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

Pointing to a favourable risk/reward setup, CIBC World Markets analyst Kevin Chiang upgraded Canadian National Railway Co. (CNR-T) to “outperformer” from “neutral” on Wednesday, emphasizing its valuation has taken a big hit” and it now trades at a historically wide discount to both Canadian Pacific Railway Ltd. (CP-T) and the S&P 500.

“CN’s forward P/E [price-to-earnings] multiple has taken a big hit over the past five weeks, having contracted almost 3 points, and is now trading at 19 times,” he said. “We view this as a good entry point. First, looking at the spread between CN and CP, this has averaged 0.34 (CN premium) over the past decade with CP currently trading at 22 times forward P/E. The current spread between these two names now sits at over 2 standard deviations. Second, a good floor valuation for CN has been the S&P 500, and over the past 10 years CN has traded at an average premium to the market of 1.38 points on a forward P/E basis. Currently, CN is trading below the S&P 500 again, highlighting that the company’s current valuation is detached from the underlying fundamentals. This discount is also at over 2 standard deviations. Please refer to the exhibits herein, highlighting the historical valuation relationship between CN, CP and the S&P 500, as well as comparing the forward P/E between CN and the S&P 500.”

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Though he acknowledged CN is assuming “a lot” of financial risk through its proposed acquisition of Kansas City Southern (KSU-N), Mr. Chiang thinks the recent decline in its equity value “more than reflects this.”

“CN’s market cap is down over US$9-billion since April 19, highlighting a disconnect between how much CN’s equity value has been hit relative to the financial risk it is taking,” he said. “As such, if CN’s voting trust application is denied, the financial hit has already been more than reflected in the decline in its market cap. As well, it will be the case that bad news is good news as risk arb investors will need to cover their CN short positions. Conversely, we believe any additional risk arb pressure from CN getting its voting trust approved has been mostly priced in.”

The analyst maintained a target of $146 for CN. The average on the Street is $149.22, according to Refinitiv data.


IA Capital Markets’ Elias Foscolos sees “potential upside and limited downside” in Inter Pipeline Ltd. (IPL-T) as the expiration of Brookfield Infrastructure Partners LP’s (BIP.UN-T) bid approaches.

With that view, the analyst upgraded his rating for its shares to “speculative buy” from “hold” on Wednesday ahead of the June 10 deadline.

“We believe potential outcomes fall under three broad scenarios: 1) BIP acquires IPL, 2) IPL surfaces an alternative option, and 3) IPL’s shareholders just say ‘no’ to BIP,” said Mr. Foscolos. “Under Scenario 1, we believe the probability that shareholders accept BIP’s current $16.50/share offer is remote and that an increased offer in the $19.00-20.00 per share range is more likely. Under Scenario 2, potential alternatives could include an en bloc sale to a third party, which we believe is unlikely, as well as partial monetizations of certain assets to enhance shareholder value. We believe a partial sale of the Oil Sands Transportation (OST) business would move the needle the most on valuation.”

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If Brookfield’s offer is increased, Mr. Foscolos said he sees “modest” upside, which he thinks is “significant” on an annualized basis.

Conversely, if a alternative does not emerge, he expects short-term downward pressure on Inter shares, however he sees “significant appreciation within a year when the HPC commences operation.

“Any other scenario such as a partial sale of the HPC, the OST business, or another asset would likely add modest upside,” he added.

Mr. Foscolos maintained a target of $19.50 for Inter shares. The average on the Street is $17.66, according to Refinitiv data.

“Since BIP announced the offer, IPL has (a) initiated a strategic review process, (b) delivered solid Q1/21 results underpinned by strong NGL frac spreads, which should continue into 2021, and (c) provided additional details regarding the HPC, including an updated capital cost estimate and EBITDA guidance. Finally, stock prices in the sector have sharply rebounded, with IPL underperforming peers,” he said.


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In a separate report, Mr. Foscolos expressed increased confidence in Superior Plus Corp. (SPB-T) following its 2021 Investor Day event.

On Monday, the Toronto-based company announced it is targeting annual earnings before interest, taxes, depreciation and amortization (EBITDA) of $700-$750-million by 2026, driven by its tuck-in acquisition strategy, which is expected to total $1.9-billion and result in $250-million in annual EBITDA.

“We believe it is possible to achieve $725-million in EBITDA by 2026,” said Mr. Foscolos. “To achieve this level of growth without issuing common equity is possible but it depends on three key variables including acquisition timing, acquisition multiples paid, and synergy capture, among other factors.”

Maintaining a “hold” rating for Superior Plus shares, he raised his target to $16 from $15.50, exceeding the $15.65 average.

“Investor day solidified our outlook and as a result, we have increased our long-term EBITDA per share CAGR,” said Mr. Foscolos.

Elsewhere, Canaccord Genuity analyst John Bereznicki increased his target to $16 from $15.50 also with a “hold” rating.

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“Superior remains focused on consolidating a fragmented U.S. market, with an emphasis on small targets within its existing footprint,” he said. “Superior also believes free cash flow growth and existing liquidity leave it well positioned to fund this plan without the need for dilutive equity. While we believe there may have been some market disappointment that Superior did not formally raise its 2021 EBITDA guidance or emphasize dividend growth, we view its business plan as ambitious but achievable.”


Citing a continued improvement in dairy fundamentals and the expected announcement of its global strategic plan on June 3, Desjardins Securities analyst Chris Li expressed greater confidence in Saputo Inc.’s (SAP-T) earnings outlook.

After raising his financial forecast by 5-6 per cent through fiscal 2023, he now thinks the Montreal-based company offers the highest upside potential among consumer staples stocks in his coverage universe, prompting him to raise his rating to “buy” from “hold.”

“Dairy fundamentals continue to improve, mainly driven by a recovery in foodservice demand (50 per cent of U.S. business), greater cheese price stability, strong demand signals from the Global Dairy Trade index and positive dry whey fundamentals. Year-ago comps get easier this quarter (4Q FY21),” said Mr. Li.

He sees the announcement of Saputo’s long-term initiatives alongside its fourth-quarter results as a potential catalyst for its shares, particularly if the strategic plan provides greater confidence in ability to achieve “attractive” growth.

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“While SAP has been vague on what it will disclose, we expect the focus to be on long-term revenue and EBITDA growth initiatives, including: (1) One USA (combination of the USA Cheese and Dairy Foods divisions last year); (2) market share gains in value-added products; (3) dairy alternative opportunities; (4) new by-product/ingredients opportunities; and (5) M&A outlook,” the analyst said. “SAP will likely provide some long-term financial targets on revenue growth, EBITDA margins, capex and ROIC.”

With his increased revenue and earnings expectations, Mr. Li raised his target for Saputo shares to $45 from $42, pointing to “accelerating earnings growth and SAP’s solid financial position, with flexibility for M&A.” The average on the Street is $41.88.

“Where could we be wrong? Despite significantly growing its business through large acquisitions, SAP’s earnings have been stagnant in the past several years, hampered by industry challenges that were largely out of its control,” he said. “While we believe SAP is well-positioned to grow earnings again, unforeseen headwinds could disrupt growth. Competition remains intense in certain segments (ie oversupply of mozzarella) and certain end-user segments are under structural pressures (ie infant formula).”


Stelco Holdings Inc. (STLC-T) is poised to benefit from ongoing cost reduction initiatives and “strong” fundamentals in the North American steel industry, according to Stifel analyst Anoop Prihar.

Seeing it “well positioned to compete,” he initiated coverage with a “buy” recommendation on Wednesday.

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Mr. Prihar is projecting 2021 adjusted EBITDA of $1.614-billion in 2021, up from $75-million, benefitting from improved prices, costs and production.

“Our STLC investment thesis is three-fold: 1) The North American macro-environment will continue to support robust steel prices,” he said. “The economic stimulus programs implemented in Canada and the US are having the desired effects, with increased economic activity seen in the automotive and construction sectors. This, along with ongoing trade tariffs in the U.S. and the prospect of a Biden infrastructure plan, are expected to support steel prices. 2) The strength in steel prices will likely be aided by the demand for scrap. With approximately 70 per cent of U.S. steel being produced using EAF’s and with scrap metal expected to account for upward of 70-75 per cent of an EAF’s operating cost, the ongoing strength in scrap prices is expected to support higher steel prices. 3) STLC management is focused on lowering cost and optimizing production. Through a series of initiatives, STLC management expects to generate approximately $48 per ton of permanent cost savings, a significant portion of which has already been realized. STLC has also expanded its product offering to include higher value ‘fully-processed’ cold roll steel and pig iron. The company has also secured supply contracts for iron ore and metallurgical coal (which are expected to account for more than 50 per cent of input cost) that provide long term access to these materials at competitive rates.”

He set a Street-high target for Stelco shares of $48, implying a 42.8-per-cent total potential return. The average is $41.86.


In the wake of a “solid” first quarter, Desjardins Securities analyst Gary Ho expects the momentum to continue for Dominion Lending Centres Inc. (DLCG-X).

On Tuesday after the bell, the Vancouver-based corporation reported core business EBITDA of $8.4-million, exceeding both Mr. Ho’s $5.3-million forecast and the consensus estimate on the Street of $6.6-million, driven by 51-per-cent year-over-year funded mortgage growth (to $13.4-billion) and “healthy” adjusted margin of 60.3 per cent (up from 47.8 per cent).

“Given robust housing activity, we raised our 2Q funded mortgage volume estimate to $24.1-billion (up from $15.6-billion),” the analyst said. “Furthermore, we estimate only a small portion of recent reflagging efforts (an increase of 8 per cent to last 12-month funded mortgage volume) flowed through in 1Q results, benefiting future quarters.”

Raising his revenue and earnings expectations, Mr. Ho also increased his target for Dominion shares to $5.75 from $5.25, maintaining a “buy” rating. The average on the Street is $5.63.

“Our positive thesis is predicated on: (1) robust housing activity bodes well for DLC in the near term; (2) reflagging efforts to add new brokers could bolster DLC growth in 2021; (3) a potential fintech play with Newton/Velocity, a business which is already EBITDA and FCF positive; and (4) the monetization of non-core assets could reduce leverage,” he said.


Garibaldi Resources Corp. (GGI-X) has the potential to become “a promising acquisition candidate by a larger mining concern as the mineral potential of its mining claims becomes more apparent,” according to Noble Capital Markets analyst Mark Reichman.

Touting the “significant” discoveries from its exploration program, he initiated coverage of the Vancouver-based company with an “outperform” rating.

“We believe the company offers an opportunity to unlock value through a corporate restructuring,” he said. “In addition to monetizing its Mexico properties in some fashion, management may at some point consider separating its base and precious metals claims into two separate companies to enhance investor appeal and allow each business to fund projects on a stand-alone basis. Polymetallic stories are often underappreciated given that metals investors often focus on base or precious metals, with a new group emerging that is focused on battery and clean energy metal.”

Mr. Reichman, currently the lone analysts on the Street covering the stock, set a $1.10 target.


In other analyst actions:

* Deutsche Bank analyst Abhinandan Agarwal upgraded Teck Resources Ltd. (TECK-N, TECK.B-T) to “buy” from “hold” after assuming coverage with a US$30 target. The average is $33.29.

* Deutsche Bank’s Liam Fitzpatrick downgraded First Quantum Minerals Ltd. (FM-T) to “hold” from “buy” with a $33 target. The average is currently $33.78.

* JP Morgan analyst Arun Jayaram raised Ovintiv Inc. (OVV-N, OVV-T) to “overweight” from “neutral” with a US$32 target, rising from US$28 and above the US$29.78 average.

* TD Securities analyst Aaron MacNeil upgraded Shawcor Ltd. (SCL-T) to “buy” from “hold” with an $8 target, up from $6.50 but below the $8.18 average.

“Given the cyclicality of Linamar’s businesses (auto parts, Skyjack, MacDon), we have assessed the potential upside scenario for Linamar’s stock if all three businesses are able to reach peak earnings in 2022,” said Mr. Sklar. “Based on our assumptions, we believe Linamar could generate peak EBITDA of $1.366-billion in 2022. Although our target multiple is based on 5 times EV/EBITDA, we believe investors could attribute a 6 times EV/EBITDA multiple (return of 69 per cent to Linamar’s stock if all three businesses were to benefit from the cyclical tailwinds of its respective industries and generate peak earnings.”

* RBC Dominion Securities analyst Matt Logan raised his H&R Real Estate Investment Trust (HR.UN-T) target by $1 to $18, exceeding the $17.29 average, with a “sector perform” recommendation.

“Looking beyond the expected near-term softness in H&R REIT’s recent Q1 results, we see a number of potential positive catalysts for H&R’s units, including: 1) the lease-up of several large developments; 2) the sale or monetization of The Bow; and, 3) the creation of at least one new public entity — potentially in 2021,” said Mr. Logan. “We also see a potential catch-up trade, as H&R’s total return has lagged the S&P/TSX Capped REIT Index by 14pp since the Feb-2020 pre-pandemic peak.”

* National Bank Financial analyst Cameron Doerksen raised his TFI International Inc. (TFII-T) target to $129 from $115 with an “outperform” rating. The average is $108.60.

* BMO Nesbitt Burns analyst Peter Sklar cut his target for Linamar Corp. (LNR-T) to $98 from $100 with an “outperform” rating. The average is $95.40.

* Ahead of the Thursday release of its first-quarter results, Canaccord Genuity analyst Aravinda Galappatthige trimmed his target for shares of EMERGE Commerce Ltd. (ECOM-X) to $1.60 from $1.75 with a “buy” rating. The average is $2.25.

“Q1/21 will be EMERGE’s first quarter following the acquisition of truLOCAL,” he said. “We believe truLOCAL is a highly prospective asset for EMERGE with the potential to grow strongly over the upcoming years as it increases penetration in existing markets and expands into new territories. Recall on the Q4/20 call, management disclosed sharper-than-expected growth for truLOCAL in Q1/21. Given its recently added footprint in Quebec and extended lockdowns across Canada likely assisting revenue trends, we would be looking for further colour on how truLOCAL is trending. We note truLOCAL represents two-thirds of EMERGE’s revenue and the majority of underlying EBITDA.”

* TD Securities analyst Aaron Bikoski raised his target for Kelt Exploration Ltd. (KEL-T) to $3.75 from $3.50 with a “buy” rating, while Stifel’s Robert Fitzmartyn raised his target to $4.25 from $4 also with a “buy” recommendation. The average is $4.01.

“Kelt has accelerated investment originally planned for 2022e into 2021e by increasing its capital expenditure program to $150-million from $120-million to capitalize on current commodity prices,” said Mr. Fitzmartyn. “This increase is likely supported by the market given the maintenance of the company’s current financial flexibility and strong portfolio of opportunities.”

* Haywood Securities analyst Neal Gilmer increased his target for Chicago-based Verano Holdings Corp. (VRNO-CN) to $38.50 from $36, keeping a “buy” rating. The average is currently $40.50.

“Verano continues to execute on its objectives and strong growth opportunities through H2/21 and into 2022. In addition, we would expect the Company to continue to pursue and evaluate attractive M&A opportunities going forward,” he said.

* Stifel analyst Maggie MacDougall raised her target for Storagevault Canada Inc. (SVI-X) to $5.70 from $5, maintaining a “buy” rating. The average is $5.21.

“On Tuesday we had the opportunity to accompany SVI CEO Mr. Steve Scott on investor meetings,” she said. “We came away with strong conviction that SVI has a good year ahead, with organic growth tailwinds, margin growth and further M&A all on the table. Given considerable pricing power, short duration customer leases, low fixed rates on 90-per-cent of its debt and the potential for a further growth tailwind as immigration in Canada resumes, we have increased our target.”

* Raymond James analyst Brad Sturges bumped up his target for BSR Real Estate Investment Trust (HOM.U-T) to US$14 from US$13.50, maintaining a “strong buy” rating. The average is US$13.15.

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