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

Raymond James analyst Michael Shaw expects Enbridge Inc. (ENB-T) to “continue to rightfully garner a premium valuation.”

However, he pointed to two significant concerns moving forward upon resuming coverage of the Calgary-based company on Wednesday.

“First is the regulatory uncertainly of the Canadian Mainline commercial structure,” Mr. Shaw said. “The Canadian Energy Regulator’s decision to deny Enbridge’s proposed Mainline contracting and the questions the CER raised about the appropriateness of the tolls, challenges the outlook for Enbridge’s single largest asset. Enbridge expects the ultimate impact of the CER decisions will be small (1 per cent to 3 per cent of consolidated EBITDA) but we expect questions on the mainline will overhang the equity until a resolution late 2022/early 2023.

“Our second concern is the outlook for organic growth beyond 2022. Under the current committed capital program, organic growth will begin to slow. Growth in recent years had been driven by large Liquids Pipeline projects. Enbridge’s current plans are shifting capital spending toward more bite-sized ‘in-corridor’ growth that carry attractive traditional returns, though with a smaller growth profile. Enbridge has plenty of levers which it can pull to reach its Distributable Cash Flow (DCF) per share growth target. We expect it will achieve its target through a combination of share buybacks, acquisitions, and incremental growth capital, but we suspect the market’s preference leans toward midstream and pipeline investments with well-defined growth programs.”

Despite those concerns, Mr. Shaw said Enbridge can “rightfully boast about an impressive energy infrastructure asset base that is unparalleled in its geographic, product, and end market diversity.”

“Simply put, the breadth and scope of Enbridge’s assets are an advantage that is impossible to replicate and worthy of a premium valuation,” he said. “Enbridge’s existing assets will generate meaningful cash flow to self-fund ‘in-corridor’ growth and incremental energy transition investments while easily covering the dividend and funding more aggressive share buybacks. Moreover, the reach of Enbridge’s assets gives it a meaningful advantage regardless of the direction and pace of the energy transition.”

Also calling its balance sheet “a point of strength,” Mr. Shaw set a “market perform” rating and $53 target for Enbridge shares. The average target on the Street is currently $55.11, according to Refinitiv data.

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Separately, Mr. Shaw said TC Energy Corp.’s (TRP-T) “class-leading committed capital pipeline truly sets it apart in an era in where capital deployment opportunities for pipelines are growing fewer and further between.”

He resumed coverage of the company with a “strong buy” recommendation, seeing it presenting investors “an attractive value proposition.”

“As oil and gas producers shift their focus toward generating free cash flow rather than production growth, pipeline companies are forced to contend with reduced demand for growth capital,” he said. “Their choices are either to follow suit by similarly focusing on direct shareholder returns or to allocate capital outside their traditional markets. TC Energy in not faced with these difficult choices: With $29-billion in committed capital projects over the next five years — over a quarter of its current enterprise value — TC Energy’s large committed capital budget sets the company apart in a market where midstream and pipeline growth is as uncertain as its ever been.

“Moreover, $23.4-billion of that capital is directed towards TRP’s natural gas pipeline projects, backed by cost-of-service regulations and/or long-term, take-or-pay contracts; and another $4.3-billion is being directed towards Bruce Power, with a long-term contract out to 2064, making it clear that TRP’s high level of growth will not degrade earnings quality.”

Mr. Shaw thinks TC Energy “also screens well for investors who are increasingly scrutinizing energy infrastructure investments in terms of how they contribute to energy transitions,” calling its 48.4-per-cent ownership of Bruce Power “one of the best energy transition investment assets in Canadian pipelines and midstream.”

“TRP has $4.3-billion of capital committed to Bruce over the next 5 years and could spend upwards of $6.5-billion before the end of the decade. We estimate the project has a 12-per-cent unlevered IRR and is under long-term contract,” he added. “As governments continue to push for renewables, Bruce will be an important source of firm generation capacity.”

Mr. Shaw set a $67.50 target for TC shares, which is 30 cents higher than the average.

“We suspect part of the concern around TRP’s valuation stems from the outlook for higher interest rates,” he said. “TRP has traditionally had a tight relationship with long-term rates. The expectation that rates will move higher in 2022, may be weighing on TRP’s P/E multiple. By our estimate, TRP’s P/E multiple is already pricing in a 100 bps move in the Canadian 10-yr yield. We expect the further risk of multiple contraction from higher interest rates is reduced and offset by healthy earnings growth into 2023.”

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After another year of its shares outperforming the broader market, Citi analyst Jim Suva sees several “positive drivers” for Apple Inc. (AAPL-Q) ahead.

“While the December quarter is constrained by supply, we believe that demand for Apple’s products and services is likely to remain resilient throughout fiscal 2022,” he said. “We do recognize that regulatory risks remain a major overhang on the stock, but we view these as headline risk rather that fundamental risk. Such headlines could provide a near-term stock pullback, which we would use as a buying opportunity for Apple shares. Apple’s current market value does not reflect new product category launches. This will change with the launch of the new AR/VR headset in 2022.”

In a research report released late Tuesday, Mr. Suva pointed to five reasons he thinks Apple shares can trade higher in 2022. They are: “Apple’s revenues should continue to grow year-over-year, as we do not believe that Apple was purely a Covid/stimulus beneficiary; Apple plans to launch a new product category, Apple AR/VR headset, in 2H’22; Regulatory risk remains a headline risk but is unlikely to impact Services revenue growth; Buybacks, dividends, and flight to quality should be factors in 2022 and Apple Car is on the horizon in 2025.”

With that view, Mr. Suva raised his 2022 earnings per share projection to US$5.86 from US$5.78, exceeding the consensus forecast on the Street of US$5.74. His 2023 estimate rose to US$6.24 from US$6.20, while his 2024 forecast slid by 2 US cents to US$6.43.

“We see Apple benefiting from strong demand across several of their products and services as the economy recovers. The growth in installed base helps to drive demand in future years,” the analyst said. “The full product + software + service package is what makes Apple unique as others do not control this. We see Apple shares as attractive given the revenue diversification, unique product + service set and potential for strong cash flow generation and shareholder returns.”

Maintaining his “buy” recommendation for Apple shares, he also increased his target to US$200 from US$170. The average on the Street is US$174.22.

“Our target price is based on applying a 32 TIMES P/E to N24M EPS [next 23-month earnings per share],” said Mr. Suva. “Given AAPL’s large net cash position, we then add back AAPL’s net cash. Our 32-times PE is in line with where Apple shares have traded currently (30-35 times PE) and in line with several of their large cap peers. Apple shares have rerated over the past two years as services revenues have become a more significant portion of their revenues and profits, and as the company has been able to demonstrate more resiliency in their sales and earnings through periods of demand volatility. Given that we are entering a period of smartphone demand recovery, coupled with our view of Apple’s accelerated shift to subscription services, product revenue diversification, new product category launches in large significant markets coupled with ample cash to withstand potential economic uncertainty and shareholder return policies, we believe Apple’s market premium is justified.”

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With the ”realities of commercialization timelines” emerging for clean technology companies, TD Securities analyst Aaron MacNeil sees reduced valuations across the sector.

“The companies in our Clean Technology coverage universe have experienced notable share price weakness recently with an average share price decline of 30 per cent since the start of November, and with our hydrogen and RNG coverage and key comparables featuring 42 per cent and 28 per cent respective reductions in their forward 12-month EV/sales multiples over the same time period,” he said in a research report released Wednesday. “

“Despite the recent pullback, companies with leverage to energy transition initiatives continue to trade at relatively high multiples of near-term revenue and cash flow when compared to companies in more mature sectors with lower long-term growth expectations. That said, we’ve observed that the coverage universe has guided to extended timelines for nearterm deliverables including the ramp up of facilities, the expectations for subsidy support and other factors, with revenues more broadly not materializing as quickly as previously expected. To this end, we believe that the decline in valuations across the sector is a function of reduced, and arguably more realistic, growth expectations. We also believe that expectations for rising interest rates and the negative readthroughs of the Omicron COVID-19 variant across multiple sectors have also negatively contributed to near-term sector valuations given the relatively higher risk profile of the sector.”

While he remains “overweight” on the sector, Mr. MacNeil cut his valuations for several stocks in his coverage universe, leading to target price adjustments.

His changes included:

  • Ballard Power Systems Inc. (BLDP-Q, BLDP-T) to US$20 from US$24 with a “speculative buy” rating. The average on the Street is US$22.45.
  • Greenlane Renewables Inc. (GRN-T, “speculative buy”) to $2.25 from $2.75. Average: $2.99.
  • Next Hydrogen Solutions Inc. (NXH-X, “speculative buy”) to $6.50 from $12. Average: $9.83.
  • Xebec Adsorption Inc. (XBC-T, “hold”) to $3 from $3.75. Average: $4.48

“We continue to prefer companies with differentiated, difficult-to-replicate products and services, with ready-to-commercialize business models and a well-articulated, plausible path to growth and profitability,” he said. “To this end, our best idea in the Clean Technology space is Anaergia (ANRG-T, SPECULATIVE BUY, $40.00 target price), based on the combination of its broad intellectual property portfolio, strategic focus on municipal waste, the pursuit of a growth-focused infrastructure model, and its ready-to-commercialize business model.”

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Canaccord Genuity analyst Matt Bottomley thinks the proceeds from Curaleaf Holdings Inc.’s (CURA-CN) recent offering of senior secured notes will provide “flexibility to execute on its growth initiatives in existing markets where it already has a leading presence in addition to new adult-use markets set to come on-line in the coming year(s); most notably New Jersey, New York, and potentially Pennsylvania.”

On Tuesday, the Wakefield, Mass.-based cannabis company announced the completion of an additional offering of US$50-million in 8.0-per-cent senior secured notes due 2026. That brings proceeds raised under the facility to US$475-million.

“Although the company ended Q3/21 with an adj. EBITDA run rate of US$285-million and more than US$300-million of cash on hand, the company intends to utilize a portion of these proceeds to refinance its existing higher cost debt (which currently sits at US$342-million with a weighted average cost of more than 12 per cent), to pay transaction fees and related expenses and for general working capital purposes,” the analyst said.

In response to Curaleaf’s “softened” 2021 outlook, he trimmed his earnings per share projection for 2022 to 39 US cents from 42 US cents.

He kept a “buy” rating and $22 target for its shares. The average is $24.80.

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In other analyst actions:

* Citing execution challenges and tough Canadian operating environment, BoA Global Research analyst Lisa Lewandowski lowered Canopy Growth Corp. (WEED-T) to “underperform” from “neutral” with a $10 target, down from $19. The average on the Street is $15.36.

* TD’s Jonathan Kelcher lowered Cominar Real Estate Investment Trust (CUF.UN-T) to “tender” from “hold” with a $11.75 target, matching the consensus.

* Following Tuesday’s earnings release, TD’s Daniel Chan cut his Blackberry Ltd. (BB-N, BB-T) target to US$8.50 from US$9, remaining above the US$8.21 average, with a “reduce” rating.

“Although the backdrop is stabilizing for BlackBerry, we believe the environment remains volatile and that it will take more time for the growth to accelerate. With the shares trading at 7.4-times forward revenue, we believe there are other higher growth opportunities that present a more favourable risk/reward profile,” said Mr. Chan.

* Oppenheimer analyst Leland Gershell initiated coverage of Acasti Pharma Inc. (ACST-Q, ACST-X) with an “outperform” rating and US$6 target.

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