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

RBC Dominion Securities analyst Walter Spracklin sees Stella-Jones Inc. (SJ-T) “very well positioned following significant FCF inflows this past year — and a resultantly strong balance sheet.”

However, he lowered his rating for its shares to “sector perform” from “outperform” in a research note released Wednesday.

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“It’s rare we downgrade a stock that has had such strong results in the past year; however with declining demand and prices in Residential Lumber, as well as reduced guidance and uncertainty around what level normalized EBITDA will decline to, we see lower prospects for an out-sized return going forward,” said Mr. Spracklin.

On Tuesday, shares of the Montreal-based company rose almost 1 per cent on the premarket release of quarterly results. However, management cut its guidance for the next fiscal year due to recent weakness in lumber price, which have dropped almost 65 per cent from their 52-week high in May. It now expects residential lumber sales to grow organically 15-20 per cent year-over-year (versus 45-65 per cent previously).

“We have adjusted our 2021 estimates to reflect the company’s new guidance; and we have reduced our 2022 estimates to reflect our new assumptions regarding the normalized EBITDA level, particularly in Residential Lumber,” the analyst said. “We are now assuming that Residential Lumber declines in 2022 to levels that are 10 per cent above 2019 as our best estimate on the new normal (this is also consistent with the annualized level for H2/21 Residential Lumber implied by management’s lowered guidance).”

With his lowered forecast, Mr. Spracklin cut his target for Stella-Jones shares to $46 from $56. The average target is currently $54.94, according to Refinitiv data.

“Based on the lower implied return, we are reducing our rating on the shares — despite the company’s strong recent fundamentals and solid balance sheet,” he said. “While we were aware that lumber prices had been coming down, we had remained constructive on the stock in anticipation of increased M&A activity. While management has been indicating an imminent deal, we do not believe this will be enough to offset mounting pressure now that we have crested peak-of-cycle demand and pricing trends in Residential Lumber. Accordingly, we expect difficult comps and further risk to guidance revisions to continue to weigh on the shares. Accordingly, we are reducing our weighting.”

Elsewhere, Desjardins Securities analyst Benoit Poirier sees Stella-Jones “well-positioned to unlock value with its M&A strategy” and sees a balance sheet set up to continue to “unlock shareholder value through share buybacks.”

“Management expects to be active with its M&A strategy in the near term, noting that discussions with potential targets have continued to progress since 1Q,” he said. “While SJ remains a disciplined acquirer (typically below 7 times EV/EBITDA — a key driver of value creation), management reiterated that valuation paid is not a hurdle to ongoing discussions. In the past, SJ noted that it could still acquire US$300-million of revenue in the long term (mostly in utility poles, although some opportunities exist in railway ties). Notably, the potential acquisition of Kansas City Southern (KCS) by CN or CP could ultimately open an M&A opportunity for SJ given its strong relationships with both railroads. For the right transaction, management would be ready to leverage its balance sheet to 3.0 times, although we do not believe this will be necessary for management to execute on its current pipeline of opportunities, leaving room for further share buybacks.”

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Mr. Poirier lowered his target for Stella-Jones shares to $59 from $65 with a “buy” recommendation (unchanged).

“SJ’s strong execution throughout the pandemic enabled the company to capitalize on the strong demand for residential lumber to generate solid FCF while improving its balance sheet and solidifying its relationships with key customers— a positive outcome for long-term shareholders,” he said.

Other making target changes include TD Securities’ Michael Tupholme to $57 from $62 with a “buy” rating.

“Although Q2/21 results were well ahead, we see the EBITDA guidance reduction as comparatively more important (forward-looking). Still, considering the recent decline in lumber demand/prices, the guidance reduction is not entirely surprising and was arguably already priced into the stock going into the Q2/21 release. Looking beyond current residential lumber weakness, we continue to like SJ’s medium- to longterm outlook (including potential upside from possible tuck-in acquisitions; not in our forecasts). Further, we see SJ’s valuation as attractive,” said Mr. Tupholme.


Citing an improving M&A environment as well as increased confidence in its growth outlook, RBC Dominion Securities Irene Nattel raised her rating for Neighbourly Pharmacy Inc. (NBLY-T) to “outperform” from “sector perform” following Tuesday’s release of its quarterly results.

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“Approximately 80-90 per cent of forecasted EBITDA growth is generated by M&A,” she said. “Based on conversations with management around pace and magnitude of inbound & outbound M&A calls/discussions, we are revising our base case around M&A to fiscal 2025 from [average 25 locations/$65-million annually] to [35 locations/$100-million annually]. We note that revised forecasts are consistent with our prior upside scenario, which we described in our initiation as ‘highly achievable.’ Having said that, we remind investors that store acquisition count in any given year could come in above/below expectations given the lumpiness associated with ‘multiple-unit chains’; Revised expectations implicitly include one such transaction annually over our forecast horizon. We also point out that based on internally generated cash flow and implied Adj. Net Debt/EBITDA less than 1.5 times post IPO, NBLY should be able to achieve forecasts without incremental equity.”

Ms. Nattel stressed “Neighbourly is no stranger to closing and integrating multi-unit deals, including Remedy Holdings with 14 locations (2019), Lovell Drugs with 12 locations (2020), Forewest Holdings with 35 locations(2020), and the most recent acquisition of 13 stores from Medical Pharmacy Group Limited (April 2021).”

With that view, the analyst now sees an EBITDA compound annual growth rate for fiscal 2022 through 2025 of 29 per cent, up 7 per cent from her previous forecast.

Following increases to her revenue and earnings expectations through 2024, Ms. Nattel raised her target for Neighbourly shares to $34 from $32. The average is $30.92.

“We raised our valuation multiple from 17.5 times to 19 times EBITDA to reflect upside bias to our financial forecasts” she said. “Now that we are formalizing the M&A component of our upside scenario assumptions into our revised base case, we are returning to 17.5 times target multiple. The combination of higher financial forecasts and normalized target multiple drives a $2 increase in our price target to $34. In our view, target valuation appropriately reflects the visibility & sustainability of NBLY’s sector-leading earnings growth underpinned by aging demographics and supported by the M&A multiple arbitrage.”

Elsewhere, iA Capital Markets analyst Chelsea Stellick raised her rating to “buy” from “hold” with a $31 target, up from $28.

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“NBLY has a niche competitive position and will continue to scale by growing its portfolio of stores and creating economies of scale,” she said. “Upcoming M&A will guide the outlook and we watch for gradually improving EBITDA margins over time as the integration playbook is repeated on each acquisition. We are increasing our outlook after F2022 for annual acquisitions to 35 stores from 25 based on company guidance.”

Others making target changes include:

* Desjardins Securities’ Chris Li to $31 from $27.50 with a “hold” rating.

“NBLY’s results and management’s positive M&A outlook reinforce our view that this is a compelling growth story driven mainly by acquisitions in a highly fragmented industry,” he said. “While we expect NBLY to achieve its target of acquiring 35 pharmacies this year, given the strong share price performance since the IPO on May 25 (up 66 per cent) and premium valuation, we believe this is partly priced in and would prefer to wait for more visibility on the sustainability of the M&A run rate longer-term.”

* Scotia Capital analyst Patricia Baker to $34 from $32 with a “sector outperform” rating.

“NBLY has a very credible strategic growth plan that should drive outsized growth in revenue and EBITDA for the next several years,” she said. “The company is advantaged in its pursuit of further consolidation of the community pharmacy market in Canada as the largest community pharmacy operator affording scale, its established reputation as the acquirer of choice, the company’s ability to execute transactions at the owner’s preferred pace, and the balance sheet to support the growth. F22 has gotten off to a good start with NBLY having acquired 14 pharmacies and, as such, is well set on the path to complete 25-plus pharmacy additions this year. The NBLY growth via acquisition strategy provides enhanced scaling opportunities which should drive EBITDA growth.”

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Though he warns of a tougher cost environment for Canfor Corp. (CFP-T) in the second half of 2012, CIBC World Markets’ Hamir Patel expects it to benefit from an improving “commodity sentiment” for lumber.

In a research report released Wednesday, the equity analyst raised his financial estimates for the Vancouver-based company, pointing to increased profitability assumptions for its European lumber operations and its growing U.S. South platform, which he sees benefiting from recent/ongoing capital projects and the upcoming greenfield expansion).

While he trimmed his forecasts for its pulp business, he now sees overall earnings before interest, taxes, depreciation and amortization (EBITDA) of $450-million in the third quarter, down from a record of $1.1-billio in the second quarter but above his previous $355-million estimate. His fourth-quarter projection rose to $250-million from $175-million.

“On the lumber side (85 per cent of mid-cycle EBITDA), with B.C. wildfire/market-related slowdowns announced in recent weeks from Canfor (115 million board feet in Q3), West Fraser (undefined volumes) and Interfor (50+ mmfbm in August), we believe lumber prices have found support after dipping below all-in B.C. Interior cash costs (which we estimate to be in the US$525-US$575 per thousand board feet range for an average mill over H2),” he said.. “Costs in the B.C. Interior (14 per cent of NA industry output) have several puts/takes over H2 with stumpage having risen $30 per cubic metre from July 1 (with a further $10/m3 increase expected in October) and duties set to increase from 9 per cent to 18 per cent from December, with relief coming from still peak pricing in Japan (10 per cent of CFP’s SPF mix), higher chip revenue (tied to pulp prices on a lag) and a substantial decline in stumpage from January. SPF prices ended last week at US$525/mfbm (down 68 per cent from YTD peak) but up 20 per cent over the past two weeks as home center activity has started to pick up after going dormant in June. We expect SPF prices to average US$600/mfbm in Q3, US$560/mfbm in Q4 and US$590/mfbm in 2022.

“On the demand front, although new res (30 per cent of lumber consumption) clearly peaked in H1 (Redfin pending home sales now off 12 per cent from year-to-date high and active listings are up 12% from their low this year), we expect low mortgage rates to support housing starts of over 1.5 million in 2021 and 2022. In the R&R market (40 per cent of lumber takeaway), bellwether indicators remain positive for medium- to long-term growth despite the sharp decline this summer (as consumers take a pause on DIY projects given elevated wood product pricing and a desire to not be stuck at home). Masco (which generates 90 per cent of its sales from R&R) recently indicated it expects its DIY paint business to see low-single-digit growth in 2022 (after a likely low-single digit decline in 2021).”

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Keeping an “outperformer” rating for Canfor shares, Mr. Patel raised his target to $34 from $32. The average is $41.2

" As one of the largest lumber producers in North America and Europe, Canfor is well positioned to benefit from the robust U.S. housing market we expect to persist over the next few years given 3-per-cent mortgage rates, demographic trends and an ageing U.S. housing stock,” he said.

Separately, he cut his target for Canfor Pulp Products Inc. (CFX-T) to $8 from $9 with a “neutral” recommendation. The average is $9.80.

“We see cleaner ways for investors to gain pulp exposure in the sector without the fiber risks associated with a business whose production base is 100-per-cent weighted to high-cost British Columbia,” he said. “At the same time, we do not expect Canfor Corporation to be a buyer of the minority interest in Canfor Pulp in 2021/22, and suspect CFP will focus on deploying capital on M&A opportunities in wood products.”


Following Tuesday’s release of “strong” second-quarter financial results, ATB Capital Markets analyst Chris Murray thinks Cargojet Inc. (CJT-T) remains “well positioned to enable and benefit from the ongoing consumer, and increasingly, merchant-led structural shift towards ecommerce.”

Before the bell, the Mississauga-based company reported revenue, adjusted EBITDA and adjusted fully diluted earnings per share of $172.1-million, $67.4-million and $1.26, respectively, exceeding the estimates of both Mr. Murray ($165.2-million, $61.9-million and $1.06) and the Street ($163.4-million, $61.3-million and 97 cents).

“Results were better-than-expected with the Company delivering solid year-over-year growth within its domestic network and ACMI segments,” said the analyst. “All-in charter was down materially versus Q2/20; however, this was expected with the segment lapping a tough comp stemming from non-recurring PPE deliveries in Q2/20.”

As the industry moves closer to its pre-pandemic state, Mr. Murray emphasized Cargojet has built a financial model that is “difficult” to replicate.

“When discussing current competitive dynamics as domestic passenger airlines make investments to grow their cargo respective offerings, management reinforced that it will be difficult for passenger airlines to replicate CJT’s existing infrastructure, which consists of many years worth of strategic investments to establish a pure-play cargo business capable of achieving more than 98 per cent on-time deliveries across a highly fragmented population,” he said. “With significant balance sheet flexibility in place, we see CJT in an advantageous position to continue to add aircraft and build on its existing infrastructure thereby widening its competitive moat and supporting future growth.

“Management confirmed that a partnership with a US cargo player would make strategic sense and support international growth as more onerous regulations around pilot fatigue imposed on Canadian operators allows U.S. carriers to avoid certain surcharges and offer more competitive pricing. We see a potential partnership helping alleviate this while allowing CJT to offer additional routes that would not otherwise be permitted under cabotage restrictions.”

Reiterating an “outperform” rating for Cargojet shares, Mr. Murray raised his target to $235 from $230, exceeding the $250.83 average,

Elsewhere, others making target changes include:

* TD Securities’ Tim James to $235 from $230 with a “buy” rating.

“We believe that Cargojet deserves a premium valuation relative to a group of comparables, due to its above-average historical growth, prudent financial leverage, improving and strong forecast margins, and competitive position within an industry that is expected to continue benefiting from a lack of cargo capacity and growth in e-commerce,” said Mr. James. “We believe that Cargojet’s valuation multiples will benefit from growth in e-commerce and air cargo demand, and the lack of belly capacity on commercial passenger aircraft.”

* Scotia Capital’s Konark Gupta to $235 from $225 with a “sector outperform” rating.

“Q2 was a positive quarter with EBITDA topping the highest estimate on the Street,” he said. “While year-over-year growth was negative due to a very tough comp, the growth story continued on a normalized basis. Demand remains strong amidst tight capacity, which is driving new contracts and opportunities ahead. Overall, we have slightly raised our estimates, partially offset by slightly increased capex guidance (up $37.5-million at mid-point). We still continue to see upside risk to our outlook.”

* RBC Dominion Securities analyst Walter Spracklin to $300 from $293 with an “outperform” rating.

“The muted reaction to CJT’s stock as a result of a strong Q2 beat is not overly surprising as CJT is largely expected to significantly benefit from the current environment of elevated domestic eCommerce,” said Mr. Spracklin. “What is underappreciated, however, in our view is: 1) the benefit of Canadian reopening that is emerging in H2 (B2B still below pre-pandemic); and 2) the lower risk in the company’s investment into international air freight than the market is currently discounting. Accordingly, CJT remains a top 3 idea in our coverage universe today.

* BMO Nesbitt Burns analyst Fadi Chamoun to $225 from $245 with an “outperform” rating.


H&R Real Estate Investment Trust’s (HR.UN-T) sale of the Calgary’s famed Bow office tower “materially” strengthens its balance sheet and positions it to “pursue the next phase of simplification,” said CIBC World Markets analyst Sumayya Syed.

On Tuesday before the bell, the REIT also announced the sale of an office complex in Mississauga for roughly $800-million in net cash proceeds with the intent to repay corporate debt.

“The layered structure of the transaction speaks to the scale of the asset and the state of the Calgary office market, which has resulted in a smaller pool of potential buyers, but has not completely eroded the appeal of very long-term leased assets with built-in growth,” said Ms. Syed. “With the reduction in exposure to Ovintiv and Bell Canada (together comprised 21 per cent of rent), the REIT has significantly addressed tenant over-concentration in a prospective smaller entity.

“Further simplification could help narrow the current NAV discount (23 per cent) to be closer in line with historical levels (10 per cent.”

The analyst said the deal “brings into focus the stronger aspects of the H&R portfolio,” which she thinks have been overlooked on account of the Bow.

“Lantower Residential in particular is benefiting from strong leasing momentum and development completions are effectively expected to offset dilution from sales,” Ms. Syed said. “The office portfolio will still have long average lease terms, and will be mainly GTA, with significant intensification potential. We expect cap rates could be close to ~6% (lower for certain assets). Our new blended 6-per-cent cap rate contemplates a 6.5-per-cent cap rate on the pro forma office portfolio, which could be conservative in light of GTA office fundamentals.”

Maintaining an “outperformer” rating for H&R units, she raised her target to $19.50 from $19. The average is $18.25.

Elsewhere, Scotia Capital’s Mario Saric bumped up his target by $1 to $18 with a “sector perform” rating.


In other analyst actions:

* National Bank Financial analyst Michael Parkin upgraded Yamana Gold Inc. (YRI-T) to “outperform” from “sector perform” with a $7.75 target, up from $7.50. The average on the Street is $8.61.

* National Bank Financial’s Gabriel Dechaine raised his Great-West Lifeco Inc. (GWO-T) target to $38 from $37, keeping a “sector perform” rating, while TD Securities’ Mario Mendonca increased his target to $42 from $40 with a “buy” recommendation. The current average is $39.20.

“Our BUY rating is supported by GWO’s strong capital position, and leading market positions across most segments in Canada and U.S. group retirement. The recently closed acquisitions in the U.S. retirement services business should lead to good earnings momentum in H2/21 and 2022,” said Mr. Mendonca.

* Citing a “lack of clarity on profitability following material year-end changes to accounting disclosures,” Stifel analyst Cole Pereira lowered Wolverine Energy and Infrastructure Inc. (WEII-X) to “sell” from “buy” with a 25-cent target, down from 60 cents. The average is 93 cents.

“WEII reported 1Q21 results that were largely in line with our estimates. However, the more material item related to updated disclosures around segment profitability and government subsidies,” he said. “WEII received $9.7-million of government subsidies for the fiscal year that were not previously disclosed because of its view on how it treated the subsidies, but were included in EBITDAS as a reduction of opex, predominantly in the Rentals business. As detailed below, there is a considerable lack of clarity on the forward profitability of this business, but we believe that it is considerably lower than we had previously modelled due to the subsidies. As a result, we have decreased our EBITDAS forecasts by 37 per cent in 2021 and 41 per cent in 2022.”

* Raymond James analyst Bryan Fast increased his Finning International Inc. (FTT-T) target to $40 from $38.50 with an “outperform” rating. The average is $40.67.

“On the back of a constructive investor day in June, Finning beat street estimates as strength across all end-markets drove strong demand,” he said. “We see mid-cycle earnings guidance (through 1H22) as ambitious, yet achievable and remain positive on the story longer term. In a sustained up cycle the company envisions mid-teens (or higher) EPS growth. Achieving these targets through product support growth of 5-9 per cent (beyond the historical average CAGR of 5 per cent), further cost reductions and disciplined free cash flow allocation to drive higher earnings. We expect momentum building off of an impressive 2Q21 print to carry into the back of the year.”

* Raymond James’ Stephen Boland raised his target for shares of Chesswood Group Ltd. (CHW-T) to $16 from $14.50 with an “outperform” rating. The average is $15.83.

* TD Securities analyst Michael Aelst raised his Metro Inc. (MRU-T) target to $66 from $61 with a “hold” rating. The average is $64.

* TD’s Vince Valentini raised his BCE Inc. (BCE-T) target to $66 from $63, reiterating a “buy” rating. The average is $60.38.

* Mr. Valentini also increased his Telus Corp. (T-T) target to $31 from $29 with a “buy” recommendation, while JP Morgan’s Sebastiano Petti raised his target by $1 to $30 with a “neutral” rating. The average is $29.93.

* Guggenheim analyst Gregory Francfort raised his Restaurant Brands International Inc. (QSR-N, QSR-T) target to US$70 from US$67 with a “neutral” rating. The average is US$73.20.

* BMO Nesbitt Burns analyst Michael Murphy increased his International Petroleum Corp. (IPCO-T) target by $1 to $8.50, exceeding the $7.94 average, with an “outperform” rating, while Stifel’s Robert Fitzmartyn raised his target to $9.50 from $9.25 with a “buy” recommendation.

“IPC reported 2Q21 results well ahead of market expectations and closer to our forecast. It is lifting its 2021 capital investment based on strong FCF generation which should not be a surprise to the market, though in general estimates should be moving higher. We are revising our 12-month target price noting a discount valuation and a strong position to boost shareholder returns over the next 18 months, though management has proven its willingness to continue to pursue M&A/A&D activity.”

* Piper Sandler analyst David Amsellem cut his Bausch Health Companies Inc. (BHC-N, BHC-T) target to US$30 from US$33 with a “neutral” recommendation. The average is $36.15.

* Jefferies analyst Owen Bennett raised his target for Tilray Inc. (TLRY-T) to US$27 from US$23 with a “buy” rating. The average is US$17.57.

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