Inside the Market’s roundup of some of today’s key analyst actions
CIBC World Markets analyst Robert Catellier views Enbridge Inc.’s (ENB-T) US$3-billion acquisition of terminal and logistics company Moda Midstream Operating LLC as a “positive,” seeing it as a “high-quality asset at an accretive price,” aligned with its strategy and business risk profile and possessing “some future growth potential.”
Shares of the Calgary-based company rose 0.9 per cent on Tuesday following the premarket announcement of the deal with San Antonio-based private-equity firm EnCap Flatrock Midstream. It includes the Ingleside Energy Center near Corpus Christi, Texas, which is currently North America’s largest crude export terminal.
“The assets provide Enbridge with over $1-billion of accretive future organic growth potential,” said Mr. Catellier in a research note. “The 15.6 million barrels of storage is permitted to expand to 21 million barrels, and the 1.5 million Bbl/d of export capacity is permitted to expand to 1.9 million Bbl/d. In addition, future solar initiatives are expected to align with the company’s goal of net zero by 2050 by generating up to 60 MW of solar power. The site includes over 500 acres of unused land. This could lead to a negative emissions terminal with longerterm potential to add renewable fuels. There are also potential storage and handling opportunities in the petrochemical and natural gas liquids industries as well as for carbon capture utilization and storage.”
In response to the deal, Mr. Catellier raised his 2022 and 2023 EBITDA projections by just over 3 per cent, while his operating earnings per share estimates rose by 2.8 per cent to $3.24 and $3.49, respectively, from $3.15 and $3.40.
“The acquisition is a digestible size, and should not have any impact on future capital allocation,” he added. “Specifically, with leverage reducing to an estimated 4.6 times, near the low end of the targeted 4.5x-5.0x range, we still see the potential for share buybacks in 2022. This is contingent on placing L3R into service. Similarly, our dividend growth outlook is unchanged as well, albeit with more conservative future payout metrics. Capital deployments of this nature are important to give investors confidence in the company’s ability to reinvest cash flow in the future. We are somewhat surprised at the attractive multiple, but there are simply not a lot of buyers for these types of assets. The sale was made from a private equity firm, probably not interested in selling to other PE firms. ESG considerations probably also limited potential buyers of these oil-based assets, notwithstanding that this should be one of the lowest emissions profile terminals in North America and could have a negative emissions profile once the solar assets are placed into service.”
Maintaining an “outperformer” rating for Enbridge shares, Mr. Catellier increased his target to $58 from $57, citing the accretive nature of the transaction. The average target on the Street is $54.47, according to Refinitiv data.
Elsewhere, RBC Dominion Securities’ Robert Kwan bumped up his target to $57 from $56 with an “outperform” rating.
“We positively view the accretive bolt-on (i.e., less than 2 per centof Enbridge’s enterprise value) acquisition of assets in line with the company’s longstanding strategy to build-out its U.S. Gulf Coast export footprint via the largest crude export facility in the region,” said Mr. Kwan. “Importantly, despite the US$3-billion acquisition price being paid in cash, we calculate a negligible impact to leverage (i.e., roughly 0.1-times impact to debt/EBITDA) and Enbridge stated that the acquisition does not change its 2022+ capital allocation priorities (i.e., potential for share buybacks in 2022 post L3R’s completion, which could be in the coming weeks).”
Following a stretch of share price depreciation after the Aug. 11 disclosure of negative grade reconciliation at its Rainy River mine, RBC Dominion Securities analyst Josh Wolfson raised his rating for New Gold Inc. (NGD-N, NGD-T) to “sector perform” from “underperform,” believing it “better reflects the company’s risk profile in the context of [its] now reduced valuation.”
“Details of the magnitude of this grade variance were not disclosed, but management noted the affected east lobe area was previously expected to contribute 50 per cent of production in 2H21 and 15 per cent thereafter,” he said. “A high degree of uncertainty regarding the implications of this update is outstanding, and post-event shares have changed by negative 15 per cent as compared to the index’s 1-per-cent performance (and NGD year-to-date is down 44 per cent vs. index down 10 per cent.
“To assess the potential impact of this risk factor, we applied varying scenarios of negative grade reconciliation to determine the potential impact on the Rainy River mine plan. Assuming negative reconciliation is not greaer than 30 per cent at the eastlobe, we see a reasonable potential for open pit grades to be more than 0.90 grams per ton in 2H and remain at or above 1.00 g/t in upcoming years, supporting annualized production of 280,000 ounces in 2022. These grades would represent an improvement from 1H21 results, and still support a positive FCF inflection event in 2H21+. Production upside to greater than 300koz by 2024 could be achieved as underground production begins to ramp-up more meaningfully.”
After trimming his earnings expectations through 2023, Mr. Wolfson cut his target for New Gold shares to US$1.50 from US$1.75, which is below the average on the Street of US$2.01.
“Despite interim elevated uncertainties at Rainy River, we view the outlook for New Gold as reasonably balanced in the context of its valuation today,” he said. “Positively, the company’s balance sheet positioning and FCF outlook remain attractive in our view, and potential upside could be realized with an optimized Rainy River underground mine plan under evaluation by yearend 2021. This is offset by interim elevated risks at Rainy River where grade reconciliation risks could be a factor beyond the east lobe, outstanding deliverables at both Rainy River’s underground build-out and the New Afton C-Zone project completion, plus New Afton higher-risk deliverables of permitting for deposition of in-pit tailings plus rehabilitating the existing impacted tailings dam. In light of this balanced outlook, we are revising our rating.”
TD Securities analyst Tim James thinks GFL Environmental Inc. (GFL-T) “offers investors a relatively resilient source of earnings and cash flow that justify higher levels of financial leverage to maximize returns to shareholders.”
Accordingly, in a research report released Wednesday, he raised his rating for its shares to “buy” from “hold.”
“In the current environment of uncertainty around the trajectory and prolonged impact of the pandemic, along with GFL’s strong execution, improving FCF, growth potential, and M&A pipeline, we believe that it is a compelling investment opportunity at current levels,” said Mr. James. “We believe that an increase in our EBITDA valuation multiple to 15.0 times from 14.0 times previously is justified by sector valuations, its economic resiliency, improving risk profile, and growing track record of delivering on guidance.
“We view GFL’s significantly stronger FCF in Q2/21 and increased 2021 guidance as positive recent developments. Results once again demonstrated the stability of the business and the high predictability of revenue and earnings. We anticipate that further execution and deleveraging will eventually drive GFL’s forward EBITDA multiple in line with its three primary comparables, resulting in a premium to its broader waste management comparable group. Although we acknowledge that sector valuations are at historically high levels, we believe that the stability and risk profile of the industry have improved relative to historical precedents, and that the current environment of uncertainty due to COVID-19 will support elevated multiples for the foreseeable future.”
His target for GFL shares jumped to $52 from $43. The average on the Street is $43.70.
“In our view, GFL is capitalizing on key strategic acquisition opportunities and taking on the required debt financing without creating undue financial risk, while also reducing its cost of debt. We believe that there is upside potential to our current forecasts for the company to generate an adjusted EBITDA CAGR of 8 per cent from 2021 through 2024 while FCF/share increases at a CAGR approaching 20 per cent.,” he added.
Separately, Mr. James cut TFI International Inc. (TFII-T) to “hold” from “buy,” citing recent share price appreciation and limited return to his revised target price of $155, up from $150 and above the $133.37 average.
“Although we believe that TFI is well-positioned to take advantage of future opportunities from its current portfolio of transportation services, the recent acquisition of UPS Freight, and additional M&A, we believe that the share-price return of approximately 135 per cent and the increase in its forward EBITDA multiple of approximately 45 per cent since initiating our BUY recommendation on October 30, 2020 have appropriately accounted for the positive outlook,” he said. “For long-term investors, we believe that there will be attractive risk-adjusted upside beyond our current 12- month target. The increase in our target price is due to a slight increase in our target valuation multiples (target EV/EBITDA to 11.0 times from 10.0 times, and target P/E to 21.0 times from 20.0 times), which we believe is prudent given sector valuations, the recent upward bias to current TFI forward valuations, and anticipated TFI growth relative to comparables. We have reduced our financial forecasts by what we consider to be an immaterial amount due to an adjustment in our assumed revenue seasonality through the rest of 2021, which also affects future years.
“We recognize the potential for TFI’s valuation to continue pushing beyond historical precedents and what we would consider to be reasonable levels, given the strength in the overall freight market. However, at this time, it is difficult to predict where valuation will ultimately peak, and there is limited analytical support to justify even higher multiples at this time, in our view.”
Scotia Capital’s Paul Steep sees the opportunity for both Descartes Systems Group Inc. (DSGX-Q, DSG-T) and Kinaxis Inc. (KXS-T) to “provide solutions for growing last mile delivery challenges, which represents a growing area of logistics focus from an economic, environmental, and sustainability perspective.”
The analysts emphasized the challenges brought on by last mile delivery for all supply chain participants as e-commerce adoption grows, as” “increased shipping volumes create more complex supply chains and manufacturers and retailers are required to respond to consumer demands while seeking to manage increased complexity and cost.”
“Pitney Bowes forecasts that global parcel volume will increase at a 15-per-cent CAGR to reach 220-262 billion parcels annually by 2026 in the world’s 13 major markets,” he added. “Last mile delivery accounts for 41 per cent of total delivery costs (source: Statista), resulting in higher environmental impacts (e.g. fuel consumption, carbon footprint), as well as friction in various stages of the delivery process.”
Mr. Steep thinks Descartes and Kinaxis are the “best positioned” companies his coverage universe to benefit from the trend.
“In addition to providing customers with end-to-end scheduling, tracking, and optimization delivery solutions, Descartes has helped firms to reduce ESG impacts by leading them to increase efficiencies (e.g. lower fuel costs and carbon consumption),” he said. “Kinaxis is seeing success with it’s recently introduced RapidStart solution, offering customers shorter 12-week implementation times in response to firms requiring faster implementations to meet these supply chain challenges. KXS’s solutions also provide ESG offsets, such as an 80-per-cent reduction in last-minute costly expediting activities, due to the solution offering improved planning & forecasting.”
Reaffirming a “sector outperform” recommendation, he raised his Descartes target to US$81 from US$72, . The average on the Street is US$73.46.
“We expect that Descartes’ revenues from last-mile delivery will continue to grow as the firm continues to see wins with new and existing customers, up from approximately 10 per cent of Descartes’ business today. Our view is that Descartes’ revenues will benefit from increased demand towards solving increased last mile challenges by providing leading warehousing and real-time delivery software & solutions. In the firm’s Q1/21 earnings call, management indicated that e-Commerce volumes and the resulting last-mile deliveries continued to drive demand for its solutions.,” he said.
His Kinaxis target jumped to $205, exceeding the $201.50 average, from $180 with a “sector outperform” rating.
“Firms are increasingly looking to Kinaxis to better plan their supply chain to address the complexity due to omnichannel and increased delivery volumes and to help reduce associated costs and inventory waste,” said Mr. Steep.
“Kinaxis’ solution is used for broader supply chain management beyond last mile delivery, with the form offering supply chain management software with a focus on concurrent demand planning with a focus on 7 vertical industries.”
Emphasizing “capital discipline is the new mantra for oil and gas development,” Raymond James analyst Michael Shaw resumed coverage of a trio of Canadian midstream companies on Wednesday.
“We see no reason to believe producers will backslide into old habits,” he said in a research note. " But producer capital disciple does not imply zero volume or capacity growth for midstreams. On the contrary, well-located midstream assets will continue to benefit from additional capital deployments. The Montney/Deep Basin in particular should see steady growth supported by the premium on Canadian condensate and the need to fill newly constructed LNG facilities. What producer capital discipline does imply is more measured production growth, which will need to be match by similarly measured growth from midstream providers.”
“E&P capital discipline implies a risk that midstreams might step-out beyond their traditional growth areas to investments where they might not have particular competitive advantages. While each project will need to be assessed on its own merit, the risks associated stepping beyond core competencies can be high. Our preference will be toward companies with opportunities that fit within existing footprints and can be managed with disciplined growth capital.”
Citing its long-term differentiated growth platform within the Alberta and B.C. Montney region, Mr. Shaw gave Keyera Corp. (KEY-T) an “outperform” rating with a $33.50 target. The average target on the Street is $34.50.
“Keyera stands out by virtue of its differentiated growth outlook versus the rest of the Canadian midstream space,” he said. “The completion of the KAPS pipeline will provide a platform for Keyera to pursue bolt on projects in the prolific Alberta and BC Montney.
“While KAPS does provide long-term growth opportunities, in the short-term there are questions and hurdles related to the project, including contracting the pipeline, the risk of cost inflation, and debt ratios that will move higher during construction.”
Mr. Shaw also gave Gibson Energy Inc. (GEI-T) an “outperform” recommendation “based on its brownfield growth portfolio plus the potential for above average shareholder returns through dividend growth and share buybacks.”
His target is $25, matching the consensus on the Street.
“We highly expect Gibson will be positioned to increase its dividend in 2022 - likely again with 1Q results - as the dividend growth keeps pace with infrastructure cash flow following the completion of the DRU in 2021, the biofuels project, and tank adds,” he said. “Moreover, there is also the possibility for share buybacks. GEI has been approved for an NCIB and will use the NCIB to ensure it fully deploys its $200-million budget.”
The analyst started Pembina Pipeline Corp. (PPL-T) with a “market perform” rating and $43.50 target. The average is $42.36.
“The ongoing difficulties with Ruby are not new for Pembina and its investors,” he said. “Natural gas spreads between Malin and Opal have structurally impaired Ruby and created significant uncertainty on the outlook for the pipeline. Pembina fully wrote down Ruby at the end of 2020 and eliminated equity distributions from the pipeline, but Ruby still represented 5 per cent of adj. EBITDA in the 1H21 and likely remains part of the forward outlook.
“The ultimate obligation on Ruby remains uncertain. Part of the capacity is contracted until 2026 but Pembina is in ongoing conversations with partners on a resolution to the debt in Ruby due 2022.”
Ahead of the release of its second-quarter 2022 financial results before the bell on Thursday, Desjardins Securities analyst Chris Li trimmed his financial expectations for Dollarama Inc. (DOL-T), expecting investors’ focus to be on the discount retailer’s margin outlook “against a backdrop of rising cost pressures.”
“We believe market expectations are generally not high due to the ban on non-essential product sales in Ontario (approximately 40 per cent of store network), which impacted about half of the quarter,” he said. “We are a little more optimistic as we believe DOL was able to recapture some of the pent-up demand once the restrictions were removed (consistent with its experience in Quebec). Consequently, our EPS estimate of 52 cents is slightly above consensus of 50 cents.
“We expect: (1) stable same-store sales vs the prior-year quarter (up 5.4 per cent in 2Q FY21 ex temporary store closures); (2) gross margin up 20 basis points year-over-year; and (3) SG&A leverage of 80 basis points year-over-year, driven by lower COVID-19-related expenses.”
After trimming his revenue forecast for 2022 and 2023, Mr. Li cut his full-year EBITDA projections to $1.276-billion and $1.429-billion, respectively, from $1.296-billion and $1.431-billion.
Keeping a “hold” recommendation for Dollarama shares, he said he sees upside to his unchanged $61 target, but prefers to “wait for better visibility.” The average target on the Street is $61.79.
“Our $61 target is based on 23 times FY23 EPS,” said Mr. Li. “This is arguably conservative given our 22-per-cent EPS growth expectation. Our conservativism reflects margin uncertainty given rising cost pressures. Since most of DOL’s shipping rates are contracted with limited exposure to spot, we expect management to reiterate its target of stable gross margin for the current fiscal year while acknowledging that higher freight rates will be a headwind next year and that it will look for ways to mitigate the impact. Based on our recent pricing survey showing a healthy price gap between DOL vs Walmart and Amazon, we believe DOL has the flexibility to mitigate higher costs through SKU refresh/mark-ups and higher price point launches, likely next year (potential catalyst). But since DOL is a price follower, the unknown is whether its main competitors will fully pass on the higher costs.”
In a separate note, Mr. Li thinks Empire Company Ltd.’s (EMP.A-T) first-quarter financial results, scheduled to be released before the bell on Thursday, will be “clouded by business normalization.
“Overall, we expect the results to reflect the impact of cycling through pandemic-induced sales last year and gradual business normalization as some consumers shift back to discount banners from full-service (EMP has higher exposure to full-service), restaurants reopen and e-commerce sales moderate,” he said.
He’s now projecting adjusted EBITDA of $565-million, down from $583-million a year ago and below the Street’s forecast of $574-billion. He expects same-store sales growth, excluding fuel, to fall 2.4 per cent, below the consensus estimate of a 2.1-per-cent dip and well below the 11-per-cent gain seen in the same period last year.
Though he raised his full-year 2022 and 2023 EBITDA forecast, Mr. Li kept a “buy” rating and $45 target for Empire shares. The average on the Street is $45.30.
“We believe EMP is a good self-help story and remains well-positioned to grow earnings over the longer term through Project Horizon,” the analyst said. “Achieving the more-than 15-per-cent EPS three-year CAGR target implies more than $3.00 EPS in FY23 and supports our $45 target price (14-per-cent potential total return). EMP trades at a notable discount to peers (14.1x forward P/E vs 16.5 times for L and 17.6 times for MRU), which we believe reflects the near-term risk of business normalization.”
Canaccord Genuity analyst Tom Gallo thinks I-80 Gold Corp. (IAU-T) is “taking control of its own destiny” with a “transformational” transaction announced Tuesday.
Before the bell on Tuesday, the Reno-based company announced plans to create a “comprehensive” mining complex in Nevada through an asset exchange agreement to acquire certain processing infrastructure, including an autoclave, and the Lone Tree and Buffalo Mountain gold deposits from Nevada Gold Mines LLC in exchange for its 40-per-cent-owned South Arturo operation. It also announced the South Arturo acqusition of the Ruby Hill Mine from affiliates of Waterton Global Resource Management for US$130-$150-million.
“Upon closing of the deal, i80 will control over 14Moz of gold resource (all categories) in one of the best mining jurisdictions globally,” said Mr. Gallo. “More importantly, owning an autoclave (Lone Tree) will allow the company to process its own sulphide material without the reliance on a toll milling contract, which is often subject to availability and can be prohibitively expensive.”
“We believe securing a processing facility is a massive positive for the company. Two underground projects (Cove and Granite Creek), the latter of which is permitted today had been orphaned assets without at least a definitive processing agreement. We have reduced our long-term processing costs to US$55 per ton (from US $100 per ton) once Lone Tree is rehabilitated and up and running ($100-150-million capital as outlined by the company). We still await a PEA, which is slated in the coming weeks. We also expect the company to commence test mining before year-end, leveraging the processing capacity granted by NGM. Our Cove and Granite NAVs increase by 13 per cent while we drop South Arturo (previously C$168-million).”
Maintaining a “buy” rating, Mr. Gallo raised his target for the company’s shares to $5.50 from $3.75. The average is $4.50.
Meanwhile, Scotia Capital’s Ovais Habib bumped up his target to $4.25 from $3.75 with a “sector outperform” recommendation.
“Overall we view these announcements positively as this (1) provides for refractory and oxide processing for i80′s Nevada mines, (2) adds substantial gold resources to i80′s property portfolio located in close proximity to existing operations,” he said.
In other analyst actions:
* Piper Sandler initiated coverage of Lightspeed Commerce Inc. (LSPD-N, LSPD-T) with an “overweight” recommendation and US$145 target, while Scotia’s Paul Steep hiked his target to US$121 from US$107 with a “sector perform” recommendation. The average target on the Street is US$119.
“Our view remains that LSPD is a strong organic revenue growth name with potential to benefit from a number of organic vectors (e.g., cloud conversion of on premise POS market, uptake of Lightspeed Payments), with the potential to continue actively consolidating the POS market and adding on new technologies,” said Mr. Steep.