Wednesday’s analyst upgrades and downgrades

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

IA Capital Markets’ Naji Baydoun thinks TransAlta Corp. (TA-T) is repositioning for growth through a greater focus on renewables, which he thinks could “provide uplift to equity market valuation.”

The equity analyst said the company’s virtual Investor Day event on Tuesday “should provide investors with greater visibility on the growth outlook and the potential future evolution of TA.”

The Calgary-based company is now aiming to add 2 gigawatts of incremental renewables capacity with a targeted investment of $3-billion by 2025, wanting to “accelerate its growth with a focus on customer-centred renewables and storage through the execution of its 3 GW development pipeline.”

It also declared a quarterly dividend of 5 cents, up 11 per cent from its previous 4.5 cent payout.

“TA’s current initiatives are expected to help the Company be off-coal in Canada by the end of 2021 and completely off-coal by the end of 2025; these initiatives, alongside the Company’s (1) continued focus on broader ESG issues, and (2) repositioning into predominantly clean energy assets, could potentially improve the shares’ appeal to select institutional investors,” said Mr. Baydoun. “As TA executes on its new growth strategy, the Company expects the majority of its future EBITDA and cash flows to be sourced from renewable power assets (rather than thermal assets currently); given the clear valuation gap between thermal and clean energy assets, we see the potential for TA’s shares to experience a positive valuation multiple re-rating as the Company delivers on its growth plans.”

Keeping a “buy” recommendation for TranAlta shares, he raised his target to $15.50 from $14. The average on the Street is $14.82, according to Refinitiv data.

“We are increasing our price target to reflect (1) our adjusted financial forecasts which incorporate lower sustaining capex and therefore higher FCF going forward, and (2) the incremental value we are now ascribing to TA’s development pipeline(given increased visibility on growth and financing plans),” he said. “We continue to like TA’s (1) balanced mix of contracted and merchant power exposure, (2) improving balance sheet and cash flow fundamentals, (3) long-term upside to rising Alberta power prices, and (4) discounted relative valuation versus IPP peers, as well as the strategic support from Brookfield.”

Mr. Baydoun also increased his target for TransAlta Renewables Inc. (RNW-T) by $1 to $21 with a “hold” recommendation. The average is $20.19.

“We are increasing our price target to reflect (1) the previously announced North Carolina solar acquisition, and (2) the incremental value we are now ascribing to RNW’s future growth (in line with the value ascribed to TA’s development pipeline),” he said. “RNW offers investors (1) an more than 2.5GW portfolio of gas & renewable infrastructure assets, (2) an attractive dividend (4.5-per-cent yield, 80-85-per-cent CAFD payout), and (3) potential longer-term growth via future acquisitions. TA’s strategic shift and refocus on renewables growth should bode well for RNW (which will in turn grow alongside TA); however, given the more limited upside to our price target relative to pure-play renewable IPPs in Canada, we would continue to wait for a better entry point or further strategic development.”

Elsewhere, CIBC World Markets analyst Mark Jarvi raised his TransAlta target to $16 from $15 with an “outperformer” rating.

“The 2021 TA/RNW Investor Day update was positive and provided a coherent strategy that builds on solid progress over the last couple of years,” said Mr. Jarvi. “In our view, TA is making prudent and logical decisions to optimize its Alberta operations and mange risk. Further, the updated plans help TA avoid undue risk around future supply in Alberta and carbon pricing policy. Going forward, capital will be devoted to lower-risk renewables that have more predictable return outcomes, and ultimately drive higher growth at RNW. We’ve made a number of model updates including higher estimates for Alberta power prices. Our target on TA moves to $16—we reiterate our Outperformer rating on TA and remain bullish on the name (particularly in the near-term).”

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After Citi’s global commodity team raised his met coal price forecasts through 2022, equity analyst Alexander Hacking upgraded Teck Resources Ltd. (TECK.B-T) to a “buy” recommendation from “neutral.”

On Wednesday, the firm moved its met price target to US$325 per ton for the second half of 2021 from US$145 previously. Its 2022 projection jumped to US$225 from US$150, while it maintained a US$150-per-ton projection for 2023.

“This equates to $165-million of additional revenue and EBITDA over the next 18 months for every seaborne ton sold by the met coal companies under our coverage,” said Mr. Hacking.

“We acknowledge that met is a peak price and facing structural de-carbonization headwinds - but the FCF is too good to ignore, in our view.”

With that view, Mr. Hacking raised his Teck rating and increased his target for its shares to $40 from $30, exceeding the average on the Street of $36.90.

“Teck Resources trades at 13-per-cent attributable-FCF yield in 2022 Citi met coal and 13 per cent in 2023 as QB2 copper ramps up,” he said. “Broadly speaking we see mostly positive catalysts going forward: QB2 ramp up in 2022 (risk of major capex overruns/delays receding), lower transport costs from Neptune, met coal earnings upgrades, and discussion of capital return in 2022 (a year ahead of expected). Operational updates have been mostly disappointing in recent years – but we see enough valuation upside to offset this risk. There is potential sum-of-parts value in Teck if the carbon portfolio is divested – although this is not embedded in our target price.

“Investment positives include a solid portfolio of mining assets including the world’s second biggest export met coal business; growth in copper; a strong balance sheet; increased capital returns in recent years. Negatives include risk of lower met coal demand in future; a history of questionable M&A and dual class share structure. On balance we see more upside than downside at current level”

Concurrently, Mr. Hacking raised St. Louis-based Arch Resources Inc. (ARCH-N) to “buy” from “neutral” with a US$110 target, up from US$62 and above the US$80 average.

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With its fourth-quarter 2021 financial results falling in line with his expectations, ATB Capital Markets analyst Frederico Gomes thinks Aurora Cannabis Inc. (ACB-T) is “gradually marching to profitability.”

On Monday after the bell, the Edmonton-based company reported revenue of $54.8-million, exceeding his $53.1-million estimate, while an adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) loss of $19.3-million was higher than his projection of a $17.2-million projection. Both results were lower than the consensus expectations on the Street ($56.2-million and a loss of $16.2-million).

“Sales remained flat as ACB continued its cost-cutting plan,” said Mr. Gomes. “While we view these cost-control efforts as crucial for the Company to achieve adj. EBITDA profitability, we believe that ACB’s current market value implies overly demanding growth expectations considering the size of and competition in the Canadian recreational market, as well as the volatile nature of international medical cannabis sales. As such, we maintain our cautious stance on the stock.”

Now estimating Aurora could turn adjusted EBITDA positive by the third quarter of fiscal 2023, he raised his gross profit expectations, pointing to gains in high-margin medical sales and “gradual” improvement in recreational sales, but his EBITDA estimates slid with the execution of its cost-cutting program.

“Our estimates imply that ACB would gain market share in both the Canadian recreational and medical cannabis markets,” he said. “In Canadian recreational, we estimate that ACB would achieve a market share of 5.0 per cent in FY2022, 5.8 per cent in FY2023, and 6.5 per cent in FY2024, up to 15 per cent in FY2031, the last year of our forecast. In Canadian medical, we estimate that ACB would grow from its current share of 20 per cent to 30 per cent in FY2031. We forecast that most of the Company’s growth in medical cannabis sales would come from international markets.”

Maintaining an “underperform” rating for its shares, Mr. Gomes trimmed his target to $6 from $7.50. The average is $7.62.

Elsewhere, CIBC analyst John Zamparo raised his target to $6.50 from $7 with an “underperformer” rating.

“We have confidence that Aurora can execute its cost-cutting program but believe it will take time, and we expect that the stock could be pressured until retail sales data improve,” said Mr. Zamparo. “Recent Hifyre data are difficult to reconcile with commentary on ACB’s consumer segment, and we forecast a meaningful sequential decline in FQ1. Aurora’s balance sheet is relatively healthy, valuation (on EV/sales) is among the industry’s lowest, and management deserves credit for its leading gross margin and robust medical sales, but absent a regulatory tailwind from the SAFE Act (which could favour ACB given its profile and volume), we do not foresee a turnaround in the stock until visibility exists on growth in the consumer segment.”

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Easing growth is taking “the air out of the commodity rally,” according to RBC Dominion Securities analysts Sam Crittenden and Alexander Jackson.

However, in a research report on the outlook for industrial metals, they said investment opportunities still exist “as the companies can generate strong FCF free cash flow] and valuations are attractive.”

“Industrial metals mining equities have pulled back 27 per cent from the highs in May due to concerns around slowing global growth as 2020 stimulus fades, particularly in China, where Evergrande’s debt issues bring a slowing property market to the forefront,” the analysts said. “Iron ore has been on the leading edge of the downside move (down 49% to $119/dmt, from $230/dmt in May) as we believe steel production cuts and normalizing supply has put the market back into surplus. Copper has fared better but is also off 13 per cent to $4.24 currently after peaking at $4.86 in mid-May. Copper may be better positioned in the near term relative to iron ore as inventories remain low, it could be less impacted by a property market slowdown in China, and the medium term outlook remains positive.”

On Wednesday, RBC maintained its 2022 copper estimate of $3.75, believing “moderating demand and increasing supply could tip the market back into a small surplus.” However, it raised its medium-term projections, noting “it wouldn’t take much to keep the market in a deficit.”

It trimmed its 2022 iron ore estimate, expecting “moderating steel demand in China and normalizing supply to push the market back into surplus.”

With those changes, Mr. Crittenden made a number of target price changes to stocks in their coverage universe.

His adjustments were:

* Champion Iron Ltd. (CIA-T, “outperform”) to $6.50 from $8.60. Average: $8.29.

* First Quantum Minerals Ltd. (FM-T, “outperform”) to $33 from $37. Average: $33.21.

* Hudbay Minerals Inc. (HBM-T, “outperform”) to $12 from $13. Average: $13.01.

* Labrador Iron Ore Royalty Corp. (LIF-T, “sector perform”) to $41 from $50. Average: $46.71.

* Lundin Mining Corp. (LUN-T, “sector perform”) to $12 from $13.50. Average: $13.36.

* Nevada Copper Corp. (NCU-T, “outperform”) to $2 from $2.50. Average: $2.13.

* Turquoise Hill Resources Ltd. (TRQ-T, “sector perform”) to $25 from $27. Average: $25.14.

In highlighting their recommended equities, the firm said: “Teck Resources benefits from record coal prices in the near term while growing copper production by 60 per cent by 2023, First Quantum can generate strong FCF as Cobre Panama ramps up to become a top 10 copper mine. Ivanhoe is on the cusp of demonstrating the potential of the Kamoa-Kakula copper mine. For Capstone, a Santo Domingo partnership could be a meaningful catalyst. Hudbay is at a FCF inflection point after completing investments in Manitoba and Peru. Champion IronOre has strong growth potential as the phase 2 project starts contributing in mid-2022.”

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A group of equity analysts on the Street raised their target prices for shares of SNC-Lavalin Group Inc. (SNC-T) following Tuesday’s Investor Day event.

SNC Lavalin eyes growth opportunities amid U.S. infrastructure boom

Those making adjustments include:

* RBC Dominion Securities’ Sabahat Khan to $43 from $41 with a “sector perform” rating. The average is $42.62.

“At its Investor Day today, SNC outlined its updated growth strategy and provided 2022-2024 targets,” said Mr. Khan. “Management is looking to build on the progress made towards repositioning the business over the recent years and drive growth across each of its business lines. The 2022-2024 organic top-line growth target of 4-6 per cent annually for SNCL Services (which reflects all business lines excl. Capital and LSTK projects) implies significant growth across its “core” businesses, and if achieved successfully, should contribute to a further re-rating of SNC shares. While there were a number of questions on the Adjusted EBIT margin guidance of 8-10 per cent, we believe guiding to a reasonable/achievable range is important as the company looks to build a track record of delivering results that are in line with expectations. We were also pleased to hear that the primary focus was on organic growth as the company works to deliver consistent results and further improve its balance sheet position (returning to an investment grade credit rating was highlighted as a goal). The company will consider M&A opportunities as well, but the focus will be on ‘bolt-on’ acquisitions that are in the ‘low-tens to low-hundreds of millions of dollars’ range in terms of size.”

* BMO Nesbitt Burns analyst Devin Dodge to $36 from $33 with a “market perform” rating.

“Though we believe SNC is on the right path to de-risking the business, the Investor Day presentations confirmed that the progression to more consistent earnings and FCF performance is likely to be measured and not a ‘step function’ change anticipated by some investors. Meanwhile, the valuation discount to peers has narrowed, which leaves little cushion to absorb any bumps in the road,” said Mr. Dodge.

* Scotia Capital’s Mark Neville to $50 from $44 with a “sector outperform” rating.

“SNC’s three-year financial targets were largely in line with expectations. If the company can deliver on these targets – with the FCF objective being the most consequential, but also unproven – we see meaningful potential upside in the equity,” said Mr. Neville.

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With its operations “turning a corner” and seeing an attractive valuation, Desjardins Securities analyst John Sclodnick raised his rating for Pure Gold Mining Inc. (PGM-X) to “buy” from “hold.”

“While we would like to see more operational consistency, our model incorporates conservative estimates, allowing for considerable future NAV [net asset value] growth, said the analyst upon resuming coverage of the Vancouver-based company following the close of its $23-million equity financing.

“Our scenario analysis indicates that much of the downside risk is factored into the share price and, in our view, the potential return of 100-per-cent more than justifies the risk, particularly given the strengthened balance sheet post-financing.”

Mr. Sclodnick sees Pure Gold’s long-term upside as “significant” with increased exploration success at its mine in the Red Lake district of Ontario.

“While we see limited downside risk from current levels and believe there is a higher probability that we see NAV growth as the company continues to execute on its plan with steady improvements in operational performance, we wanted to look at the significant upside potential that may exist at this asset longer-term,” he said. “The neighbouring Red Lake Mine complex shows geological similarities to the PureGold mine, with both showing bonanza grades at similar depths with quartz veins along maficultramafic contacts.”

The analyst trimmed his target for the company’s shares to $1.70 from $1.80. The current average is $1.89.

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With October as “historically the seasonal entry point,” Raymond James analyst Daryl Swetlishoff thinks it’s “the time is right to add to Paper & Forest Product company positions.”

“After falling precipitously over the summer both SPF and SYP lumber as well as OSB appear to have bottomed and have ground higher in recent weeks,” he said. “Pulp markets have also remained resilient in Europe while downward pressure in NA and China remains a key issue despite unplanned downtime and ongoing logistical issues weighing on supply. Lumber futures markets have performed even better and now sit at a marked premium to current cash markets. We expect a combination of better retail demand along with B.C. interior curtailments to support markets even as Pro Dealer/Home builder shipments are impacted by ongoing logistical issues.

“Despite recent share price appreciation we continue to see generous upside in shares and submit that the market is undervaluing the impact of 1H21 FCF. In particular, we expect aggressive year-to-date share repurchases underpin value and could lead to multiple expansion with reduced free floats leading to a ‘share paper shortage’ when generalist investors return in earnest. Lastly, we highlight that historically, building materials producer shares have shown strong seasonality with October being the prime month to build/add to positions.”

In a research note released Wednesday, Mr. Swetlishoff trimmed his target prices for five stocks in his coverage universe after reducing his third-quarter earnings estimates to adjust for lower building materials pricing.

His changes were:

• Canfor Corp. (CFP-T, “strong buy”) to $47 from $50. The average on the Street is $40.67.
• Conifex Timber Inc. (CFF-T, “outperform”) to $3.25 from $3.85. Average: $3.20.
• Interfor Corp. (IFP-T, “strong buy”) to $57 from $61. Average: $44.83.
• Western Forest Products Inc. (WEF-T, “outperform”) to $2.90 from $3. Average: $2.77.
• Mercer International Inc. (MERC-Q, “strong buy”) to US$18 from US$21.50. Average: US$15.80.

“We note modest (less than 5-per-cent) target price reductions for Interfor, Canfor and Western Forest, while West Fraser’s target [$170] remains unchanged which is largely attributed to the company’s significantly reduced share count following the recently completed Substantial Issue Bid (SIB) and extensive action on the NCIB,” the analyst said. “We continue to see compelling value in building materials stocks, with a healthy 56-per-cent average total return to target with 2021 Best Pick Interfor boasting 84-per-cent upside. We further note that our target multiples remain conservative ranging from 4.5-6.0 times which largely represents the lower end of long term historical averages among our coverage.”

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In other analyst actions:

* Veritas Research analyst Howard Leung raised InterRent Real Estate Investment Trust (IIP.UN-T) to “reduce” from “sell” with an $18.50 target. The average on the Street is $19.22.

* Mr. Leung upgraded Canadian Apartment Properties Real Estate Investment Trust (CAR.UN-T) to “buy” from “sell” with a $69 target, exceeding the $67.45 average.

* Wells Fargo analyst Praneeth Satish raised his target for shares of Enbridge Inc. (ENB-T) to $56 from $53, keeping an “overweight” recommendation. The average is $54.84.

“On 9/28/21, we attended ENB’s virtual ESG event,” he said. “The presentation (a first for ENB) highlighted ENB’s approach to ESG. Like other companies, ENB has announced a number of long-term targets as it relates to E, S, and G . Importantly, however, management’s compensation is tied towards achieving these targets. In addition, emissions are part of ENB’s project evaluation framework. In our 2021 ESG Scorecard, ENB received the highest score in the midstream sector. For all of these reasons, we view ENB as having among the best in class ESG frameworks within midstream”

* Desjardins Securities analyst Frederic Tremblay trimmed his H2O Innovation Inc. (HEO-X) target to $3.25 from $3.50 with a “buy” rating, while Canaccord Genuity’s Yuri Lynk cut his target to $3 from $3.25 also with a “buy” rating. The average is $2.42.

“4Q results were in line with our expectations as short-term industry challenges (eg freight, inflation, FX) and a tough comp temporarily overshadowed HEO’s positive attributes,” Mr. Tremblay said. “Looking ahead, we believe HEO will take appropriate steps to mitigate the challenges while pursuing growth opportunities in the attractive water market. The company remains well-positioned for long-term success thanks to its proven expertise across three complementary segments, strong balance sheet and disciplined M&A strategy.”

* Baird analyst Colin Sebastian lowered his target for shares of Shopify Inc. (SHOP-N, SHOP-T) to US$1,650 from US$1,700, keeping an “outperform” rating. The average is US$1,701.96.

* TD Securities analyst Michael Aelst increased his target for Loblaw Companies Ltd. (L-T) to $98 from $95 with a “buy” rating. The current average is $91.55.

* Morgan Stanley analyst Ioannis Masvoulas cut his Lundin Mining Corp. (LUN-T) target to $10.70 from $11.50, keeping an “equal-weight” recommendation. The average is $13.36.

* RBC analyst Irene Nattel increased her Pet Valu Holdings Ltd. (PET-T) target to $34 from $32, reiterating a “sector perform” rating. The current average is $33.33.

“Recent management meetings reinforce our view of PET as a compelling SMID-cap, defensive consumer retail idea that is particularly well positioned within the staples space against the backdrop of accelerating inflation,” said Ms. Nattel.

“Our Sector Perform rating reflects current valuation that, in our view, appropriately factors in the near-term growth outlook.”

* Jefferies analyst Hamzah Mazari raised his GFL Environmental Inc. (GFL-N, GFL-T) to US$44 from US$42 with a “buy” rating. The average is US$39.