from $23 with a “neutral” recommendation.