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

Scotia Capital analyst Konark Gupta sees a “transformational” year ahead for Canadian railway companies.

“We remain positive on Canadian rails as they start new chapters this year while traffic is likely to improve after three years of lackluster performance as the economy continues to recover and supply chain disruptions potentially ease later this year,” he said in a research report released Wednesday.

“Further, we are not overly concerned about inflation or fed tightening because rails have pricing power and very limited exposure to floating rate debt, while higher interest rates could provide a pension tailwind to EPS. We think Canadian rails’ valuation premium over U.S. rails is justified by CNR’s potential to grow 2022 EPS fastest in the group on margin turnaround while accelerating shareholder returns, and CP’s ability to boost its competitive position post KSU merger approval in late 2022.”

Despite that bullish view, Mr. Gupta warned fourth-quarter 2021 traffic results are likely to disappoint and he anticipates “a weak start” to this year.

He’s projecting adjusted earnings per share for Canadian National Railway Co. (CNR-T) of $1.57 for the final quarter of the last fiscal year, up 10 per cent year-over-year and 6 cents higher than the consensus forecast. His Canadian Pacific Railway Ltd. (CP-T) estimate is 96 cents, down 5 per cent and 2 cents lower than Street’s view.

“We estimate the KSU transaction (voting trust), which closed in December, dilutes CP’s Q4 EPS by $0.05 (debt and equity issuances more than offset equity pick-up; note, we exclude amortization of intangibles from our EPS outlook),” the analyst said. “We are more cautious than consensus on revenue for both rails but expect an operating ratio (OR) beat from CNR and an OR miss from CP. Our estimated 58.5-per-cent OR (down 290 basis points year-over-year) for CNR would be its best for any Q4 since 2015 and for any quarter since Q3/19, driven by solid progress on the strategic plan rolled out in September. By contrast, we expect CP’s OR to deteriorate by 260 bp year-over-year to 56.5 per cent due to a large land sale gain in Q4/20. Canadian rails underperformed their U.S. peers on Q4 traffic due largely to B.C. floodings, tough winter conditions and Canadian grain weakness. We calculate CNR’s traffic (RTMs) was down 10.8 per cent year-over-year (we had down 9.1 per cent) and CP’s traffic was down 9.9 per cent year-over-year (we had down 6.5 per cent) with grain and intermodal weighing on the most (along with coal for CP).”

Mr. Gupta noted the companies saw a decline of 20 per cent year-over-year in RTMS in the first two weeks “with continued headwinds from Canadian grain (volume down 50 per cent year-over-year) and likely weather challenges.

“While winter uncertainty typically lasts through February, we expect grain weakness to persist into the summer, followed by a turnaround in 2H on easy comps and potentially higher output in the new crop year (begins August 1),” he said. “As a result, we estimate high single-digit RTM declines in Q1, followed by relatively muted growth in Q2 and nearly double-digit growth in 2H for a full-year traffic growth of 3.0 per cent for CNR and 5.0 per cent for CP.”

.After reducing his fourth-quarter 2021 and full-year 2022 estimates to “reflect weaker-than-expected Q4 traffic, a weak start to Q1/22, recent CAD strengthening, and other adjustment,” Mr. Gupta cut his target price for CP shares to $105 from $106 with a “sector outperform” rating. The average on the Street is $105.60, according to Refinitiv.

He maintained a $168 target for CN also with a “sector outperform” recommendation. The average is $159.


Market conditions continue to be “unfavourable” for Saputo Inc. (SAP-T), obscuring improvement initiatives, according to National Bank Financial analyst Vishal Shreedhar.

Ahead of the early February release of its third-quarter 2022 results, he’s projecting earnings per share of 34 cents, down 38 per cent year-over-year and 5 cents lower than the Street’s consensus estimate. He attributed the drop largely to “continuing challenges” in the United States.

“We project weaker year-over-year results in the USA, Europe and International sectors; Canada performance is expected to be slightly higher year-over-year,” said Mr. Shreedhar.

“(1) In the U.S., dairy markets remained challenging, including lower year-over-year block cheddar prices and a negative milk cheese spread (was significantly positive last year); inventory realization was better year-over-year. We anticipate the quarter to be characterized by unfavourable market factors and rising cost inflation (freight, etc.), partly offset by pricing initiatives (to build more fulsomely in Q4) and sequentially improving labour challenges. (2) In Canada, we anticipate continued solid performance, partly offset by higher transportation costs due to the floods/landslides in BC during the latter part of Q3. (3) In Australia, the key themes are competition for milk intake (though improving sequentially), continued export challenges, and improved international ingredient market pricing. (4) In Europe, our understanding is that inflationary costs have been slower to manifest (vs. North America); challenges this quarter reflect unfavourable mix and softer volumes, partly offset by pricing initiatives (to manifest more so in Q4).”

Trimming his revenue and earnings expectations through fiscal 2023, Mr. Shreedhar lowered his target for Saputo shares by $1 to $35, reiterating a “sector perform” recommendation. The average target is $37.50.

“We continue to acknowledge heightened uncertainty with our estimates given meaningful changes in the backdrop associated with the pandemic and related shifts in consumer behaviour, as well as heightened cost inflation (labour, transportation, energy, raw materials),” he said.

“The challenge for Saputo is whether it can deliver rising returns on capital and acquire prudently, as it had done successfully in periods of its history. We are optimistic that it eventually will; however, in the interim, we await more concrete signs of execution and/or more attractive valuation.”


RBC Dominion Securities analyst Sam Crittenden sees First Quantum Minerals Ltd. (FM-T) “positioned as a go to copper name,” pointing to its “strong free cash flow potential at current copper prices, organic growth, an improved balance sheet, and uncertainty around Panama royalties and cost inflation largely answered.”

On Monday, the miner announced it has agreed with Panama’s government to increase royalty payments at its flagship Cobre Panama copper mine to $375-million a year. It also revealed its 2021 preliminary production, guidance through 2024 and climate change targets.

“At spot copper, we calculate FCF in 2022 of $2.7-billion implying a yield of 14.4 per cent, vs. peers at 12.5 per cent,” said Mr. Crittenden. “First Quantum has made steady progress reducing leverage with net debt falling to $6.3-billion at Q3/21 after peaking at $7.7-billion in Q4/19. They announced a 10 cents per share annual dividend with the potential for 15 per cent of excess FCF returned to investors – we estimate that this could be an extra 50 cents per share on our 2022 estimates.”

“FM’s organic growth plans can drive 3-per-cent annual copper production growth through 2024. This includes the expansion at Cobra Panama to 100Mtpa from the current 85Mtpa. The S3 expansion at Kansanshi is meant to ‘bring Kansanshi up to the level of CP and Sentinel’ by adding milling capacity, modernizing, and simplifying an operation that started in 2004. The Ravensthorpe nickel project is moving past the challenges in 2021 as they move into the Shoemaker Levy pit (where ore is better suited for the mill), and together with the $60-million Enterprise nickel project can take nickel production to 40-50kt by 2024 from 17kt in 2021 (nickel is 7 per cent of our 2024 EBITDA estimates).”

After updating his financial model to include the new royalty plan in Panama and to add “modest” value to the Las Cruces underground project, Mr. Crittenden trimmed his target to $39 from $40 with an “outperform” rating. The average is $35.82.

Elsewhere, Canaccord Genuity’s Dalton Baretto raised his target to $38 from $37 with a “buy” rating, while Jefferies’ Christopher LaFemina increased his target to $45 from $40 with a “buy” rating.


Following Tuesday’s corporate update and “surprise” fourth-quarter results, ATB Capital Markets analyst Chris Murray says he’s becoming “increasingly positive” on Autocanada Inc. (ACQ-T).

Shares of the Edmonton-based company rose 2.4 per cent during the trading session after it reported a preliminary revenue range for the quarter of $1.13-billion to $1.17-billion, up 30 per cent year-over-year and exceeding the consensus forecast on the Street of $1.04-million as same-store sales growth jumped 14 per cent.

It also provided an update on its recent M&A activity, including the $112-million acquisition of Autopoint Group and deals for Airdrie Autobody in Canada and Crystal Lake Stellantis in the U.S.. Those moves led to an increase in net debt to $200-$220-million from $29.8-million at the end of September.

“Despite the increase in debt levels, we continue to see the Company as well-positioned to deliver incremental acquisitive growth over the near to medium-term with management previously noting that its pipeline remains healthy,” said Mr. Murray.

The analyst said AutoCanada’s comments on supply/demand dynamics in the marketplace and further M&A opportunities give him " greater confidence around the sustainability of the Company’s margins as well as the longer-term growth profile as management continues to improve operations while repositioning ACQ as an increasingly omnichannel retailer.”

“With ACQ able to obtain used inventory at attractive pricing through lease returns with pre-set residuals coupled, holding 50-60 days of used inventory with pent-up demand for new vehicles, we view the Company as well-positioned to capitalize on the strong used market and a normalizing supply environment for new, which was reinforced by a strong (preliminary) used/new ratio in Q4/21″ he said. “We believe that a normalization of supply should increase transactions volumes, of both new and used vehicles, which ultimately should drive total gross profit higher as each transaction adds higher-margin F+I and maintenance opportunities.

“We expect that EBITDA from acquired stores to increase materially as the Company introduces its systems and processes, which should lower the effective multiple being paid. Given leverage remains below target levels, we anticipate that management will continue to seek our M&A opportunities, with a focus on the Ontario market and brands it currently does not have exposure to. Management reiterated that its M&A due diligence process is more rigorous, now requiring nine to 12 months (from 90-120 days) as the Company is placing greater emphasis on the quality of management/human capital being acquired.”

Raising his earnings expectations through 2023, Mr. Murray increased his target for AutoCanada shares to $87 from $85, reiterating an “outperform” rating. The current average target on the Street is $59.84.

“We remain positive on the sustainability of the margin profile, near-term M&A, and digital, and see the recent weakness in the share price representing a buying opportunity,” he said.

Elsewhere, CIBC World Markets’ Krista Friesen raised her target to $49 from $48.50 with an “outperformer” rating.


On-demand grocery delivery service is likely to become the “next major growth driver” for Goodfood Market Corp. (FOOD-T), said Desjardins Securities analyst Frederic Tremblay.

On Tuesday, the Montreal-based company reported first-quarter results that largely met his expectations, including revenue of $77.8-million and an adjusted EBITDA loss of $14.6-million.

“Similar to 4Q FY21, the 1Q results reflected the easing of pandemic-related restrictions, wage inflation and investments to support the nascent on-demand delivery business,” he said. “Revenue was flat vs last quarter, with average weekly orders of the meal kit subscription service stabilizing 40 per cent higher than pre-pandemic levels. Margin improved sequentially thanks to efficiencies and lower SG&A.”

Concurrently, the company’s management provided initial metrics on its on-demand delivery strategy which Mr. Tremblay said exhibited a “a solid start.”

Within two months of launching the first two micro fulfillment centres, on-demand delivery has reached an annualized sales run rate of $21-million, fuelled by an upward trend in active customers, average order values that are twice as large as comparables, and repeat orders,” he said. “As detailed in our deep dive, we see an opportunity for FOOD to disrupt the $140-billion grocery market. FOOD’s advantages in on-demand include its early entry, differentiated product offering, competitive prices and past investments.”

“Our positive stance on the major on-demand opportunity in Canada and on Goodfood’s ability to be successful in this next phase of its evolution is unchanged. We will monitor execution as the company looks to prudently accelerate the launch of dedicated micro fulfillment centres (8+ in FY22, 15+ per year in FY23 and beyond).”

Mr. Tremblay emphasized that such growth is unikely to cause a large spending jump, noting each location has capex of approximately $750,000.

“We believe that with solid execution, the quarterly cash burn can continue to shrink in FY22 even as FOOD lays the foundation for its next leg of growth,” he said.

Following cuts to his full-year revenue and earnings projections, Mr. Tremblay lowered his Street-high target for Goodfood shares to $7 from $8. The average is $4.89.

“We expect FY22 to be a productive transition period during which the company should continue to establish the foundation of its next phase of growth,” he said. “This includes introducing additional SKUs and opening new micro fulfilment centres, which should provide progressive benefits in FY22 and have a significant positive impact on FY23 growth. From a near-term margin/cost perspective, we expect that scaling up the on-demand delivery platform for groceries, meal kits and prepared meals will require investments in people, technology and marketing. The high-single-digit adjusted EBITDA margin generated by Goodfood’s subscription-based meal kit business offers some flexibility to allocate resources into on-demand grocery, and we continue to expect that group-wide profitability will be delayed in the short term to take advantage of this untapped opportunity. That being said, we highlight stronger revenue generation (including scale in on-demand delivery), mitigation of labour and/or inflation challenges (eg productivity enhancements, pricing) and better density of delivery routes as some of Goodfood’s potential margin improvement tailwinds as FY22 and FY23 unfold.”

Other analysts making adjustments include:

* Stifel’s Martin Landry to $5 from $8 with a “buy” rating.

“We believe that Goodfood is losing market share in the meal kit sector and that it is experiencing delays in ramping-up its on-demand delivery services,” said Mr. Landry. “As a result, we have materially reduced our revenue forecasts, down 16 per cent for FY22 and down 18 per cent for FY23.”

“While declining revenues combined with operational losses are not an appealing scenario for investors, we believe that the current valuation, at 0.7-times forward sales already reflects these headwinds.”

* Scotia Capital’s George Doumet to $3.50 from $4 with a “sector perform” rating.

“Similar to last quarter, Q1 saw ongoing elevated labour and food costs and tough comps that led to continued top-line deleveraging,” said Mr. Doumet. Looking ahead (and largely in line with our numbers), FOOD expects to: (i) return to top-line growth by the summer or by the fall and (ii) see continued adj. EBITDA quarter-over-quarter margin improvements towards break-even (which we estimate will likely occur outside our forecast horizon).

“We continue to be encouraged by the early day on-demand metrics, however remain on the sidelines until we gain more comfort around the sustainability of these trends – and ultimately until we gain more visibility around the cash burn (including the adj. EBITDA/FCF break-even paths).”

* Canaccord’s Luke Hannan to $3.75 from $4 with a “hold” rating.

“We anticipate investors will be unlikely to reward the stock with a higher multiple until (1) demand headwinds abate and (2) the growth profile of its on-demand business is clearly shown in its financial results,” he said.

* RBC’s Paul Treiber to $3.75 from $4.50 with a “sector perform” rating.

* Acumen’s Jim Byrne to $4.25 from $6 also with a “hold” rating.

* Raymond James’ Michael Glen to $4 from $6.50 with a “market perform” rating.


Barclays analyst John Aiken made a pair of rating changes to Canadian bank stocks on Wednesday.

He raised Bank of Montreal (BMO-T) to “overweight” from “equal weight” with a $165 target, rising from $140. The average on the Street is $156.44.

Conversely, he lowered Canadian Imperial Bank of Commerce (CM-T) to “equal weight” from “overweight” with a $169 target, up from $162 and above the $166.23 average.

Mr. Aiken also raised his Bank of Nova Scotia (BNS-T) target to $96 from $84, keeping a “overweight” rating. The average is $94.24.


In other analyst actions:

* BMO Nesbitt Burns analyst Joel Jackson cut his Superior Plus Corp. (SPB-T) target to $13 from $14, below the $15.92 average, with a “market perform” rating.

* BMO’s Alexander Pearce lowered his target for Labrador Iron Ore Royalty Corp. (LIF-T) to $36 from $38, keeping a “market perform” average. The average is $40.

* Seeing it “well positioned” for shifting fundamentals in the uranium market, CIBC World Markets analyst Bryce Adams initiated coverage of Cameco Corp. (CCO-T) with an “outperformer” rating and $37 target, exceeding the $35.10 average on the Street.

“We expect nuclear energy, a scalable, low-carbon energy source, to be key in reducing global dependency on fossil fuels as efforts to curb climate change persist. In our view, Cameco offers investors Tier 1 assets, with premium jurisdictional exposure, a significant reserve base, a strong balance sheet, and a reasonable valuation. More than 10 years have passed since the March 2011 Fukushima-Daiichi nuclear accident in Japan and the ensuing excess supply and inventory build that suppressed uranium market fundamentals for most of the 2010s. Recently, market fundamentals have shifted and new financial players have entered the space. We forecast a near-term market deficit and a US$50/lb uranium price in 2022E, increasing to our US$55/lb long-term price in 2024E,” said Mr. Adams.

* CIBC’s Cosmos Chiu cut his target for Alamos Gold Inc. (AGI-T) to $13 from $14.50 with an “outperformer” rating. Others making changes include: Stifel’s Ian Parkinson to $17.50 from $20 with a “buy” rating and Scotia Capital’s Trevor Turnbull to US$9 from US$9.50 with a “sector perform” recommendation. The average is $12.78.

“4Q21 production softer than expected but annual 2021 guidance achieved,” said Mr. Parkinson. “Three year guidance also released, with production volumes largely in line with our expectations. Operating costs are seeing cost inflation, both due to industry wide issues as well as a stronger Canadian dollar FX than previous guidance. We are reducing our target price ... on the back of guidance particular cost inflation.”

* Citi analyst Prashant Rao raised his Suncor Energy Inc. (SU-T) target to $35 from $31, below the $41.70 average, with a “neutral” rating.

* With the release of its 2022 guidance and five-year outlook, National Bank Financial analyst Mike Parkin trimmed his target for Eldorado Gold Corp. (ELD-T) to $16 from $17.50 with an “outperform” rating. The average is $19.75.

* Canaccord Genuity analyst Dalton Baretto cut his Centerra Gold Inc. (CG-T) target to $12.50, remaining above the $11.90 average, from $13 with a “buy” rating, while Scotia Capital’s Trevor Turnbull also lowered his target to $12.50 (from $13.50) with a “sector outperform” recommendation.

“A generally solid quarter, with gold production above our forecasts while copper production was modestly below as Mt. Milligan appears to be re-sequencing its mine plan,” he said. “Full-year gold production was at the upper end of guidance, and CG expects to announce full-year 2021 costs that are at or below the low end of guidance ranges. ... The re-sequencing of Mt. Milligan is evident in the 2022 guidance as well, with gold production above our forecast and copper production below. On a consolidated basis, gold production as well as cost guidance is in line with our estimates while capex guidance is modestly above our forecasts. We note that the capex guidance does not include any planned spend at Kemess, which we estimate at $16 million for the year. In addition, CG is guiding to a tax rate of 23 per cent at Oksut going forward, now that the Investment Incentive Certificate has been fully utilized.”

* Mr. Baretto lowered his target for Fortuna Silver Mines Inc. (FVI-T) to $5.50 from $6 with a “buy” rating. The average is $6.01.

“FVI reported solid Q4 operating results, with production of all metals slightly exceeding our expectations. We note Lindero in particular, which produced 36koz of Au (35 per cent of full-year production) vs. our estimate of 30koz. On a full-year basis, production of Au, Ag and Zn was within guidance, while Pb production exceeded guidance. However, our focus is now on the 2022 guidance figures, which were universally weak relative to our estimates. Based on the mid-point of the respective guidance ranges, gold and silver production is expected to be 16 per cent and 14 per cent below our respective forecasts, with guidance for each of the four operating assets below our estimates. Cost guidance was well above our forecasts, particularly at Lindero and Yaramoko, and overall capex guidance (ex. Seguela) was 76 per cent above our forecast.,” he said.

* Canaccord’s Bobby Burleson slashed his Ascend Wellness Holdings Inc. (AAWH.U-CN) target to US$10 from US$13 with a “buy” recommendation. The average is US$13.19.

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