Inside the Market’s roundup of some of today’s key analyst actions
Despite increasing his steel price forecast for 2022, RBC Dominion Securities analyst Alexander Jackson downgraded Stelco Holdings Inc. (STLC-T) to a “sector perform” recommendation from “outperform” on Wednesday, citing a recent run-up in its share price and the expectations for a “more balanced” market exiting the year.
“We continue to like Stelco for its highly fixed cost structure and free cash generation, but the shares are relatively fairly valued in our view. The risk to our thesis is a tighter steel market and higher HRC prices,” he said.
In a research report released before the bell, Mr. Jackson raised his hot-rolled coil (HRC) price forecast for the year, now seeing an average of US$1,156 per short ton, up from US$975. That led him to raise his 2022 earnings before interest, taxes, depreciation and amortization (EBITDA) estimate for the Hamilton-based steel maker to $1.228-billion from $816-million.
“HRC prices have rebounded in the past month since Russia invaded Ukraine and steel products exports from the two countries to Europe and the U.S. have effectively ceased,” he said. “In 2021 Ukraine and Russia were responsible for approximately 58 per cent of all pig iron imports into the US (an important raw material for EAF producers). The tightening supply has increased input costs for steel makers and created a knock-on effect on steel, and specifically HRC, where pig iron is an outsized input compared to other ore based metallics (steel inputs) in US mills. We have seen scrap prices also climb as mills look to substitute where they can.
“The resulting higher HRC prices are particularly beneficial for integrated producers (like Stelco) who utilize less scrap and produce hot metal as an intermediary. There is obviously uncertainty in terms of how long the Russia/Ukraine conflict will impact global supply of steel making materials; however, over time we expect trade flows to adjust and an eventual resolution to help bring the market more into balance. We have revised our 2022 prices up and kept our 2023 and onwards prices unchanged. We continue to expect increased domestic steel capacity and solid demand across sectors to offset and bring the market into relative balance going into 2023 and beyond.”
With his earnings estimate increase, Mr. Jackson raised his target for Stelco shares to $60 from $51. That exceeds the $54.64 average on the Street, according to Refinitiv data.
“Currently the shares are trading at a discount to both its historical average and the U.S. peers, which we view as unwarranted given the recently updated assets, long-term contract for iron ore and low cost nature of the business and expect shares to re-rate as the company demonstrates consistent production and sales at its low cost operations,” he said. “We could see Stelco continue to trade at a discount to U.S. peers given the single asset nature.”
Seeing “muted” advertising traction and higher-than-anticipated costs, National Bank Financial analyst Adam Shine thinks the Street’s expectations for Corus Entertainment Inc.’s (CJR.B-T) second-quarter results are “looking high.”
In a research report previewing the April 8 release, he predicted the company’s television segment is “likely to disappoint,” given the current market backdrop.
Mr. Shine is projecting total revenue of $360-million, up 0.3 per cent year-over-year and in line with the consensus estimate of $370-million. However, he’s forecasting a 23.1-per-cent drop in adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) to $86.6-million, missing the Street’s $57.7-million view. His adjusted earnings per share estimate of 8 cents is a 10-cent fall from a year ago and 2 cents lower than consensus.
“With its Q1 reporting in January, management had suggested that TV & Radio ad sales were tracking at low single digits,” said the analyst. “We now forecast a combined gain of 0.1 per cent, as we believe TV ad sales were impacted not only by Omicron but also lingering supply chain issues and the geopolitical backdrop. Subscriber revenues likely benefited from ongoing streaming traction, especially of STACK TV, but other TV revs enjoyed library sales to Hulu and Netflix in Q2/21 and we didn’t hear about any similar sales in Q2 this year which could be a matter of timing. We have TV EBITDA margins contracting 800 basis points (down 465 basis points in Q1) due to expectations of a weaker top line in addition to the previously telegraphed increase in programming spend, no CEWS & no Part I/II license fee holiday.”
Mr. Shine said television spending in fiscal 2022 is “materially elevated not only because of lower costs in H1/21 but also due to catch-up spending for prior Cancon under-investment ($50-million split 2022/2023).” He’s expecting television expenses to rise by “progressively lower” rates through the year, but sees ad sales facing tougher comps in the second half of the year. "
“It remains to be seen if the pace of the economic recovery will help strengthen performance,” he said.
Keeping an “outperform” rating for Corus shares, Mr. Shine reduced his target by $1.50 to $6.50. The average is currently $8.06.
Canaccord Genuity’ analyst Derek Dley expects Dollarama Inc. (DOL-T) to benefit from “strong” holiday season sales, delivering “solid” fourth-quarter financial results.
Ahead of the March 30 earnings release, he’s forecasting revenue for the quarter of $1.302-billion, up 18 per cent year-over-year and ahead of the consensus estimate of $1.232-billion. His EBITDA projection of $406-million also tops the Street ($387-million) and represents a 24.3-per-cent jump, leading to 73 cents per share in earnings (versus the 71-cent consensus).
“Dollarama reported solid results last quarter with same-store sales up 0.8 per cent year-over-year despite comping a relatively strong quarter, as the company was able to capitalize on an early start to Halloween and back-to-school sales.,” he said. “Alongside the results, management provided a look into Q4/F22, noting that early holiday sales were off to a strong start with quarter-to-date data showing that same-store sales were up 4 per cent, with the crucial main holiday sales period still ahead. Further, we note that the company is lapping relatively soft comps in Q4/F21, a quarter that was impacted by more stringent retail restrictions in place last year, particularly for the month of January, along with an extra week of early holiday season sales being pulled into the prior quarter. With this in mind, we are expecting year-over-year same-store sales growth of 7.0 per cent.”
Mr. Dley did warn that the Montreal-based discount retailer will see its gross margins hurt by “an unfavourable product mix shift driven by fewer restrictions, and therefore higher sales, for the month of January, which typically generates a higher percentage of lower margin items;,” He also cited ongoing supply chain and inflationary pressures
“Further, we see SG&A showcasing a trend similar to last quarter with a decline in costs driven by the rollback of COVID-19 measures and relaxation of operating restrictions being offset by inflationary pressures on labour costs,” he noted.
However, Mr. Dley raised his target for Dollarama shares to $65 from $57 with a “hold” recommendation. The average is $67.69.
“While we still believe in Dollarama’s long-term growth profile — a result of its lack of meaningful competition, industry-leading profitability and free cash flow generation, and healthy ROIC [return on invested capital] — we believe the softer near-term outlook particularly as it relates to margin growth, is likely to leave the stock range-bound over the coming quarters,” he said.
Elsewhere, Scotia’s Patricia Baker increased her target to $72 from $66 with a “sector outperform” rating.
“Despite ongoing challenges for most retailers around supply chain, labour, and overall cost inflation, we harbour little concern around Dollarama’s ability to navigate the challenging backdrop well,” she said. “DOL is advantaged by its unique operating model, and we see its ability to mark up combined with its refresh strategy as ably providing DOL with a path to handle inflation. The company’s pack away strategy, combined its having addressed supply chain challenges early in 2021, mean DOL is less challenged than others. The current backdrop of higher prices for consumers driven by historically high inflation could favour DOL as consumers shift to value and also permit DOL as a price follower to engage in more mark-ups. In our view, DOL has a resilient operating model and is well positioned for further store and share growth.”
While E Automotive Inc. (EINC-T) topped his revenue expectation for the fourth quarter of its 2021 fiscal year, Canaccord Genuity analyst Aravinda Galappatthige warned supply chain challenges and related inventory issues are likely to persist well into late 2022 after previously expecting normalization by the second half of the year.
After the bell on Tuesday, the Toronto-based company, which operates a online wholesale auction marketplace for automotive dealerships, reported revenue of $23.1-million, up 149 per cent year-over-year and above Mr. Galappatthige’s $18.5-million estimate, driven by a 265-per-cent surge in gross transaction value.
Conversely, its adjusted EBITDA loss grew to $5.5-million from $2.5-million a year ago and missing the analyst’s estimate of a $4.5-million loss. That was due largely to higher-than-anticipated expenses.
“E Inc. reported Q4/21 results after market close, with revenue coming in ahead of our estimates, driven by higher used car prices and stronger volumes notwithstanding the tight inventory conditions seen across the industry,” the analyst said. “In fact, we were particularly encouraged by the sharp increase in vehicles transacted of 149 per cent year-over-year, of which 93 per cent was organic. Profitability, however, was a bit lower on account of higher SG&A, we believe partly due to the ramp-up of sales and operations in the U.S..”
Mr. Galappatthige thinks that progress south of the border remains “key to the investment thesis, given the size and opportunity in this market.”
He added: “We see a number of potential drivers of upside: • First, the pace is picking up in the west as EINC ramps up the sales team with the full platform migration (from the legacy ABS) now complete. • Second, the company appears to be moving quickly in terms of expanding beyond its California base, now setting up operations and hiring sales teams in the Southeast. • Third, as EINC integrates the FastLane acquisition, we see opportunities for synergistic gains, in particular with respect to establishing compelling U.S.-Canada cross-border offerings. Management noted on the call that pre-acquisition, as much as 20 per cent of its Canadian volumes were in fact Canada-to-U.S. transactions and that the acquisition sets up the opportunity to build a more streamlined offering to US dealers looking for direct cross-border inventory. Fastlane also facilitates growth in the U.S. Midwest, off its present base.”
Citing “the broader market selloff over the past few months, particularly for small-cap growth names (including EINC’s comps),” Mr. Galappatthige cut his target for E Automotive shares to $20 from $28, maintaining a “buy” recommendation. The average is $25.84.
Others making target adjustments include:
* Scotia’s Michael Doumet to a Street-low $17 from $16.50 with a “sector perform” rating.
“EINC shares are down 40 per cent since its IPO,” said Mr. Doumet. “In our view, the share price decline has nothing to do with its execution; EINC’s execution in the Q was solid as its sequential growth exceeded that of its peers, namely [ACV Auctions Inc.] ACVA-US (down 2 per cent quarter-over-quarter on units) and [Kar Auction Services Inc.] KAR-US’s BacklotCars/Carewave (down 6 per cent quarter-over-quarter). Its Canadian business was also profitable in 2021. That said, valuations across the digital auction (and tech) space have compressed and that has happened with EINC as well (we previously lowered our valuation multiple.”
* ATB Capital Markets’ Martin Toner to $28 from $27 with an “outperform” rating.
“The wholesale automotive auction market continues to be experiencing unusual market conditions, and supply is very tight, pressuring overall market volumes,” he said. “Given these conditions, [Tuesday’s] results reflect strong execution, share gains and the benefits of the Company’s acquisition strategy in Quebec. It remains early to evaluate the U.S. expansion, but management remains confident. We believe these results will be well received by the market.”
* Eight Capital’s Christian Sgro to $22 from $28 with a “buy” rating.
In other analyst actions:
* Touting its “unparalleled growth at a favourable risk profile,” Scotia Capital analyst Orest Wowkodaw resumed coverage of Capstone Copper Corp. (CS-T) with a “sector outperform” rating and $9 target, up from $7.50 following its recently completed combination with Mantos Copper.
“Overall, we view the business combination as very positive for CS-T shareholders,” he said.
* After increased his uranium price forecast, Raymond James analyst Brian MacArthur raised his targets for these producers: Cameco Corp. (CCO-T, “outperform”) to $40 from $34; Denison Miners Corp. (DML-T, “outperform”) to $2.80 from $2.60 and NexGen Energy Ltd. (NXE-T, “outperform”) to $10 from $9. The averages on the Street are $36.91, $2.68 and $9.46, respectively.
“The uranium market is different from many other commodity markets,” he said. “Like any commodity, it is impacted by supply/demand fundamentals as well as funds flows, but given the size of the market, concentration of uranium supply, and the political nature of uranium, large unexpected price moves can occur. More and more governments have been considering nuclear as part of the solution for climate change, and it has begun to attract interest from some ESG funds. Given the Russia/Ukrainian conflict some governments are now also considering nuclear as part of their “Energy Diversification Strategy”. However, the conflict has also highlighted supply chain risks in the industry.”
“We believe the combination of growing uncovered demand over the next few years (which is a function of consumption plus inventory policy), increased security of supply concerns given the concentrated supply and current geopolitical situation, long lead times for greenfield production and the fact many greenfield projects would need higher uranium prices, and growing financial interest could lead to higher uranium prices, and we have increased our uranium price forecasts ... We have also increased the target prices for our uranium coverage given these higher uranium price forecasts.”
* TD Securities’ Graham Ryding resumed coverage of Atrium Mortgage Investment Corp. (AI-T) with a “hold” rating and $15.50, above the $15.11 average.
“We view Atrium as an attractive income investment with a defensive approach to lending and an experienced management team. We see potential for modest portfolio growth over the medium term and believe that the dividend is well-supported. We view valuation at 1.3 times book value as fair,” he said.
* BMO Nesbitt Burns’ Ryan Thompson resumed coverage of Endeavour Silver Corp. (EDR-T) with a “market perform” rating and $5.50 target. The average is $7.48.
* Acumen Capital analyst Trevor Reynolds resumed coverage of Journey Energy Inc. (JOY-T) with a “speculative buy” rating and $5.75 target, up from $3.75 and above the $4.17 average, after the close of its $12.1-million financing.
“Overall, JOY is well positioned at current commodity prices to meaningfully reduce leverage while growing production this year,” he said. “We expect JOY to review commodity pricing through the year, with a strong likelihood of increased spending if prices remain at current levels.”
* Expecing “higher-for-longer” fertilizer and grain pricing, CIBC World Markets’ Jacob Bout hiked his Nutrien Ltd. (NTR-N, NTR-T) target to US$120 from US$89 with an “outperformer” rating. The average is US$98.99.
“Fertilizer/grain supply is being significantly impacted by Russia’s invasion of Ukraine and the related sanctions, and an elevated price environment is likely for the foreseeable future (in fact, we think there are positive long-term structural ramifications for the potash industry),” he said.”While fertilizer demand is elastic to sharp increases in pricing (particularly potash/phosphate; nitrogen to a much lesser extent), we believe that any negative impact to NTR/MOS from a demand perspective should be more than offset by the lack of supply from Eastern Europe. The net impact is that North American producers should benefit from strong pricing, while incrementally ramping up production levels to the extent possible.”
* Following a meeting with President and CEO Andrew Phillips and CFO Pam Kazeil, RBC’s Luke Davis bumped up his PrairieSky Royalty Ltd. (PSK-T) target by $1 to $21 with a “sector perform” rating. The average is $20.55.
“In our view, the royalty model is well positioned given leverage to both increased producer activity alongside exposure to rising commodity pricing,” he said. “We believe this presents upside to our current estimates, particularly if producers pivot to higher rates of growth. Combined with no exposure to cost inflation, we believe the near-term risk-reward is increasingly attractive. PrairieSky remains unhedged, which is backstopped by 90 per cent-plus operating margins, allowing the company to capture potential upside and enhance free cash flow.”
* Eight Capital initiated coverage of Silver Tiger Metals Inc. (SLVR-X) with a “buy” rating and $1.20 target, below the $1.38 average.