Inside the Market’s roundup of some of today’s key analyst actions
A cybersecurity flaw with its QNX Real Time Operating System will have a “minimal impact” on BlackBerry Ltd.’s (BB-N, BB-T) long-term prospects, according to Canaccord Genuity analyst T. Michael Walkley.
On Tuesday, the U.S. Cybersecurity and Infrastructure Security Agency and the U.S. Food and Drug Administration warned a vulnerability in the software puts at risk cars and medical equipment that use it, believing it exposes the highly sensitive systems to attackers, which could execute an arbitrary code or flood a server with traffic until it crashes or gets paralyzed.
However, Mr. Walkley thinks the problem will not have an impact on QNX’s “strong design wins” in the auto market.
“BlackBerry has the patches available and also encouraged customers to upgrade to newer versions of QNX and to date BlackBerry is unaware of any issues caused by this vulnerability to older versions of QNX,” he said. “While this is an issue to track, it appears BlackBerry has worked with customers for some time on this issue.”
In fact, following recent discussions with BlackBerry’s Chief Security Architect & Co-founder of Cylance Ryan Permeh and VP of Research Operations Eric Milam, Mr. Walkley said “security is an oft overlooked aspect of the BlackBerry story.”
“We came away with increased conviction in the company’s growth prospects, which looks well positioned to accelerate given BlackBerry’s differentiated AI-driven data lake approach driving proactive prevention,” he said. “We strongly believe better threat detection and response is directly correlated to the amount of data and threat telemetry collected and analyzed, which contextually improves efficacy over time. While this was a long time coming post the Cylance acquisition, we believe management finally has a cogent plan in place to grow its security practice, which should only accelerate through additional capital if a deal is reached to sell its licensing business. We believe BlackBerry is turning the corner, but we await more proof in execution on the new product roadmap, evidence of crossselling opportunities emerging, growing overall software and services revenue, and the potential for upside to our estimates before becoming more constructive on the shares.”
Citing its long-term growth prospects, Mr. Walkley raised his rating for the Waterloo, Ont.-based company to “hold” from “sell” with its shares having fallen below his target price of US$10. The average target on the Street is US$8.36, according to Refinitiv data.
“We believe Blackberry has a strong product portfolio and improving long-term growth potential, despite the continued share price volatility due to its status as a ‘meme’ stock,” he said.
“However, given the uncertainty surrounding the sale of the licensing business and softer 1H/2022 software and services revenue, we await more proof in execution on the new product roadmap, evidence of cross-selling opportunities emerging, growing overall software and services revenue, and the potential for upside to our estimates before becoming more constructive on the shares.”
Canaccord Genuity analyst Yuri Lynk expects the recent drop in lumber prices to pressure Doman Building Materials Group Ltd.’s (DBM-T) margins moving forward.
Accordingly, in the wake of the release of weaker-than-anticipated second-quarter financial results, he lowered his rating for the Vancouver-based company, formerly known as CanWel Building Materials Group Ltd., to “hold” from “buy.”
“With the benchmark 2x4 SPF lumber price down 74 per cent from its record high set on May 10, the investment case for DBM has been turned on its head,” he said. “We see consensus estimates coming down materially and expect the gross margin outperformance witnessed over the last three quarters to turn to underperformance in Q3/2021 as falling prices crimp profitability. CanWel, proforma Hixson, generated EBITDA of $135-million in 2019 and $250-million in 2020. Our 2022 EBITDA estimate sits at $203-million, which implies lumber prices average US$525 per thousand board feet and a gross margin of 14.5 per cent.”
After the bell on Monday, Doman reported adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $94-million, up 187 per cent year-over-year but narrowly lower than Mr. Lynk’s $94.4-million projection. Revenue rose 83 per cent to $756.8-million, missing the analyst’s estimate of $743.2-million, while margins rose 3 per cent year-over-year to 17.3 per cent, topping his 17.0-per-cent forecast.
“Until higher cost inventory is averaged down, management expects the lower pricing environment to offset the margin expansion observed in H1/2021,” the analyst said.
“During the call, management mentioned that following a soft end to Q2, volumes have been picking up in Q3 aided by the noted price reductions in construction materials. We thus believe we will see recovering volumes reach a more normalized level (similar to 2019) throughout the remainder of 2021 and into 2022. Longer-term demand drivers remain solid with the rate of new housing starts in Canada and the U.S. increasing 44 per cent year-over-year in the quarter.”
After adjusting his estimates to account for lumber pricing headwind and the “transformational” acquisition of Texas-based Hixson Lumber, Mr. Lynk cut his target for Doman shares to $7.50 from $12. The average is $11.29.
Elsewhere, others making target adjustments include:
* Stifel’s Anoop Prihar to $12 from $14 with a “hold” rating.
“While profit margins in the near term are expected to be impacted by the recent decline in lumber prices, we expect margins will recover to more normalized levels by Q4/21 and into the next year,” he said.
* Raymond James’ Steve Hansen to $10.50 from $13.50 with an “outperform” rating.
“We are trimming our target price ... based upon the near-term headwinds associated with the sharp correction in LBM prices, an outcome that reflects consumer resistance to the stratospheric prices observed earlier this year. Notwithstanding these changes, we reiterate our OP2 rating based upon our constructive view of the North American housing outlook and the transformational benefits we foresee from Doman’s recent Hixson acquisition,” he said.
* CIBC’s Hamir Patel to $9 from $10 with an “outperformer” rating.
“While the sharp correction in commodity prices will weigh on organic sales comps and margins in H2/21, we continue to see DBM as well-positioned to benefit from a multi-year period of robust shipments for treated lumber across North America (as well as heathy Canadian distribution volumes) given low mortgage rates, rising home equity levels and an ageing NA housing stock,” said Mr. Patel. “Additionally, we expect the recent US$408-million Hixson Lumber acquisition (closed June 4) to open up additional acquisition opportunities for DBM across the U.S. beyond its prior focus on the U.S. West Coast.”
* RBC Dominion Securities’ Paul Quinn to $11 from $12 with an “outperform” rating.
“Doman Building Materials Group Ltd. reported Q221 results that were below our expectations but largely in line with consensus as the rapid decline in lumber and panel pricing left Doman holding onto high-priced inventory. Although we expect results will be choppy over the next few quarters, we still like the Doman story as the company generates significant cash flow and integrates recent acquisition,” said Mr. Quinn.
While he acknowledges its focus on M&A is likely to be a lingering overhang for its shares, Credit Suisse analyst Andrew Kuske thinks Pembina Pipeline Corp. (PPL-T) core business “should be front row centre for investors.”
In a research note released Wednesday, he lowered his rating for the Calgary-based company to “neutral” from “outperform” after resuming coverage following its attempt to acquire Inter Pipeline Ltd.
“Historically, PPL’s M&A approaches have been disciplined with larger deals (e.g. Provident, Veresen and Kinder Morgan Canada) achieving corporate objectives and longer-term value,” he said. “To us, the specific failed M&A was unique and PPL played a White Knight without an early mover advantage. So, the M&A focus for some looks inappropriate at this time – especially when a number of other development opportunities exist.”
Pointing to “positive” mid-year updates from Pembina and other regional energy infrastructure companies, Mr. Kuske emphasized an advantageous volume and margin environment in Western Canada is positive, adding: “In addition to these dynamics, opportunities associated with the Alberta Carbon Grid (ACG) look to be very well placed as outlined in our work (Compelling Carbon Capture Considerations and Carbon Capture In Conversation). Ongoing export efforts with the Cedar LNG Project and a partnership for Trans Mountain System opportunities look to provide upside and optionality.”
He bumped up his target for Pembina shares to $46 from $42, exceeding the $41.88 average on the Street.
“PPL’s midstream assets in key WCSB plays underpin critical energy infrastructure with growth opportunities from network expansion. Following a strong move in regional commodity prices, our energy infrastructure bias shifted to larger caps versus the more regional stocks – to a certain degree – PPL straddles both groups,” said Mr. Kuske.
In a research report previewing third-quarter earnings season for Canadian banks, Canaccord Genuity analyst Scott Chan made a series of target price adjustments.
- Bank of Montreal (BMO-T, “buy”) to $143 from $139. The average on the Street is $134.46.
- Canadian Imperial Bank of Commerce (CM-T, “buy”) to $157 from $149. Average: $153.52.
- National Bank of Canada (NA-T, “hold”) to $101 from $97. Average: $100.67.
- Royal Bank of Canada (RY-T, “buy”) to $140 from $134.50. Average: $136.22
- Toronto-Dominion Bank (TD-T, “hold”) to $87.50 from $89. Average: $92.57.
“For the Group, we made positive FQ3 EPS revisions (up 7 per cent) primarily due to better credit (i.e. reserve releases on performing loans),” he said. “As a reminder, all Big-6 banks reported reversals (stage 1 & 2) last quarter. Overall, we are increasing our Group target prices by an average of 2 per cent based on modest F2022 EPS revisions of 1% per cent and supported by our slightly higher target multiples for our BUY-rated names (pecking order for quarter: BMO, RY, CM). We believe the latter Banks continue to display better relative fundamentals to our HOLD-rated picks (pecking order: NA, BNS, TD). The quality of FQ3 earnings may not live up to expectations (i.e. loan growth, NIM, Capital markets trading) as we could see the Group trade off slightly up until/on release dates.”
Second-quarter earnings season for Canadian energy services and infrastructure companies was largely “devoid of surprises” and fell in line with expectations, according to iA Capital Markets analyst Elias Foscolos.
“For the remainder of 2021, our outlook is shaped by many macro factors,” he said. “As vaccination rates begin to plateau and threats of another COVID wave fuelled by the delta variant increase, governments are currently faced with many decisions regarding restrictions and vaccination mandates. These decisions could play a major role in the movement of commodity prices, which are a significant factor in our coverage universe’s stock price performance.”
In a research report released Wednesday, Mr. Foscolos downgraded Fortis Inc. (FTS-T) to “hold” from “buy,” pointing to its current return to his increased target price for its shares following recent appreciation.
“FTS’ Q2/21 results were below estimates with Adj. EPS of $0.55 (iA estimate: 59 cents, consensus: $0.59) as rate base growth, warm weather in Arizona, and new rates at Tucson Electric Power (TEP) were offset by FX headwinds, which had a negative 5-cent year-over-year impact to EPS,” he said. “FTS reaffirmed its 2021-2025 growth plan of $20-billion, which is expected to drive 6-per-cent CAGR [compound annual growth rate] in the rate base, translating into 6-per-cent average annual dividend growth. The plan does not include the $1.7-billion Lake Erie Connector project. Additionally, we believe FTS has favourable torque to the transition to cleaner energy in North America. In particular, we believe the transmission investment opportunity to support policy goals in the U.S. is substantial. FTS also released a sustainability update with its Q2 results; some highlights from the update include (a) 15-per-cent reduction in scope 1 GHG emissions in 2020, (b) record safety performance in 2020 (while completing a record capital buildout, we would note), and (c) gender parity on the Board of Directors. FTS also continues to highlight its long-term emissions reduction target of 75 per cent by 2035, driven by retiring coal assets at TEP and investing in renewables.”
Mr. Foscolos raised his Fortis target by $1 to $61. The average on the Street is $58.90.
He also made these target price adjustments:
- AltaGas Ltd. (ALA-T, “buy”) to $30 from $29. Average: $28.83.
- Canadian Utilities Ltd. (CU-T, “buy”) to $39 from $40. Average: $37.08.
- Emera Inc. (EMA-T, “buy”) to $63 from $62. Average: $60.81.
- Hydro One Ltd. (H-T, “buy”) to $35 from $33. Average: $32.71.
As electric vehicle sales continue to gain momentum, IA Capital Markets analyst Puneet Singh expects lithium prices to maintain their upward trend.
In a research note released Wednesday, he raised his long-term price assumptions for both lithium carbonate and hydroxide and expects equities tied to the chemical to also increase.
“Lithium equities have seen a burst of funds flow over the past couple months,” said Mr. Singh. “While these equities tend be more volatile than others, battery grade lithium carbonate (year-to-date: up 105 per cent, average: US$12,660 per ton; last price: US$13,725 per ton) and lithium hydroxide (YTD: up 115 per cent, average: US$12,000 per ton; last price: US$15,960 per ton) have sustained their higher prices in recent months, signalling tighter market conditions. EV (electric vehicles; fully electric and plug-in hybrids) sales figures are backing this up (H1/21: 2.7 million units; 2020: 3 million units; 2019: 2 million units). Recall, the lithium market was oversupplied in prior years but the bottoming out of lithium prices last year coupled with supply curtailments in Australia during the pandemic moved the market back into balance. These higher prices fed through to larger cash flowing producers earnings during the Q2/21 reporting period which also drew attention and reinvigorated funds flow into the sub-sector. Our developers are also benefitting as the market anticipates their transition to production in the near future.
“The hydroxide market is growing and, in the future, will be emphasized as it has better power density application in batteries. However, right now, carbonate is dominating, coming from large scale brine operations in South America. We now expect battery grade lithium carbonate and lithium hydroxide prices to trend higher until 2023 (previously 2022; 2023: Li2CO3: US$16,000 per ton, LiOH: US$17,500 per ton) in response to tighter market conditions. EV sales are trending higher and newer projects with higher processing costs will necessitate higher lithium prices to be built. Thus, we have also increased our long-term price deck (long term: Li2CO3: US$13,000 per ton, LiOH: US$14,000 per ton).”
Mr. Singh reaffirmed Toronto-based Neo Lithium Corp. (NLC-X) as his top pick in the sector, seeing multiple catalysts ahead.
With a “buy” rating for its shares, he raised his target to $6.50 from $5. The average on the Street is $5.45.
“Neo Lithium owns 100 per cent of the Tres Quebradas (3Q) lithium brine project in Argentina,” he said. “NLC will look to complete a final feasibility study (FS) in Q3/21. NLC is expected to publish updated parameters on its 20ktpa plan. The high-grade resource could lead to a reduction in the initial capex estimate as ponds may not to be as large as originally predicted. Following the FS, the Company will seek an Environmental Impact Assessment (EIA) for a final construction permit and look to start construction pending a final financing. Funding discussions are ongoing. The world’s largest battery maker, CATL, (300750-SZ, Not Rated) owns an 8-per-cent stake in NLC and is a likely partner for its financing. If CATL were to sign a long-term offtake agreement as a part of the financing for 3Q, we think they will push for a larger (40ktpa vs. 20ktps plan currently) phased expansion of the brine operation. In a larger scenario, we seem NLC being worth roughly double our current target. NLC, with its top tier, low impurity, large high-grade deposit, is materially undervalued.”
Seeing Lithium Americas Corp. (LAC-T) undergoing a “transformation” into a large producer, Mr. Singh raised his target for its shares to $29 from $24, exceeding the $27.68 average, with a “speculative buy” recommendation.
“Lithium Americas owns the Cauchari-Olaroz brine project as a joint venture with its largest shareholder Ganfeng (002460-SZ, Not Rated) in Argentina and 100% of its Thacker Pass lithium clay project in Nevada,” he said. “In our view, the larger Record of Decision (RoD) appeal is the main hurdle for Thacker Pass (additional groups are trying to get an injunction this month after environmentalists failed last month). The final briefing on the RoD is scheduled to finish in Dec/21 with a final ruling by the judge expected in Jan/22. In its most recent update, LAC re-iterated its Thacker Pass construction target being early 2022. We’ve delayed Thacker Pass’ timeline in our valuation to be conservative but note that this is a large project that should be of domestic importance to the U.S. Thacker Pass’ RoD appeal decision will be an overhang on LAC’s shares until it’s cleared up. However, we fully expect LAC to re- rate as its Argentinean brine project, Cauchari-Olaroz starts production next year.”
In other analyst actions:
* Pointing to delays in its application for approval of its treosulfan drug with the U.S. Food and Drug Administration and the fallout from a manufacturing “stumble” with IXINITY medicine, Canaccord Genutity analyst Tania Gonsalves said she’s “turning cautious” on Medexus Pharmaceuticals Inc. (MDP-T), lowering the Toronto-based company to “hold” from “speculative buy” after “weak” quarterly results. She trimmed her target to $3.20 from $6, below the $9.40 average.
* Stifel analyst Robert Fitzmartyn upgraded Perpetual Energy Inc. (PMT-T) to “hold” from “sell” with a 40-cent target, up from 10 cents and above the 35-cent average.
“Perpetual reported second quarter financial and operating in line with expectations, though the focal point for the market will be its recapitalization via the formation of Rubellite Energy, of which will acquire Perpetual’s Clearwater heavy oil interests for predominantly cash allowing for a full capital solution to its financial leverage and liquidity issues,” he said. “We offer a directional view on Rubellite and revised forecast founded on a view that it can now keep up with partner and operator Tourmaline Oil’s planned activity at East Edson.”
* Laurentian Bank Securities analyst Ryan Hanley initiated coverage of Major Precious Metals Corp. (SIZE-CN) with a “speculative buy” recommendation and 80-cent target.
“It is our belief that the Skaergaard project has been historically overlooked due to a depressed gold price and unattractive Platinum Group Elements (PGE) market,” he said. “However, given the recent appreciation in palladium price driven by increased global demand as a result of the growing green economy (palladium’s largest application is in catalytic converters), this has led to a 78-per-cent price increase over the last two years. As a result, we believe that Skaergaard offers substantial scale and potential value to those seeking palladium exposure and who are comfortable with the inherent risks of an exploration stage company with a project in a remote region.”
* Desjardins Securities analyst Chris Li trimmed his target for Freshlocal Solutions Inc. (LOCL-T) to $6 from $8.50 with a “buy” rating, while Canaccord Genuity’s Luke Hannan cut his target to $6.50 from $9.50 with a “Buy” recommendation . The average is $7.75.
“There are three main reasons why we have elected to keep our BUY rating: (1) a sale of the Blush Lane business even at a depressed price would likely be more than enough to bring LOCL onside with its liquidity covenant; (2) the company expects to begin recognizing higher-margin revenues from its eGMS business as soon as Q4/F21 (i.e., the quarter ending September 30, 2021), bringing it onside with its trailing six-month EBITDA covenant; and (3) even after reducing our target multiples to account for what has effectively become a “show-me” story, there remains considerable upside from current levels, in our view,” said Mr. Hannan.
* RBC Dominion Securities analyst Matt Logan raised his Summit Industrial Income Real Estate Investment Trust (SMU.UN-T) target to $23 from $17.50, reiterating a “sector perform” rating. The average is $22.88.
“With market rents materially above in-place rents in Toronto and Montreal, IRRs and replacement costs are becoming a better barometer than cap rates. We see replacement costs rising, but have limited visibility into the underlying factors driving further growth (e.g., land pricing, development charges, materials). Net/net, we see favourable tailwinds for SMU’s units, but think much of the good news is factored into the trading price,” said Mr. Logan.
* RBC’s Pammi Bir increased his SmartCentres REIT (SRU.UN-T) target by $1 to $33 with an “outperform” rating. The average is $31.63.
“On balance, we continue to see a decent entry point to a name with a solid organic growth recovery underway, a healthy balance sheet, among the largest value-creation pipelines in the Canadian REIT sector, and a platform well-equipped to execute,” he said.
* RBC’s Sabahat Khan increased his High Liner Foods Inc. (HLF-T) target to $15 from $13 with a “sector perform” rating, while Scotia Capital’s George Doumet increased his target to $14.50 from $14 also with a “sector perform” rating and BMO’s Jonathan Lamers bumped his target to $15.50 from $15 with a “market perform” rating.. The average is $16.88.
“HLF reported Q2 results that were shy of expectations, with adj. EBITDA coming in 7 per cent below street estimates,” said Mr. Doumet. “The volume recovery in the quarter was aided by a resurgence in foodservice, but was held back by global supply challenges and, as a result, came in softer than expected.
“We continue to look for a more stable/predictable recovery in volumes to get more constructive on HLF shares. In the context of ongoing supply chain challenges (and potentially rising commodity cost inflation), we believe this could take longer to achieve. Until then, we expect the company’s trading multiple to remain range-bound.”
* TD Securities analyst Daryl Young raised his Westshore Terminals Investment Corp. (WTE-T) target to $24 from $23 with a “hold” rating. The average is currently $25.40.
* TD’s Sam Damiani raised his Dream Unlimited Corp. (DRM-T) target to $32 from $31 with a “buy” rating. The average is $33.33.
* BMO Nesbitt Burns analyst Joanne Chen increased her Minto Apartment Real Estate Investment Trust (MI.UN-T) target to $28 from $24.50, keeping an “outperform” rating. The average is $27.
“Our constructive outlook on Minto Apartment REIT was reaffirmed following Q2/21 earnings. Although some pressures on organic growth remain, we believe the momentum has clearly shifted in the positive direction on the leasing front,” she said.
“We believe the quality of Minto’s portfolio in Canada’s largest urban markets will continue to attract a good proportion of the strong immigration growth that is expected (recent data suggests Canada remains on track to meet its ambitious 2021 immigration targets).”
* Scotia Capital analyst Mario Saric raised his H&R Real Estate Investment Trust (HR.UN-T) target to $18.25 from $18, with a “sector perform” rating. The average is $18.42.
“In a nutshell, we would actively buy H&R in the low-$16s (i.e. here) for a short-term trade (Back-to-School Special) given our view of limited downside,” he said. “As stated previously, we think a simple spin-out of Primaris has modest upside (14 per cent of our GAV), while a simultaneous spin-out of Lantower (23 per cent of our GAV incl. Jackson Park) could drive 10-per-cent-plus unit price upside based on our Shadow REIT math; HR said it will introduce at least 1 new entity in 2021. The upside needs internally managed vehicles as external vehicles could drive negative sentiment seeing that H&R internalized in 2013 (at 16 times). Selling assets for an SIB = similar 10-per-cent-plus upside in our view. H&R is our preferred near-term diversified REIT play.”
* Scotia’s Himanshu Gupta hikes his BSR Real Estate Investment Trust (HOM.U-T) target to US$17 from US$14.50, topping the US$16.02 average, with a “sector perform” rating.
“BSR unit price is up 38 per cent year-to-date and now largely trading at our NAVPU of $15.55, with implied cap rate of 4.5 per cent,” he said. “Valuation is the only thing which is keeping us at SP rating (and not SO rating). Otherwise, it seems the fundamentals have rebounded and have now begun to accelerate in Texas multi-family markets. The excitement in rents is spilling over to the cap rates too.”
* National Bank Financial analyst Tal Woolley increased his Automotive Properties Real Estate Investment Trust (APR.UN-T) to $14 from $13.50, topping the $13.36 average, with an “outperform” rating.