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

Enbridge Inc. (ENB-T) is “positioned to provide stable, low-risk growth through both conventional and low-carbon investments,” according to iA Capital Markets analyst Matthew Weekes.

Following Tuesday’s Investor Day even, he assumed coverage of the Calgary-based company, reiterating the firm’s “buy” recommendation for its shares after its 2022 guidance fell in line with his expectation.

Enbridge is projecting earnings before interest, taxes, depreciation and amortization (EBITDA) of a range of $15-billion to $15.6-billion, aligning with iA Capital Markets’ $15.46-billion forecast. Discounted cash flow per share of $5.20-$5.50 also met its estimate ($5.30).

“[Enbridge] is targeting 5-7-per-cent average annual DCF per share growth through 2024,” said Mr. Weekes. “ENB expects this growth to be driven by a combination of revenue escalators and efficiency enhancements, growth capital investment of $3-4-billion per year in highly strategic, capital-efficient projects, and deployment of up to $2-billion per year of excess capital, weighing additional organic growth against share repurchases, asset/tuck-in acquisitions, and further reducing leverage. ENB’s current secured growth backlog for 2022+ is $9.0-billion, including $4.5-billion in 2022.

“Growth opportunities [are] seen across the business, but we will most likely see an increasing shift to gas and renewable investments. ENB forecasts up to $6-billion of annual organic growth investment capacity, of which 75 per cent is attributable to gas and renewables, while liquids are still expected to remain a key component of the business and generate attractive returns and cash for investment in other areas.”

After refreshing the firm’s valuation for Enbridge, Mr. Weekes trimmed its target to $54 from $56, warning of “some medium-term risk in the Liquids Pipeline segment around Mainline tolling and other factors.” The average on the Street is $55.52.


RBC Dominion Securities analyst Walter Spracklin thinks downward pressure on Canadian Pacific Railway Ltd. (CP-T) stock ahead of an index rebalance “presents a rare holiday gift.”

In a research note released Wednesday, he said several factors weighing on CP, including “expected (and significant) net index selling, are temporary and now create a “significant buying opportunity.”

“Recall CP and KSU will be holding their shareholder meetings to approve the transaction on Dec 8 and 10, with expected close of the deal into voting trust on Dec 14,” said Mr. Spracklin. “The delisting and removal of KSU from U.S, indexes will be only partially offset from the increased weight in the Canadian index, leading to net selling of CP to the tune of 12.4 million shares ($1.1-billion).

“In addition to the index rebalance, we flag that CP has been under pressure these past few months as a result of a number of factors, all of which we view as temporary: 1) flooding (now over); 2) supply chain (likely over by mid-2022); 3) arb shorting as part of KSU transaction (over by Dec 14); 4) hedge fund shorting associated with CN activist play (over by March 2022 at latest); and 5) drought that impacted Grain haul (over by mid-2022). Not only do these factors have a finite impact, many will soon switch to positive comps for H2/22 (especially in the case of Grain).”

Mr. Spracklin called the deal for Kansas City Southern as a “generational event,” seeing “meaningful opportunity from many angles: 1) new network significantly extends CP’s reach into the US and as far south as Mexico; 2) significant diversification merits, both geographic and by product mix; and 3) meaningful cost and revenue synergies – currently pegged at US$1-billion – which in our view will likely prove conservative.”

Seeing it as a “time to act” on CP, he maintained an “outperform” rating and $115 target for its shares. The average is currently $103.56.

“We see now as opportunistic given the temporary nature of the factors ... and the unique nature of the acquisition opportunity,” said Mr. Spracklin. “Furthermore, we expect arbs will be less active on rebalance day (given selling will be on the U.S. line and buying on the Canadian line) potentially creating an even more attractive opportunity not only to buy CP today, but to take advantage of downward pressure on KSU on the date of the rebalance should that opportunity arise. Accordingly, we recommend monitoring closely trading patterns this week and next for such an opportunity.”


Driven by the industry’s “newfound focus on shareholder returns and capital discipline, backed by FCF yields well into the midteens for most producers at strip pricing,” Canada’s energy sector should see a “solid” 2022, according to Desjardins Securities analysts Justin Bouchard and Chris MacCulloch.

“As we roll into 2022, we can state unabashedly that we have Buy ratings on every single producer under our coverage,” they said. “A focus on oil or natural gas, big or small—it really makes no difference, as we see an environment where a rising tide lifts all boats again despite the meteoric performance of the Canadian energy sector in 2021.

“To be sure, there are still a number of headwinds for oil before a sustained shift to significantly higher prices — but if the world does not experience another global lockdown due to Omicron (or the next variant), there is clear line of sight to a much stronger price environment in the second half of 2022. On the natural gas front, the heating season is off to another slow start, with a decidedly bearish December weather forecast. But there is still plenty of winter left, and the one thing you can always count on with natural gas markets is that volatility will remain front and centre.”

In a research report released Wednesday, the analysts called 2021 “the year of capital discipline” for the energy sector after oil prices beginning below US$50 per barrel “coming out of the depths of despair in 2020.”

“When we look at the sector based on current strip commodity prices, we see double-digit FCF yields across the board,” they said. “And if you believe in the strip, it is difficult to imagine that investors won’t eventually gravitate toward the sector in greater numbers, particularly if global inflation fears continue rising and companies practice what they preach with respect to shareholder returns. As we highlighted earlier, we still believe that the sector provides a compelling investment opportunity in 2022, even following its stellar performance this year.”

With that view, the analysts revealed a trio of “top picks” for the coming year:

They are:

* Suncor Energy Inc. (SU-T) with a “buy” rating and $42 target, up from $41 previously and above the $39.95 average on the Street.

“2021 was yet another challenging year for SU as operational issues overshadowed many of the positive steps undertaken with respect to ESG and capital allocation,” they said. “The delay at Fort Hills was the final element which underscored for many investors that had lost focus on ‘operational excellence’. While it is difficult to argue with that contention, we believe the tide is about to turn. The company’s deeply discounted stock price, strong core asset base and focus on capital allocation make it a compelling name for 2022. At its investor day in May, SU outlined a very clear strategy which included a ‘value over volumes’ approach, a focus on paying down debt, returning cash to shareholders and a commitment to absolute GHG emissions reduction targets (as opposed to intensity-based targets). We believe that SU will quickly return (if it isn’t there already) to its ‘operational excellence’ standard which had been on full display for the better part of the last decade. Continuing to deliver solid quarterly results (as shown in 3Q21), ramping Fort Hills to full capacity and delivering on the synergies associated with the recent assumption of operatorship at Syncrude are key near-term catalysts that we believe will add to the momentum. The company’s FCF profile is impressive and its capital allocation strategy translates into meaningful shareholder returns. Not only has SU put a cap on annual spending through 2025 at $5-billion, but the capital allocation policy is for 50 per cent of FCF to be allocated toward debt repayment, with the balance funding share buybacks. And let’s not forget that in October the company announced a doubling of its dividend to near prepandemic levels (current yield of 5.5 per cent), which not only demonstrates a commitment to returning cash to shareholders, but also speaks to the confidence that SU has in its ability to execute. Despite the recent volatility in oil markets, the 2022 outlook for SU is very positive.”

* ARC Resources Ltd. (ARX-T) with a “buy” rating and $21 target, up from $20 and exceeding the $18.07 average.

“Over the past three quarters, ARX has been diligently working on the integration of assets following the strategic combination with Seven Generations earlier this year,” they said. “The deal provided ARX with increased scale and expanded capital allocation flexibility — both of which have significantly boosted its cash flow profile while providing additional diversification across the hydrocarbon value chain. The company’s production profile is roughly 60-per-cent natural gas and 40-per-cent liquids, which provides exposure to both commodities. In our view, the stock is heavily discounted and the valuation does not reflect the fundamentals of a company that is highlighted by a strong cash flow profile, low debt metrics and a commitment to returning 50–80 per cent of FCF to shareholders. It is also worth noting that in November, the company announced a 52-per-cent increase to the dividend (current yield of 3.6 per cent) — and there is visibility to further dividend growth in 2022.”

* Advantage Energy Ltd. (AAV-T) with a “buy” rating and $10 target, rising from $9.50 and topping the $9.09 average.

“AAV has been methodically executing its business plan this year of driving down costs, growing production and directing FCF to the balance sheet,” they said. “But let’s first address the 183,000-tonnes-of-CO2 elephant in the room. In late March, AAV announced the establishment of its Modular Carbon Capture and Storage (MCCS) technology and the formation of its clean-tech subsidiary Entropy, which offers profitable CO2 capture (on a post-combustion basis) at prices below $50 per ton CO2 (more than 10-per-cent IRR). With Phase 1 already under construction at the Glacier Gas Plant and set to come onstream in March 2022, the company dropped the proverbial hammer last month by announcing a target to achieve net zero Scope 1 and 2 emissions by 2025, which is well ahead of most of its North American industry peers. If you read the tea leaves, AAV appears poised to emerge as a key player in the forthcoming energy transition as it looks to deploy its MCSS technology through the production of ‘blue natural gas’ (ie net zero emissions). Operationally, the company has been executing on its plan to grow production by 10 per cent annually, as it continues to fill spare processing capacity at Glacier, which is still operating well below nameplate capacity. Even following the recent pullback in natural gas prices, the company is poised to generate $150-million of FCF in 2022 based on the current strip and is on track to extinguish its remaining debt load by early 4Q22. All of which begs the question of what’s next for AAV? With dry powder at its disposal, the company could begin returning capital to shareholders in 2022, either through a dividend, share buybacks or some combination thereof. We should also note that with the stock trading at 3.6x EV/DACF based on the current strip, the market has discounted limited upside for Entropy. In other words, AAV still provides an attractive call option on Entropy’s MCSS technology and the MOUs that it has signed to date. Meanwhile, with the federal government’s proposed plan to increase carbon prices to $170 per ton CO2 by 2030, the potential market for CCS technologies in Canada could soon leave many investors blushing. All the more so when considering that EU and UK ETS carbon prices have also been rising by the day after recently eclipsing EUR80 per ton CO2, along with the lucrative 45Q tax credits on offer in the U.S. for CCS technologies, which would be significantly enhanced through passage of the Build Back Better Act in the US Senate. Simply put, you would be hard pressed to find another company that offers the same combination of operational excellence, disciplined financial management and industry-leading ESG performance, with the potential to capitalize on the forthcoming energy transition through its 90-per-cent ownership stake in Entropy.”

Among large-cap stocks, the analysts made these target changes:

* Canadian Natural Resources Ltd. (CNQ-T, “buy”) to $65 from $60. Average: $62.70.

“CNQ is always in the mix when discussing top picks owing to its prowess at squeezing maximum value from its assets; it has outlined a strategy to pay down debt and return cash to shareholders,” they said.

* Cenovus Energy Inc. (CVE-T, “buy”) to $21 from $20. Average: $19.81.

“CVE is closing in on its longer-term net debt target of $8-billion; once achieved, the company will shift its focus to shareholder returns, most likely through an outsized share repurchase plan while continuing to strengthen the balance sheet,” they said.

* Imperial Oil Ltd. (IMO-T, “buy”) to $50 from $44. Average: $48.

“IMO is generating significant amounts of FCF and has committed to shareholder returns. The question at this point is what form those shareholder returns will take; the company is in the process of evaluating its options,” they said.

For dividend-paying stocks, their changes were:

* Crescent Point Energy Corp. (CPG-T, “buy”) to $11 from $10. Average: $9.27.

* Enerplus Corp. (ERF-T, “buy”) to $17.50 from $17. Average: $15.25.

* Freehold Royalties Ltd. (FRU-T, “buy”) to $17.50 from $16.50. Average: $15.64.

* Tamarack Valley Energy Ltd. (TVE-T, “buy”) to $5.75 from $5.50. Average: $5.17.

* Vermilion Energy Inc. (VET-T, “buy”) to $19.50 from $19. Average: $16.69.

* Whitecap Resources Inc. (WCP-T, “buy”) to $11.50 from $10. Average: $10.92.


A slowdown in e-commerce growth is likely to weigh on the results for its Empire Company Ltd.’s (EMP.A-T) Voilà grocery delivery service, according to BMO Nesbitt Burns analyst Peter Sklar, who expects losses that are “larger and more lengthy than investors anticipated.”

That led him to lower his rating for the parent company of Sobeys to “market perform” from “outperform” on Wednesday.

“Our [October] analysis implied that Voilà would be required to capture a substantial 37-50-per-cent market share of the current online grocery spend in the GTA, or at least a 28-per-cent share of the total GTA online grocery market by calendar 2023 (assuming good growth of the overall online grocery market) in order to achieve capacity,” he said. “Recent website activity exacerbates our concerns.

“We monitor traffic to Voilà's website and specifically the monthly number of unique users and total visits to the website. ... Activity on Voilà's website has declined since peak COVID-19 levels in May of this year (the blue shaded areas represent peak COVID-19 levels) and numbers are now flat-lining. There could be an argument that this lack of growth is just temporary as consumers return to restaurants as COVID-19 eases, however, we have noted that since July, website activity has increased for other websites such as Instacart (although arguably some growth is due to expanding categories beyond food), HelloFresh (although this is a meal kit website), and Cornershop.”

Mr. Sklar said the financial impact of Voilà is “potentially meaningful” given that it is currently expected to lose 25-30 cents per share relative to his 2022 earnings per share projection of $2.62.

“Until more clarity surfaces regarding Voilà's financial outlook, we are concerned that the potential losses will suppress the stock price performance relative to peers,” he said.

Mr. Sklar trimmed his target for Empire shares to $41 from $45, which is the current average on the Street.


RBC Dominion Securities analyst Andrew Wong sees a positive set-up for fertilizer markets going into 2022.

“We expect global ag markets to remain tight in 2022, supporting strong crop prices, which we think may persist for a similar time frame as prior ag cycles at 3 years (through 2023),” he said. “However, we see potential for an extended cycle due to the combination of weather-related production disruptions, fertilizer supply challenges, environmental awareness impacting crop productivity and acreage growth, strong global demand, and broad inflationary pressures. Overall, we think the supportive ag backdrop has resulted in very strong farmer economics, which we expect should continue to support strong fertilizer demand and relatively high prices.”

In a research report released Wednesday previewing the new year, Mr. Wong predicted that backdrop will lead to “strong” performance for fertilizer equities with support coming by “continued upward estimate revisions, positive underlying fundamentals, low valuations, and strong free cash flow yield at 20-30 per cent in 2022 and 10-15 per cent in 2023.”

“However, we think in the near term, valuations may stay at low ‘peak’ multiples while fertilizer prices consolidate from current high levels, which could result in an uneven start to the year,” he said.

“Fertilizer equity valuations have declined even as fundamentals have improved significantly as shares are trading at low ‘peak’ valuations. However, we stress that forward consensus estimates, which current low valuations are based on, are likely using very conservative fertilizer price forecasts. Our forward 12-month EBITDA estimates based on spot prices are 50-90 per cent higher than current consensus estimates, which indicates that estimates are likely to move higher as price forecasts are marked to market.”

Mr. Wong said he likes Saskatoon-based Nutrien Ltd. (NTR-N, NTR-T) due to its “combination of attractive upside with strong downside support due to solid financials and FCF generation backed by steady Retail operations.”

Keeping an “outperform” rating, he raised his target for its shares to US$85 from US$80. The average on the Street is US$80.40.

“We believe Nutrien provides an attractive combination of significant exposure to positive ag and fertilizer market fundamentals while also having strong downside support due to steady cash generation from the Retail segment,” he added. “Additionally, we see potential upside optionality from the company’s ability to flex potash capacity up if market conditions are tighter than anticipated.”

Mr. Wong also made these target adjustments:

* Mosaic Co. (MOS-N, “outperform”) to US$65 from US$55. Average: US$45.93.

“We see significant upside potential for Mosaic due to a combination of strong underlying phosphate and potash fundamentals, improving operations, rising free cash flow, and attractive valuation,” he said. “We believe Mosaic’s improved operations and ongoing tightness in the phosphate market remain underappreciated, which should provide share price upside as these developments become better appreciated and priced in. Additionally, the overhang from Vale’s minority ownership in the company was addressed in Q4, which could also help share re-rate in 2022.”

* CF Industries Holdings Inc. (CF-N, “sector perform”) to US$73 from US$70. Average: US$69.33.

“We expect strong nitrogen fundamentals to elevate CF’s cash generation in the near term, as the company benefits from the arbitrage between low-cost North American natural gas costs versus higher international costs,” he said. “Longer-term, we are turning more constructive on nitrogen markets due to a tightening S&D and potential upside from low-carbon ammonia demand. However, we maintain a neutral rating due to greater potential volatility in near-term nitrogen prices that are in large part driven by global energy prices.”


Echelon Capital analyst Andrew Semple said he has “high hopes” for Ascend Wellness Holdings Inc. (AAWH-U-CN), pointing to its “exceptional” retail performance from a “strong portfolio of high torque states, vertically integrated across all.”

He initiated coverage of Boston-based cannabis company with a “buy” recommendation, touting its “solid and growing” wholesale business and the potential for a “massive” market opportunity with the legalization of adult-use sales in New Jersey.

“Ascend is one of America’s fastest-growing cannabis companies, driven by its laser focus on the nation’s most attractive limited-license markets,” said Mr. Semple. “It is vertically integrated across all markets, has demonstrated strong branded product distribution at wholesale, and operates a highly productive retail store network. Ascend’s dispensaries are generating sales of $15-million per year on average, the highest metric we are aware of in U.S. cannabis (for those with 10+ operating stores). This metric is at least 20 per cent above the next closest peer, highlighting the exceptional performance of its retail business. The Company has been increasing production capacity to keep pace with demand. 118,000 square feet of cultivation canopy is online today, with plans to more than triple to 382,000 square feet by year-end 2023. With $205-million of cash on hand as of September 30, the Company is well situated to advance its two-pronged M&A strategy: 1) maximize licensing in existing states, and 2) enter new limited-license markets at scale ahead of impending adult-use transitions.”

Mr. Semple said Ascend has “accumulated a highly desirable footprint across several of America’s most attractive cannabis market.”

“It has built a leading cannabis business in Illinois, is scaling operations across Massachusetts, Michigan, New Jersey, and Ohio, and has agreed to purchase a controlling stake in a New York medical cannabis business,” he said. “Most of these states are limited-license cannabis markets, meaning regulators have authorized only a certain number of cannabis businesses, which typically provides for high barriers to entry and strong economics. Ascend is vertically integrated in each state, resulting in higher margin capture and maximization of commercial opportunities in markets that cap the amount of cultivation canopy or number of stores allowed per entity. Ascend currently operates 20 dispensaries and 118,000 square feet of cultivation canopy across these states (ex. New York).

“The Company’s portfolio is well-positioned to capitalize on massive growth opportunities as medical markets transition to adult-use sales. The Company’s success in Illinois is exemplary of its successful strategy and attractive market opportunities ahead.”

Emphasizing its “incredible” organic growth trajectory that exceeds its peers and a track record of accretive M&A with “more to come,” the analyst set a target of $13 per share. The average target on the Street is US$14.71.

“Ascend trades at 7.4 times our 2022 EV/2022 EBITDA estimates, compared to large cap U.S. cannabis limited-license focused peers at 9.1 times,” said Mr. Semple. “We believe Ascend should at least trade in line with, or at a slight premium to the peer group based on its focus on limited-license markets, New Jersey adult-use near-term upside opportunity, strong balance sheet, and ability to pursue accretive M&A.”

“The commencement of legal adult-use sales in New Jersey is one of the most important catalysts for Ascend. This market will be the next key driver for the next leg of step-function growth for the Company (similar to how Illinois propelled the business in 2020 & 2021).”


In other analyst actions:

* After its management pushed back full-scale construction and underground development at its Premier gold project in British Columbia to April of 2022, Raymond James analyst Craig Stanley lowered Ascot Resources Ltd. (AOT-T) to “outperform” from “strong buy” with a $1.65 target, down from $1.85 and below the $1.81 average.

* National Bank Financial initiated coverage of Abrasilver Resource Corp. (ABRA-X) with an “outperform” rating and 70-cent target.

* In response to a “recent deterioration in commodity prices,” Stifel analyst Robert Fitzmartyn cut his target for Advantage Energy Ltd. (AAV-T) to $8.25 from $9.50 with a “buy” rating after the release of its 2022 capital budget. The average target is $9.09.

“Advantage has tabled a $170-$200-million E&D capital investment plan that is more expansive than our placeholder of $125-million and consensus at $162-million,” he said. “Renewal of its liquids growth initiatives supported by the current crude oil price environment and an effort to stem leakage associated with growing take-or-pay commitments at Wembley/Pipestone are partial drivers to its rationale. In the absence of further M&A/A&D activity in the future, we portray excess FCF directed to debt repayment.”

* TD Securities analyst Graham Ryding resumed coverage of Atrium Mortgage Investment Corp. (AI-T) with a “buy” rating and $15 target, down from $15.50. The average on the Street is $14.97.

* Mr. Ryding also resumed coverage of Timbercreek Financial Corp. (TF-T) with a “hold” recommendation and $9.50 target, below the $9.88 average.

* Eight Capital initiated coverage of Capstone Mining Corp. (CS-T) with a “buy” rating and $9.50 target, exceeding the $7.53 average.

* Following its $500-million acquisition of Telus’ Financial Services business, Scotia Capital analyst Paul Steep raised his target for Dye & Durham Ltd. (DND-T) shares to $60 from $53 with a “sector outperform” rating, while CIBC World Markets analyst Stephanie Price increased her target to $50 from $46, keeping a “neutral” rating. The average is $59.20.

“Our view is that the firm’s financial results will continue to be fueled by its organic growth and integration of recent acquisitions,” said Mr. Steep. “We believe that DND’s existing mix of business and geographic markets offers the potential for further acquisitions given that the legal information, payments and software markets remain fragmented. Our near-term focus for DND’s financial performance remains centered on its integration and onboarding efforts given recent M&A activities along with real estate activity levels in key markets.”

* Alliance Global Partners analyst Brian Kinstlinger lowered his target for Enthusiast Gaming Holdings Inc. (EGLX-T) to $9, below the $9.93 average, from $10. He maintained a “buy” rating.

* Cowen and Co. analyst John Kernan lowered his Lululemon Athletica Inc. (LULU-Q) target to US$515 from US$520 with an “outperform” rating. The average is US$468.57.

* Acumen Capital analyst Jim Byrne hiked his Mainstreet Equity Corp. (MEQ-T) target to $135, exceeding the $125 average, from $126 with a “buy” rating, while TD Securities’ Lorne Kalmar bumped up his target to $130 from $115 with a “hold” rating.

* Stifel analyst Robert Fitzmartyn trimmed his target for Touchstone Exploration Inc. (TXP-T) to $2.75 from $3.50 with a “buy” rating. The average is $3.46.

“Following Touchstone’s announcement of its second test result at Royston, we revise our suite of NAVs reflecting the characterization of Royston has a light crude oil discovery and not a natural gas feature,” he said. “Our RENAV [risked exploration net asset value] is down 22 per cent driven by a combination of factors, though dominant in one facet is that crude oil projects are encumbered by a higher fiscal take and taxation burden, although we continue to portray sizable upside on an unrisked (ENAV) basis at $3.30 per share (Atax, 10 per cent) which excludes remaining exploration optionality. As such, we are reverting to $2.75 per share, the same level prior to receipt of its initial Royston drill announcement, and continue to rate the stock a BUY.”

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