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

A group of equity analysts on the Street raised their target prices for Teck Resources Ltd. (TECK.B-T) in response to the miner’s Investor Day event, where it reaffirmed its strategic plan to focus on increased copper production and reducing contributions from coal.

Investors were unimpressed, sending shares of the miner lower by 3.2 per cent on Tuesday after it reduced its 2021 forecast for refined zinc production on Tuesday, citing the impact from wildfires in British Columbia. Its forecast is now in the range of 285,000 ton to 290,000 tons, falling from 290,000 tons to 300,000 tons previously.

See also: Norman B. Keevil, Teck’s chairman emeritus, unsentimental about possible sale of miner’s coal business

Pointing to strong coal prices and calling its strategy “strong,” BMO Nesbitt Burns analyst Jackie Przybylowski upgraded Teck shares to “outperform” from “market perform.”

“[Tuesday’s] virtual investor day update provided helpful colour on the company’s operations, its corporate strategy, and sustainability initiatives,” she said. “The important QB2 project is progressing on schedule, investments in technology are showing significant benefits, and cash flows are strong (especially in the case of sustained spot copper and coal commodity prices).”

Ms. Przybylowski raised her target for Teck shares to $44 from $40. The average on the Street is $36.37, according to Refinitiv data.

“We see strong cash flows, as prices remain elevated in Teck’s key commodities, a strategy which is clearer and better articulated than in the past, and potential for positive catalysts as outlined on page 3. While completion of the QB2 project continues to be a risk, the company appears to be managing the project well, and we wouldn’t expect meaningful negative news until closer to the target completion in H2/22,” she added.

Other analysts making target adjustments include:

* Raymond James’ Brian MacArthur to $39 from $37 with an “outperform” rating.

“We believe Teck offers good exposure to coal, copper, and zinc, and is able to convert EBITDA from its Canadian operations efficiently given its large Canadian tax pools. Given Teck’s long life, low jurisdictional risk, diversified asset base, and valuation, we rate the shares Outperform,” said Mr. MacArthur.

* Canaccord Genuity’s Dalton Baretto to $31 from $28 with a “hold” rating.

* CIBC World Markets’ Bryce Adams to $35.50 from $34 with a “neutral” rating.

* TD Securities analyst Greg Barnes to $40 from $37 with an “action list buy” rating.

* Scotia Capital’s Orest Wowkodaw to $43 from $35 with a “sector outperform” rating.

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Following Tuesday’s Investor Day event, iA Capital Markets analyst Elias Foscolos reaffirmed his view that Brookfield Business Partners L.P. (BBU.UN-T, BBU-N) is positioned to deliver “robust” net asset value growth “as it seeks to monetize assets that are at or near maturity, continues to enhance EBITDA in existing operations, and redeploys capital to further expand and diversify its operations and provide new growth platforms.”

Noting Brookfield Business already possesses a healthy pipeline of future opportunities worth US$20-billion in potential equity capital after a series of acquisitions this year, he thinks it has a “competitive advantage in sourcing and executing attractive deals” through its partnership with Brookfield Asset Management Inc.

“In addition to corporate liquidity for bridging future transactions, BBU’s existing portfolio companies generate strong distributable cash flow, and BBU also notes potential up-financing opportunities that have arisen based on natural de-leveraging at the portfolio company level,” said Mr. Foscolos. “While BBU will continue to exercise patience and seek to maximize value, several of its key businesses are likely at or near maturity, and we expect a ramp up of monetizations in the short term. BBU could also seek to access public markets, but we do not believe this would be the preferred approach at current unit valuations.”

The analyst expects to see “strong” long-term returns, noting its target of achieving per unit value of US$110 in five years, which he said equates to a compound annual growth rate of 15 per cent relative to its current NAV estimate.

“Given BBU’s track record of delivering average [internal rates of return] of 30 per cent, we believe this is highly achievable,” said Mr. Foscolos.

“BBU estimates its current NAV at $54-58 per unit (30-35 per cent year-over-year), or $56 per unit at the midpoint, with potential embedded value of $75+ per unit. While BBU’s valuation does not include corporate costs and management/performance fees, the current 24-per-cent discount on the trading price of the units is near-historically wide.”

Maintaining a “buy” rating for its units, Mr. Foscolos increased his target to US$53 from US$52, which is the current average on the Street.

Elsewhere, BMO Nesbitt Burns analyst Devin Dodge raised his target to US$55 from US$54 with an “outperform” rating.

“Against the backdrop of improving fundamentals for many of its businesses, progress on profit improvement plans across its portfolio, strong exit valuations and an active new investment pipeline, we believe the risk/reward is very favourable. BBU remains our top pick,” he said.

Mr. Dodge also increased his target for Brookfield Infrastructure Partners LP (BIP-N, BIP.UN-T) to US$64 from US$63, reaffirming an “outperform” recommendation. The average is US$62.64.

“We believe there are a number of tailwinds for BIP, including a robust organic growth outlook, an active new investment pipeline and strong demand for its mature investments. The yield is attractive while the payout ratio returning to its targeted range in 2022 could allow distribution growth to shift higher. BIP is among our preferred investment ideas,” said Mr. Dodge.

Raymond James’ Frederic Bastien raised his target for Brookfield Infrastructure to US$70 from US$65 with an “outperform” rating.

“Our Best Pick for 2021 has not disappointed, executing on a sound asset rotation strategy and capitalizing on broadly conducive dynamics for organic growth to increase its annual FFO per unit run-rate by over 20 per cent,” said Mr. Bastien. “The good news is there is still much for BIP unitholders (and BIPC shareholders) to look forward to. The next several years should see governments invest heavily in infrastructure to stimulate growth, telecom operators plow billions of dollars into data centers to keep up with spiraling cloud demand, and midstream companies seek capital to transition their businesses into a net zero world. We expect this backdrop to provide Brookfield with plenty of opportunities to buy high-quality assets for value and de-risk them with its operations-oriented approach.

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Brookfield Renewable Partners L.P. (BEP-N, BEP.UN-T) possesses “the scale and expertise to deliver on the opportunity of a generation,” said Raymond James analyst Frederic Bastien following its Investor Day event.

“Mark Carney, Brookfield’s Vice Chairman and Head of Transition Investing (and former Governor of the Banks of England and Canada), indicated that the momentum behind decarbonization continues to accelerate amid growing net zero carbon commitments,” he said. “How fast are things moving? Mr. Carney noted that commitments to net zero from governments and corporations have increased a respective sixfold and threefold in just 18 months. Global decarbonization is clearly a daunting task, with required annual investment over the next 30 years estimated in the $3.5-trillion to $5-trillion range, as compared to ‘only’ $300-billion today. That said, BEP is arguably the best positioned player we are aware of to deliver on the near term steps involved—namely, the reduction of scope 2 emissions by corporate partners. As discussed by CEO Connor Teskey at our recent Sustainability Conference and evident in recent agreements with the Amazons of this world, Brookfield already ranks as a go-to decarbonization partner.”

Pointing to its recent share price weakness, Mr. Bastien raised Brookfield Renewable to “outperform” from “market perform”

“BEP units are off 23 per cent from their Jan-22-21 high, versus a gain of 13 per cent for the S&P 500, and trading at roughly the same levels they were when we downgraded them on valuation concerns last fall,” he said. “However, as outlined during the investor day, the opportunity in front of Brookfield Renewable has materially improved since then — something we believe is not reflected in the current unit price. Specifically, BEP intends to lift its pace of capital deployment to the tune of 20 per cent, drive above-average FFO per unit growth, and deliver project returns that are head and shoulders above those of most renewable developers today. As such, we are taking this opportunity to upgrade.”

His target increased to US$44 from US$41, exceeding the US$42.83 average on the Street.

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BMO Nesbitt Burns analyst Peter Sklar reduced his third-quarter financial estimates for North American auto parts manufacturers “sharply” on Wednesday, due to a production slowdown necessitated by the ongoing semiconductor shortage.

“At the beginning of the COVID-19 pandemic, global auto production halted, which caused auto OEMs to reduce component orders,” he said. “During this time, semiconductor manufacturers shifted production towards smartphone and computing platforms. As global auto production slowly resumed and economic conditions improved, auto sales rebounded faster than originally anticipated. However, auto OEMs have not been able to re-order semiconductor components as quickly as needed with semiconductor manufacturers operating at capacity in order to supply various consumer electronic sectors, which has led to a global semiconductor shortage.”

In justifying his reductions, Mr. Sklar pointed to Wards Intelligence’s Sept. 13 forecast of a 20-per-cent year-over-year decline in production for Detroit’s Big Three automakers in third quarter, versus an estimated 10-per-cent drop previously. He also noted IHS Markit’s Sept. 16 forecast predicted Western European production will decline 24 per cent (versus 11 per cent previously).

“We note that these forecasts could be further revised downward in the future if the semiconductor shortage is prolonged,” he added.

That led Mr. Sklar to drop his target prices for stocks in his coverage universe, including:

* Magna International Inc. (MGA-N, MG-T) to US$100 from US$109 with an “outperform” rating. The current average on the Street is US$107.80.

* Linamar Corp. (LNR-T, “outperform”) to $97 from $102. Average: $99.20

* Martinrea International Inc. (MRE-T, “market perform”) to $13 from $14. Average: $18.38.

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RBC Dominion Securities analyst Sabahat Khan expects Roots Corp. (ROOT-T) to see improved sales through the second half of 2021 as store traffic.

However, in the wake of the Sept. 10 release of in-line second-quarter financial results, he warned supply chains disruptions “represent an ongoing risk.”

“Management noted that heading into Q3, all stores have reopened (except for one location), a notable improvement compared to the company entering Q2 with 68 corporate retail stores and 5 pop-ups temporarily closed,” said Mr. Khan. “We expect the broad-based reopening to contribute to a more sustained and material improvement in top-line once restrictions are completely removed; however, some near-term margin pressure as labor costs increase (with the addition of staff supporting the seasonal uptick in Q3/Q4 demand) and rent abatements subside (expected to be lower in Q3 and nil in Q4).”

The analyst said he’s “keeping an eye on inventories” moving forward, noting: “Through Q3 to-date, management noted that they are experiencing some supply chain challenges and are mitigating the impact (i.e., 2 times the lead times for ocean freight, product shortages) through: 1) leveraging existing inventory on-hand (the pack-and-hold inventory the company put away); and, 2) using air freight for key seasonal products. With the demand environment likely to improve this holiday season amidst the ‘re-opening’, we view the supply chain issues as the primary risk facing the company this holiday season. The company should be able to offset some of the potential shortfall with inventory on-hand from prior seasons; however, using airfreight could impact margins.”

Reiterating a “sector perform” rating for Roots shares, he bumped up his target to $3.50 from $3. The average on the Street is $4.46.

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Tidewater Renewables Ltd. (LCFS-T) is set to benefit from a “first mover advantage in a supportive regulatory environment,” according to Acumen Capital analyst Trevor Reynolds, who sees a “significant growth runway.”

He initiated coverage of the subsidiary of Tidewater Midstream and Infrastructure Ltd. (TWM-T), which began trading on the Toronto Stock Exchange after its initial public offering on Aug. 18, with a “buy” recommendation.

“TWR is in a unique position to capitalize on an energy transition which is nearing an inflection point,” said Mr. Reynolds. “Canada is currently producing only a nominal volume of renewable diesel from the Parkland refinery (Burnaby, BC), thus TWR has a first mover advantage as they work to lock up long term feedstock agreements. Low carbon fuel projects are supported by an established fuel credit market in B.C. which results in a projected 1.4-times net build multiple on TWR’s initial renewable diesel project being constructed at Prince George. We note a Canada wide regulatory framework is expected in 2023 which has the potential to further improve TWR’s economics, while demand for renewable fuel products is already established south of the border by credit markets in California, Oregon, and Washington.”

“The initial assets acquired through the spin-out transaction generate approximately $40-million of run rate EBITDA and operate under long-term take or pay contracts with TWM as the primary counter party. Moving forward the initial focus will be execution on the renewable diesel project at Prince George which is expected to be the primary driver of EBTIDA increasing to over $150-million in 2023. Furthermore, TWR has identified two renewable natural gas projects (total capex $80-million) as medium to longer term opportunities. Including hydrogen and CCUS, TWR has identified more than $1.8-billion in potential projects.”

The analyst set a target of $22.75 per share. The current average on the Street is $20.63.

“Our group of comparable companies for TWR include both biofuel/RNG producers and traditional refiners. TWR currently trades at significant discount to its peers as we look into 2023. We believe over time as projects come online, cash flow compounds, and investors gain comfort around TWR’s ability to execute on its business strategy, the valuation gap will moderate,” he said.

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Reminding investors “big gains come in small packages,” Echelon Partners analyst Stefan Quenneville initiated coverage of Nanalysis Scientific Corp. (NSCI-X) with a “buy” recommendation, expecting significant growth moving forward.

The Calgary-based scientific instrument manufacturer specializes in the production of compact Nuclear Magnetic Resonance spectrometers, which Mr. Quenneville thinks will “transform the way laboratory- and field-based users approach chemical analysis.”

“Nanalysis’ NMR instruments provide the optimal balance of performance, portability, and user-friendliness to serve new markets better than competitors,” he said. “We expect this heightened market penetration to drive dramatic growth of 124 per cent in 2021 and 76 per cent in 2022, as the technology is quickly adopted in the marketplace.”

“Ongoing collaborations with impressive industry partners such as Bosch in shipping vessels (BOSCHLTD-NSE) and Sartec in oil refineries (SRS-BIT) are expected to yield instruments tuned for specific operating environments. This would greatly accelerate the adoption of NMR by users in a US$1-billion TAM made up of a diverse set of industries that currently lack access to traditional NMR instruments and other quality analytical methods.”

Seeing “meaningful upside optionality over the longer-term” and viewing Nanalysis as “currently heavily undervalued,” Mr. Quenneville, currently the lone analyst on the Street covering the stock, set a target of $2.85. The stock closed at $1.09 on Tuesday.

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In other analyst actions:

* Raymond James analyst Farooq Hamed initiated coverage of Surge Copper Corp. (SURG-X) with an “outperform” rating and 65-cent target.

“With both assets based in BC, Canada, close to local infrastructure and a past-producing mine (Huckleberry mine currently on care and maintenance), we believe SURG’s asset exposure compares favourably to other exploration stage copper development companies in terms of ability to de-risk future development,” Mr. Hamed said.

* Scotia Capital analyst Orest Wowkodaw increased his Nevada Copper Corp. (NCU-T) target to $1.50 from 15 cent, keeping a “sector perform” rating. The average is $2.13.

“Despite an attractive valuation and an elevated Cu price environment, we rate NCU shares Sector Perform based on heightened operating and balance sheet risk,” he said.

* Scotia Capital’s George Doumet lowered his Park Lawn Corp. (PLC-T) target by $1 to $42, which is below the $44.44 average. He maintained a “sector outperform” recommendation.

“We are introducing our FY2023 estimates, while tapering our 2H/21 and 1H/22 organic growth assumptions to reflect a more pronounced normalization of at-need volumes than previously expected,” he said. “We continue to look for healthy organic growth over our forecast horizon driven by growth in revenue per call, higher preneed volumes, and incremental volumes resulting from recent investments in capacity, notably Westminster, which is expected to come online in 2H/22. That said, we are seeing evidence of softer than expected death rates in the US, and more so in PLC’s key geographies (more on this below). As such, we have taken a conservative approach and assumed this trend is to continue (despite the ongoing surge in delta variant cases) over the next few quarters. Our 2021 and 2022 adj. EBITDA estimates are reduced by 7 per cent. Fresh off the heals of the company’s equity raise, we look more carefully at what it means for upside to our estimates once deployed. We estimate upside of 25-per-cent-plus to our adj. EBITDA estimates as the company continues to execute on its funnel of acquisitions.”

* CIBC World Markets analyst Dean Wilkinson increased his Brookfield Asset Management Inc. (BAM-N, BAM.A-T) target to US$67 from US$65, keeping an “outperformer” rating. The average on the Street is US$63.38.

* Jefferies analyst Chris LaFemina cut his target for First Quantum Minerals Ltd. (FM-T) to $40 from $42 with a “buy” rating. The average is $33.38.

* Mr. LaFemina also reduced his target for Sierra Metals Inc. (SMT-T) to $2.50 from $3.30 with a “hold” rating. The average is $4.53.

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