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

Citi analyst Stephen Trent thinks Air Canada (AC-T) has a “good long-term trajectory,” but he warned its upside potential is “less clear” as competition intensifies.

“Air Canada looks poised for a strong recovery over the coming years, provided that international long-haul corridors continue to recover as the market expects and management hits its internal targets,” he said. “Although Citi’s 2024 estimated EBITDA margin for Air Canada of 19 per cent is in-line with pre-pandemic levels, 2024 earnings per share should not be fully recovered. This is in contrast with our more bullish expectations for the likes of Volaris or Copa, where 2024 should materially exceed pre-pandemic levels.”

In a research report released Wednesday, Mr. Trent lowered his earnings per share projection for 2022 to a loss of $1.59 from a 69-cent deficit and 2023 to a profit of $1.90 from $2.48. His 2024 estimate rose to $5.12 from $4.74.

“Forecast adjustments for Air Canada include the incorporation of more modest, expected capacity growth, higher forecasted passenger yields and more expensive fuel costs into our model,” he said. “Passenger yields, the airline industry’s price point, measures the amount of ticket revenue generated per passenger mile flown.”

“Air Canada cited strong recoveries in the leisure and visiting friends and relatives (VFR) segments – even though the carrier sees managed business travel only reaching 75 per cent to 80 per cent of pre-pandemic levels by next year. Although Air Canada stated that it has seen a good uptake for its higher fares, management had conceded in its recent comments that it may need to stimulate demand on some corridors — and that competition in some of these regions remained intense.”

While his medium-term EPS estimates declined, Mr. Trent raised his target price for Air Canada shares by $1 to $24.50, maintaining a “neutral” recommendation. The average on the Street is $29.88, according to Refinitiv data.

“This occurs as we shift the target multiple from 9.5 times to 13 times – now applied to the reduced 2023 EPS,” he said. “This more optimistic target multiple now puts Air Canada’s valuation more in-line with U.S. discount carriers – and this considers Air Canada’s propensity to trade more in-line with the latter group, rather than its legacy carrier counterparts.”

“We rate AC at Neutral primarily on uncertain short-medium term profitability due to severely depressed passenger volumes stemming from COVID-19 and the related government restrictions on travel from some of its key neighboring nations. Valuation looks full, in our view, relative to recent historical trading levels and compared to its large US network carrier peers. Given the higher uncertainty in North American aviation markets, we prefer to have more earnings visibility before getting more aggressive with Air Canada shares.”


Scotia Capital’s Konark Gupta predicts the first quarter was “challenging” for Canadian railway companies.

In a research note released Wednesday, the equity analyst said he’s “cautious” heading into earnings season with a “tough” winter, fuel inflation and the impact of the CP labour disruption “materially impacting” his earnings expectations.

“Although Q1 consensus is already down 3 per cent for CNR and 6 per cent for CP since Q4 earnings, we see further downside risk (more for CP),” said Mr. Gupta. “While we think Q1 should also weigh on CP’s full-year consensus, we agree with CNR consensus as 20-per-cent EPS guidance looks achievable despite risk to OR guidance.

“However, we remain positive on both stocks for different reasons as traffic is also improving, 2H setup is looking better (Canadian grain rebound potential), and bulk commodities could have upside risk from Russia/Ukraine conflict. We prefer CNR in the near term for stronger EPS outlook in the group this year along with accelerating shareholder returns. We view CP as more of a late-2022 story given its greater exposure to grain and other bulk commodities, while KCS merger is also poised to receive regulatory decision in the fall.”

Mr. Gupta kept a “sector outperform” recommendation for both stocks and raised his target prices. His changes are:

* Canadian National Railway Co. (CNR-T) to $174 from $170. The average on the Street is $163.42.

“We expect CNR to maintain 20-per-cent EPS growth guidance along with low single-digit traffic growth assumption and capex, FCF and ROIC targets,” he said. “However, we see some risk to 57-per-cent OR [operating ratio] guidance due to higher diesel prices, which typically don’t impact annual EPS as both revenue and cost increase for a net wash. We now assume 58-per-cent OR for CNR (was 57 per cent) vs. 61.2 per cent in 2021. We are also growing cautious about CNR’s plan to spend $5.0-billion on buybacks under the current NCIB (expires on January 31, 2023) given no repurchases were disclosed by the time of our writing.”

* Canadian Pacific Railway Ltd. (CP-T) to $106 from $105. The average is $107.21.

“Similarly, we expect CP to maintain a broad guidance of positive organic growth in EPS and traffic (ex-KCS) but we don’t think it can achieve its organic margin expansion goal unless there are any offsets (e.g., land sales),” he said. “We now estimate 6-per-cent organic EPS growth for CP (was low double-digit), assuming 58.7-per-cent OR (was 56.5 per cent) vs. 57.6 per cent in 2021 (58.7 per cent ex-land sales in 2021). Overall, there could be upside risk to our estimates for both rails from incremental traffic (e.g., bulk commodities, due to Russia/Ukraine conflict), a rapid decline in diesel prices, or a material pullback in CAD vs. USD. On the flip side, our estimates could face some downside risk if Canadian grain doesn’t rebound to normal in the new crop year (effective August 1).”


With long-term interest rates rising “rapidly,” Canaccord Genuity analysts Mark Rothschild and Christopher Koutsikaloudis think there is now “a greater risk” of capitalization rates increasing.

“As a result of the recent rise in long-term interest rates, the spread between cap rates and Canadian BBB bond yields is now 115 basis points, down from 247 bps at the beginning of 2022 and below the long-term average of 214 bps,” they said. “In the near term, there remains a wall of capital targeting investments in real estate, and we expect demand to remain strong. However, with spreads between cap rates and the cost of debt now well below the long-term average, we view the risk of cap rates rising as more material.”

In a research report released Wednesday, they adjusted their ratings and target prices for several real estate investment trusts in their coverage universe, believing “investors will, and should, consider the potential for cap rates to rise and the impact on property values.”

Cap rates represent the rate of return owners should expect to earn on a property, measured by comparing anticipated rental income to a building’s value.

In addition, they emphasized a number of REITs have performed well so far in 2022 “and the implied returns have become more modest,”

“Following a total return of 35 per cent in 2021, the S&P/TSX Capped REIT Index returned 0.9 per cent in Q1/22, below the return of 3.8 per cent from the S&P/TSX Composite Index, yet better than U.S. REITs, which posted a total return of negative 3.5 per cent. We attribute the underperformance of REITs relative to the broad market to rising long-term interest rates, widening credit spreads and outsized returns for the Canadian energy and materials sectors.”

The analysts moved six REITs to “hold” from previous “buy” recommendations. They are:

  • Allied Properties REIT (AP.UN-T) with a $48 target, down from $50. Average: $51.27.
  • Crombie REIT (CRR.UN-T) with a $19.25 target. Average: $19.67.
  • Dream Office REIT (D.UN-T) with a $26.50 target. Average: $28.22.
  • Plaza Retail REIT (PLZ.UN-T) with a $5 target. Average: $5.16.
  • RioCan REIT (REI.UN-T) with a $26.50 target. Average: $26.83.
  • SmartCentres REIT (SRU.UN-T) with a $33.50 target. Average: $33.63.

The analysts’ target changes were:

  • Canadian Apartment Properties REIT (CAR.UN-T, “buy”) to $63 from $66. Average: $67.20.
  • Dream Industrial REIT (DIR.UN-T, “buy”) to $19 from $21. Average: $19.64.
  • Granite REIT (GRT.UN-T, “buy”) to $105 from $115. Average: $110.27.
  • InterRent REIT (IIP.UN-T, “buy”) to $19 from $19.50. Average: $19.63.
  • Killam Apartment REIT (KMP.UN-T, “buy”) to $25.50 from $26.50. Average: $25.94.
  • True North Commercial REIT (TNT.UN-T, “hold”) to $7 from $7.50. Average: $7.63.

“The lower target prices reflect our belief that investors will, and should, consider the potential for cap rates to rise and the impact on property values,” they said. “In the near term, there remains a wall of capital looking to invest in real estate, and we expect demand to remain strong. Also, most REITs are well positioned to grow cash flow and NAV through raising rental rates and value-add development projects.

“However, with corporate bond yields having risen more than 130 bps so far in 2022, and spreads between cap rates and the cost of debt well below the long-term average, we view the risk of cap rates rising as more material. In addition, a number of REITs have performed well in 2022 and the implied returns have become more modest. As a result of this performance, and the lower target prices, we are reducing our ratings for six REITs from Buy to HOLD.”

Mr. Rothschild and Mr. Koutsikaloudis highlighted a group of REITs that they believe should outperform over the next year, saying: “Factoring in year-to-date returns and updates to our target prices, we believe current valuations for a number of REITs including Eastern Canada-focused apartment REITs (InterRent, CAP REIT, Killam and Minto), Dream Industrial REIT and First Capital REIT are attractive, and these REITs should outperform over the next year. In addition, we believe Brookfield Asset Management (BAM) should benefit from rising allocations to alternative investments and growing management fees.”


With its valuation in in line with historical norms and at a premium to the North American Construction average, Stifel analyst Ian Gillies downgraded Aecon Group Inc. (ARE-T) to “hold” from “buy” on Wednesday.

“Aecon’s business continues to benefit from government spending tailwinds and increased infrastructure spending,” he said. “However, we believe much of this has now been priced into the stock. More specifically, the current 2023 estimated P/E of 14.0 times is modesty above the 10-year average. With the potential for cost pressures, we believe it is challenging to argue for the company to trade to the upper end of the 10-year range of 16.1 times.”

Mr. Gillies emphasized Aecon’s financial outlook remains “constructive,” however he sees it priced into the stock already.

“We believe that revenue growth should be in the mid-single digits over the next two years, driven by continued government spending, and this is visible through a robust backlog covering 1.5 times our 2022 revenue estimate,” he said. “We are expecting EBITDA margins to improve from 5.2 per cent in 2021 (ex-CEWS) to 6.4 per cent in 2023, which would put the company in line with 2018 and 2019. One potential concern is wage inflation and materials costs, which could impede margin expansion. The 2021-2023 EPS CAGR [compound annual growth rate] is 31 per cent to $1.22, which would bring EPS back to the level above 2019 at $1.09.”

The analyst raised his target for Aecon shares to $18 from $17.25. The average on the Street is $20.10.

“Aecon had a challenging 4Q21 release on March 1, 2022,” said Mr. Gillies. “The stock bottomed on March 15, 2022 at $15.54 and has since regained 9.5 per cent, as the market has recalibrated around the updated business outlook. Recall, the 2022 gross and EBITDA margin outlook changed dramatically with 4Q21 results as disclosures changed relating to 2021 CEWS contribution, which tempered expectations of future years.”


Haywood Securities’ Geordie Mark sees “attractive” return on invested capital potential for Endeavour Mining PLC’s (EDV-T) Sabodala-Massawa mine in Senegal.

On Monday, the London-based miner announced it will proceed with the expansion of the complex with a 1.2-million-tonne-per-annum BIOX plant to process high-grade refractory ores. It sees the potential for the asset to be a “top tier” mine with the production capacity of over 400,000 ounces per year at an “industry-leading” all-in sustaining cost.

“We highlight the Company’s track record of delivering development projects into production on time (if not before), and on-budget,” said Mr. Mark. “Given the established nature of the infrastructure and workforce we see schedule and budget risks more related to extrinsic factors (e.g., supply chain, and weather) rather than any inherent capacity issues. We note that the Company ended 2021 with US$906 million in cash with net cash position of US$76 million.”

Mr. Mark thinks the project’s development can be funded internally given the company’s liquidity, including US$500-million undrawn in its revolving credit facility).

“The Fetekro feasibility is due soon, and we believe that time and opportunity cost is lost if development is deferred in any meaningful period, whereby liquidity, projected balance sheet and human resource capacity are considered sufficient to cater for temporally overlapping, but non-identical projects,” he said. “Inflation is obvious from labour costs, consumables to capital items, and in many respects, it is difficult to imagine the collective project cost structure to moderate meaningfully with deferral resulting in potential opportunity cost: not only in revenue generation, but also in furnishing project enhancement through discovery.”

Pointing to its portfolio’s “quality and diversity,” a “strong” balance sheet and the expectation for production growth over the short-to-medium term, Mr. Mark reaffirmed Endeavour as a “Top Pick” and recommends investors accumulate shares at current prices.

“In our view, EDV’s shares offer shareholder value in a higher gold price environment given the diverse asset base, organic growth catalysts and raw natural resource potential across its exploration portfolio ($80 million 2022 budget),” he said. “Notwithstanding, this Senior Gold Producer is expected to demand a premium bid given its balance sheet, growth potential and yield.”

Maintaining a “buy” recommendation, he raised his target to $50 from $46. The average on the Street is $43.54.

Elsewhere, Berenberg’s Jonathan Guy raised his target to $47 from $42 with a “buy” rating.


Desjardins Securities analyst Kevin Krishnaratne thinks VerticalScope Holdings Inc. (FORA-T) is “well-positioned to capitalize on digital ad and e-commerce trends, with attractive forum economics which drive a strong operating profile that we see being complemented by material M&A near-term.”

He initiated coverage of the Toronto-based provider of cloud-based software platforms for online communities, which went public last June, with a “buy” recommendation, seeing its “alternative social media channel poised to attract more attention from brands and retailers.”

“VerticalScope’s forums cater to enthusiasts seeking reviews and discussions on products such as cars, home furnishings and electronics, among many other verticals,” said Mr. Krishnaratne. “We see a big opportunity for VerticalScope to attract more ad spend from brands seeking known audiences given recent ad tech ecosystem changes, such as the deprecation of third-party cookies and the elimination of mobile IDs. We also believe the company serves as a key channel for retailers seeking shoppers, as it helps enable e-commerce sales via the placement of affiliate links on its forums.”

“We believe the economics of forums based on user-generated content, volunteer content moderation and organic web traffic supports EBITDAmargins of more than 50 per cent, with a capex-light model driving more than 70 per cent EBITDA-to-FCF conversion. We model organic revenue growth of 3.5 per cent in 2022 (to US$94.6-million) owing to e-commerce headwinds and 8.8-per-cent growth in 2023 (to US$102.9-million). We see adjusted EBITDA margin at 45.7 per cent in 2022 and 48.6 per cent in 2023, and FCF at US$30.9-million in 2022 and US$36.0-million in 2023.”

Calling M&A a “key part of the growth story,” the analyst thinks executing on its 2022-2023 pipeline has the potential to double the company’s adjusted earnings before interest, taxes, depreciation and amortization. VerticalScope is currently planning to add US$50-million in EBITDA from almost 50 target.

“VerticalScope’s tech stack, Fora, streamlines the M&A process and can drive 20-per-cent revenue upside at targets within two quarters,” he said.

Mr. Krishnaratne set a target of $31.50 per share. The average target on the Street is $33.92.

“We view VerticalScope as a uniquely positioned media tech company which shares elements of digital media, social media and social commerce business models, with few direct peers,” he said.

“With regard to our valuation for VerticalScope, we are comfortable using a 10.0 times multiple on our core organic 2023 adjusted EBITDA estimate, which is a slight discount to where specialty media peers are currently trading. While we acknowledge the elements of social media (18.3 times) and social commerce (26.3 times) within VerticalScope’s business, we believe its lower growth profile and smaller size relative to social peers warrants a discount.”


Believing its financial guidance is “conservative” and possessing an “attractive” valuation, Canaccord Genuity Joseph Vafi initiated coverage of Payfare Inc. (PAY-T) with a “buy” recommendation on Wednesday.

The Toronto-based fintech company provides a payment platform for the gig workforce, which he believes is setup for “continued growth” and has a “bright” future.

“Payfare is a fast-growing payments company operating in the Earned Wage Access (EWA) segment of the gig economy,” said Mr. Vafi. “EWA plays a big role in the success of companies participating in the gig economy as it allows for 1099 workers (gig workers) to access their earned wages as soon as the service is rendered, a win-win for both the gig company and worker. In a short period of time, Payfare has managed to sign some of the biggest and fastest growing gig platforms out there, including Lyft, DoorDash, Uber Canada, UberEats, and Instacart. Recently, Payfare surpassed the 500K active user mark, which we believe will start to afford the company multiple scale benefits to help grow further while also providing a margin lift. Although still a relatively small company, this level of success with some of the most demanding, high growth internet platforms out there speaks to a solid value proposition especially since attraction and retention of gig workers has increasingly become a key part of achieving growth plans.

“We expect business momentum to continue for Payfare in the near to medium term. Payfare is still far from fully penetrated within its current base of customers and we see this to be the main growth opportunity for the company this year. Beyond existing customers, there is clearly still plenty of opportunity to add more platforms which rely on the gig worker.”

Mr. Vafi thinks there’s “material upside” to its guidance and sees “several levers which should begin driving enhanced gross margins.”

“We view Payfare as a leading payments player in the gig economy, positioned for outsized growth in the near term,” he said. “With a current valuation of 2 times our 2023 sales estimate, we see the business as attractively valued, especially given our view that guidance is conservative. Also, we see zero value built in for what could be a material asset over time in the branded Paid Platform. Other Fintechs that are operating in similar domains involving worker payments, payroll and personal finance are trading at an average of approximately 4.5 times 2023 estimated sales. That said, we also believe that we will need to see some progression on gross margins for PAY shares to realize multiple expansion toward the mean of the peer group. We like our rather conservative sales outlook for Payfare given what we believe to be accelerating new user adds; we also see multiple levers here to gross margin progression. As a result, we think there is a good case to be made for multiple expansion from here.”

He set an $11 target for Payfare shares. The average is $14.67.


In other analyst actions:

* RBC Dominion Securities analyst Michael Siperico initiated coverage of Brossard, Que.-based G Mining Ventures Corp. (GMIN-X) with an “outperform” rating and $1.75 target. The average is $1.94.

“G Mining Ventures (GMIN) is a gold-focused development-stage company, differentiated by its experienced technical team and in-house project acquisition, financing and execution capabilities via the relationship with G Mining Services (GMS), a leading consulting and engineering firm,” he said. “The team has led the development of large scale mines for some of the sector’s leading operators, and is now targeting 500kozpa within five years for GMIN. The first project is the shovel-ready Tocantinzinho (TZ) project in Brazil, where we forecast production of 200kozpa starting in 2024.”

* Canaccord Genuity’s Katie Lachapelle raised his Sigma Lithium Corp. (SGML-X) target to $24, above the $17.67 average, from $17 with a “speculative buy” rating.

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