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

National Bank Financial analyst Adam Shine thinks the path to regulatory approval of Shaw Communications Inc.’s (SJR.B-T) $26-billion combination with Rogers Communications Inc. (RCI.B-T) “exists but more patience will be needed.”

Expecting a negotiation settlement with the federal Competition Bureau to occur in the fall, he raised his recommendation for Shaw shares to “outperform” from “sector perform” on Wednesday.

“Rogers has 45 days to file a response to the Competition Bureau’s opposition,” said Mr. Shine. “The Bureau has 14 days to then reply. Parties may wish to move expeditiously, so we’ll see how quickly Rogers’ response comes. The Tribunal process could be long. The better next step could be refreshed discussions between the Bureau and Rogers as well as Shaw which is likely to become more involved. Shaw would be expected to extend the 7/31/22 outside date but will want to witness progress. The next 30-60 days appear critical to see if the Bureau and Rogers can move closer together. The Bureau noted that the start of litigation doesn’t preclude a settlement. We think a deal happens but it might occur in the fall rather than summer.”

The analyst said Shaw’s Freedom Mobile, the source of the Competition Bureau’s concern, has “always been a standalone entity.” He also emphasized its Shaw Mobile business is “easily extracted” from its cable operations.

“Freedom operates mostly in Southern Ontario and to a lesser degree in Alberta and British Colombia,” said Mr. Shine. “It has never been integrated with Shaw’s cable business and remains a standalone operation. Freedom’s microwave and fibre backhaul requirements are fulfilled via commercial agreements at market rates. Roaming agreements exist with each of the Big 3 and Freedom has discretion where the traffic gets assigned. These backhaul and roaming agreements can be easily transferred or re-established by a new owner.”

“Shaw Mobile was launched on 7/30/20 as a mobile virtual network operator division of Freedom with a geographic focus on AB and BC. It’s thus supported by Freedom’s wireless network, while paying Shaw for backhaul services based on commercial agreements. Shaw’s Wi-Fi network has 450 hotspots (dual cabinets can support Wi-Fi and wireless). The hotspots helped in the early days of the wireless efforts as customers out West could hop on Wi-Fi if needed. Freedom’s network saw coverage improve with the rollout of 600 MHz spectrum. No Wi-Fi hotspots exist in Ontario where Shaw has no cable assets. Out West, very little offloading is happening to these Wi-Fi hotspots. It would likely be just a matter of months to separate Shaw’s wireless assets from its cable platform, as wireless can be easily bifurcated with key terms.”

He maintained a $40.50 target for Shaw shares, matching the proposed acquisition price. The average is currently $39.80, according to Refinitiv data.


BMO Nesbitt Burns analyst Fadi Chamoun sees a “significant self-help opportunity” available for Canadian National Railway Co. (CNR-T) from “improving the revenue quality and reconnecting the company with its [precision scheduled railroading] roots.”

Accordingly, he raised his rating for CN shares to “outperform” from “market perform” on Wednesday, believing the company has “regained momentum” in the second quarter after a “weak” start to the year.

“We estimate that the core operating margin improvement opportunity is approximately 700 basis points versus the 39 per cent earned in F2021,” said Mr. Chamoun. “While the new CEO, Tracy Robinson, has not yet announced specific financial targets, she has outlined a general strategic framework, which targets this opportunity and should prove supportive of stronger results going forward.”

“Service data and volume trends have been very encouraging since early March. CNR’s car miles per car day have recovered from the winter freeze of around 154 throughout January and February to 211 on average this past month. The recovery in velocity is positively impacting freight cars online, which have been declining while volumes have improved. These trends supported an increase in our Q2/22 EPS to $1.84 from $1.72 previously (consensus $1.71). Volume comps get easier in H2/22 and with demand remaining strong alongside robust pricing and self-help improvement initiatives, we believe momentum should further accelerate in H2/22.”

With that view, Mr. Chamoun also raised his full-year 2022 EPS estimate to $7.08 from $6.98, exceeding the Street’s $6.95 forecast. His 2023 estimate jumped to $8.34 from $8.02, also topping the consensus of $7.90.

“While we are maintaining our target price of $170, we see potential upside of $190-200 in a scenario where the demand environment remains favorable and CNR executes on the large self-help opportunity,” he said. “In a more muted-demand environment, we believe that the downside is limited as steps to improve efficiency and revenue quality should enable the company to defend the earnings power. Q2/22 operating/service and volume trends are also tracking ahead of expectations leading us to raise our forecast.

Mr. Chamoun’s $170 target for CN shares exceeds the $162.83 average.

“The risk of a recession has increased and the visibility into the freight cycle is more muted,” he said. “So, why upgrade now? We believe that CNR’s self-help opportunity will defend the earnings power in a scenario of weaker demand limiting the downside from current level while the upside scenario is very attractive and could support valuation up to $190-200 over the next two to three years.”


Following weaker-than-anticipated first-quarter results, Echelon Partners analyst David Chrystal thinks cost inflation will remain a significant financial obstacle for Canadian Apartment Properties Real Estate Investment Trust (CAR.UN-T) moving forward, however he continues to expect revenue growth to “accelerate.”

“Despite a tightening apartment market, CAPREIT’s softer-than-expected Q122 results reflect near-term challenges owing to (1) a tight regulatory environment that limits the REIT’s near-term organic revenue growth, and (2) inflationary pressure on operating expenses, particularly utilities, wages and repairs and maintenance costs,” he said. “Though we expect to see revenue growth accelerate through 2022, and cost pressures to ease somewhat for the remainder of the year, we expect that NOI [net operating income] margins will be softer, and organic NOI growth muted for the next few quarters.”

On Monday after the bell, the Toronto-based REIT reported revenue of $246.6-million, up 8 per cent year-over-year and above Mr. Chrystal’s $245-million estimate. However, earnings before interest, taxes, depreciation and amortization (EBITDA) rose 3 per cent to $135-million and adjusted funds from operations gained 2 per cent to 45 cents, missing his forecasts ($144.9-million and 48 cents, respectively).

“Though CAPREIT delivered modest year-over-year organic revenue growth (2.3 per cent) reflecting rising occupancy (up 60 basis points) and average rent, a 9.6-per-cent increase in operating expenses resulted in a 1.7-per-cent decline in same-property NOI,” he said. “The cost increase was in large part due to rising natural gas and electricity prices and consumption as well as increased weather-related maintenance (including boiler maintenance and snow removal) in a particularly cold Q1. We expect that some cost pressures will ease in Q2 and Q3 as weather-related costs are eliminated; however we note that wages, contracts and supplies will likely continue to see inflationary pressure going forward. While organic NOI growth will likely turn back positive, margins will likely remain under pressure until revenue growth returns to pre-pandemic levels (4-5 per cent).”

During Q122, average lifts on turnover in the Canadian apartment portfolio were up 10.2 per cent above prior rents, the strongest figure since Q120. Management commentary, and strengthening demand into the spring/summer leasing season suggest that this figure will continue to rise in the coming quarters. We expect that lifts on turnover will ultimately meet or exceed the 13-14-per-cent range achieved in 2018-2019 pre-COVID. However, renewal lifts (up 1.3 per cent in Q122) remain constrained in the near term due to relatively low allowable increases across most jurisdictions with rent control regulations (more than 90 per cent of NOI). We see a stronger revenue growth outlook in 2023, when we expect that allowable increases will be somewhat higher (more than 2 per cent on average), and lifts on turnover will reflect growing demand in supply-constrained markets.”

Mr. Chrystal reduced his 2022 estimates to reflect the quarterly results and a “slight” reduction to his NOI margin assumptions. That led him to cut his target for CAP REIT units to $62.50 from $68. The average on the Street is $65.08.

Keeping a “buy” recommendation, he said: “We are confident in CAPREIT’s long-term outlook, irreplaceable portfolio of assets in supply constrained markets, and exceptional financial position. That said, in the near-term we believe the muted organic growth profile and headwinds of rising interest rates will continue to hinder unit price performance.”

Elsewhere, others making target adjustments include:

* Raymond James’ Brad Sturges to $66 from $70 with a “strong buy” rating.

“The recent sell-off in CAPREIT’s unit price has created an extremely wide disconnect between public and private market pricing for the Canadian multifamily REIT sector,” said Mr. Sturges. “Given this pricing dislocation, CAPREIT has established a normal course issuer bid (NCIB). While there are limits to the activity level that CAPREIT can realistically achieve, we believe incremental unit buyback activity by CAPREIT can provide a positive signal of inherent underlying value to investors. We also view the re-election of the Ontario PC government in the upcoming June election as a possible material near-term positive catalyst for CAPREIT’s deeply discounted unit price.”

* Desjardins Securities’ Michael Markidis to $65 from $67 with a “buy” rating.

“Fundamentals are getting stronger and operating metrics are trending in the right direction,” said Mr. Markidis. “Our revenue forecast assumes that vacancy loss, incentive amortization and new leasing spreads will return to pre-pandemic levels in 2H22. We expect that opex inflation will continue to weigh on profitability in the short term. On a total portfolio basis, our model employs an NOI margin assumption of 64.8 per cent for 2022 (down 60 basis points vs 2021). Continued top-line momentum, combined with more modest cost pressure, is expected to drive 40 basis points of margin expansion in 2023.”

* RBC Dominion Securities’ Jimmy Shan to $66 from $69 with an “outperform” rating.

“Q1/22 reflected a tough winter but improving revenue outlook, which H2 should better reflect,” he said. “Given current valuation, NCIB is being considered with asset sales. Valuation is tricky—a glass-half-full investor looks to inflationary impact on replacement cost & rents; a glass-half empty investor looks to the negative/thin investment spread impact on cap rates.”

* iA Capital Markets’ Johann Rodrigues to $60 from $65 with a “buy” rating.

“We would advise investors to pick away at the stock, choosing to time their entry points, but to not miss out on a discount that occurs 1-2 times a decade,” he said.

* CIBC World Markets analyst Dean Wilkinson to $60 from $63 with a “neutral” rating.

* TD Securities’ Jonathan Kelcher to $66 from $70 with an “action list buy” rating.


Though it reported lower-than-anticipated sales and earnings in the “seasonally-weak” first quarter, ATB Capital Markets analyst Frederico Gomes raised his recommendation for Sundial Growers Inc. (SNDL-Q) to “outperform” from “sector perform,” calling it “the contrarian (and defensive) play in Canadian cannabis”

On Monday after the bell, the Calgary-based company reported net revenue of US$17.6-million, below the estimates of both Mr. Gomes (US$19.7-million) and the Street (US$20.3-million). It logged an adjusted earnings before interest, taxes, depreciation and amortization loss of US$0.7-million, also missing expectations (profits of $14.2-million and $10.9-million, respectively).

Mr. Gomes said the results were due in part to rising interest rates that led to negative fair value adjustments in its SunStream investment portfolio.

“The quarter included only one day of contribution from Alcanna and Nova Cannabis (NOVC-T); therefore, we believe the results do not accurately capture SNDL’s underlying fundamentals,” he said. Given the heightened volatility in capital markets and the headwinds plaguing the Canadian cannabis market—for LPs and retailers—we now believe SNDL presents the most compelling risk-reward alternative in the sector as both a contrarian and defensive play.”

“As of today, we estimate SNDL has $361-million in unrestricted cash, virtually zero debt (excl. leases), and $588-million in investments. We believe the Company has one of the strongest balance sheets among its peers; this level of liquidity is a cornerstone of our investment thesis, as it endows SNDL with flexibility to seize attractive opportunities in a market downturn, making it a contrarian play. We also estimate SNDL’s net tangible book value at 40 cents per share, which, together with its diversification (investments plus exposure to liquor retail and across the cannabis value chain), makes for a defensive play, reducing risk while maintaining upside.”

Trimming his full-year 2022 and 2023 revenue and earnings estimates due to a lower contribution from SunStream, Mr. Gomes maintained a target of 80 US cents for Sundial shares. The average on the Street is 69 US cents.

“Our Outperform rating is supported by the increased upside potential implied by our Price Target following SNDL’s recent stock price decline coupled with the Company’s defensive balance sheet, which we believe fundamentally lowers risk on the stock,” he added.


In reaction to a share price drop of almost 21 per cent since April 12 to its lowest level since 2017, ATB Capital Markets analyst Tim Monachello raised his rating for Questor Technology Inc. (QST-X) to “sector perform” from “underperform” on Wednesday.

“While our view of QST’s fundamental outlook is unchanged and we continue to believe it faces near-term demand headwinds, we believe its recent stock performance reduces the downside for investors from current levels,” he said.

Mr. Monachello maintained his financial estimates for the Calgary-based environmental services company, projecting “modest” EBITDA growth from $1-million this year to $4-million by 2024. He called that forecast “achievable and ultimately could prove conservative in upside scenarios.”

“We continue to believe that QST’s longer-term prospects are encouraging given an increasing focus by governments and other stakeholders on reducing upstream emissions and given Questor’s growing portfolio of IP in methane reduction and monitoring technologies and waste heat to power solutions,” the analyst noted. “That said, QST has struggled to regain its operational footing following the downcycle, which has significantly impaired demand within its Rental platform. Still, we believe modest utilization growth is a relatively low-risk assumption over the coming years given the aforementioned longer-term tailwinds and QST’s ongoing efforts to transition its rental focus more toward midstream pipeline maintenance operations. In addition, Questor has demonstrated spotty success in growing its waste heat to power presence in industrial settings outside the energy sector, which could provide upside to our sales projections.”

Mr. Monachello maintained a $1.50 target for Questor shares. The average is $1.78.

“Determining a bottom for companies with depressed cash flows and relatively high growth rates can be fraught with challenges, and we believe a downside scenario could ultimately present some downside from current levels,” he said. “That said, we note that QST is trading at just 6.5 times 2023 estimated and 4.1 times 2024 estimated EBITDAS. QST’s valuation is also backstopped by its strong balance sheet position: at Q1/22, we forecast QST had roughly a $15-million net cash position (roughly $0.53 per share), though we forecast its working capital balance to be negligible. While we believe QST’s historical multiples have limited relevancy given its depressed cash flow profile, it is worth noting that QST has traded up to at least 4.6 times EV/EBITDAS in every year since 2012 and up to at least 7.4 times in every year since 2013. At 4.6 times 2023 estimated EBITDAS, our model suggests a downside valuation of roughly $0.98. At 7.4 times 2023 estimated EBITDAS, our model suggests a $1.25 valuation. Our estimates suggest that every $0.10 decline in QST’s share price reflects roughly a 1.0-turn decrease in its 2023 estimated EV/EBITDAS trading multiple.”


Following a “strong” start to 2022, National Bank Financial analyst Don DeMarco named K92 Mining Inc. (KNT-T) a “Top Gold Pick.”

On Monday, the Vancouver-based miner reported adjusted earnings per share of 7 cents, in line with the Street’s forecast and a penny below Mr. DeMarco’s estimate. All-in sustaining costs of $788 per cent was 15 per cent below the company’s guidance midpoint.

“We are adding KNT as a top gold pick (was previously honourable mention,) considering: (i) operations intact and trending into a backend loaded year, plus visibility for production growth on the order of 220 per cent (vs fiscal 2021) to 333k oz by 2025; (ii) acute exploration catalysts with the 2022 program focused on expansion drilling, and updates pending at Kora/Judd south, Kora/Kora deeps and Judd, each with potential to move the needle; (iii) one of few remaining single-asset companies with production wheelhouse of interest to seniors, and in our view, M&A appeal heightened after our expected granting of the mining lease extension in H2/22; (iv) limited capex inflation risk with the pending Stage 3 DFS coming from a low base with the PEA (July 2020) pegging capex at $125-million; (v) attractive entry point following the recent sector correction, with KNT last one month down 19 per cent (vs S&P TSX Gold Index down 21 per cent), yet exploration and growth-focused thesis unchanged; (vi) K92 is trading at P/NAV 0.74 times (TXG 0.58 times, LUG 0.78 times) with visibility for 1 times-plus on M&A,” said Mr. DeMarco. “Some pushback on jurisdiction with PNG ranked 56/84 in the 2021 Fraser rankings, though mitigated by continued FDI, including recent multi-billion LNG investment.”

Maintaining an “outperform” rating, he bumped his target to $12.75 from $12.50. The current average is $12.10.

Elsewhere, Desjardins Securities’ Jonathan Egilo trimmed his target to $11.25 from $12.50 with a “buy” rating.

“While adjusted EPS was in line with consensus, operating costs came in below the Street — an impressive feat in today’s environment, where much of the industry is fending off inflationary pressures,” said Mr. Egilo. “We continue to view K92 Mining as our top gold producer pick. Our target price dropped as we reduced our target multiple to account for recent compression across the industry.”


In other analyst actions:

* National Bank Financial’s Tal Woolley cut his target for American Hotel Income Properties REIT LP (HOT.UN-T) to $4.75 from $5 with a “sector perform” rating. The average is US$3.90.

* Scotia Capital’s Mark Neville reduced his target for ATS Automation Tooling Systems Inc. (ATA-T) target to $55 from $63, below the $60.50 average, with a “sector outperform” rating.

“We have lowered our FQ4/22 and F2023 estimates to reflect potential supply chain constrains and inflationary pressures,” he said. “While ATS has successfully mitigated these issues to date (i.e., through the December Q), we believe the pressures have likely gotten incrementally more challenging. We believe sourcing/supply chain risks likely pose a greater risk than inflation as contracts are generally short-cycle and the company locks in most of its costs at the time of contract proposal/award -- however, we reduced both our gross margin (to reflect inflation) and backlog conversion/revenue (to reflect supply chain) assumptions through calendar 2022.”

* National Bank Financial’s Don DeMarco trimmed his Aya Gold & Silver Inc. (AYA-T) target to $11.25 from $11.50, below the $13.50 average, and reaffirmed an “outperform” recommendation.

* Canaccord Genuity’s Aravinda Galappatthige cut his target for BBTV Holdings Inc. (BBTV-T) to $2 from $3.50, keeping a “hold” rating, after weaker-than-expected first-quarter results and seeing its outlook remain “murky.” The average on the Street is $4.31.

“We have cut our target price ... as we consider 1) lower-than-expected traction in terms of gross margins even as Plus Solutions grows, 2) meaningful cash burn coupled with a seemingly challenged working capital position, and 3) sustained weakness in the Base Solutions segment,” he said. “Further, in the market conditions, even large-cap, well established tech names are seeing substantial valuation resets toward historic lows. Against this backdrop, we suspect micro-cap names (particularly ones with negative EBITDA and levered balance sheets) could face more punitive multiples.”

* CIBC World Markets’ Dean Wilkinson cut his Capstone Mining Corp. (CS-T) target to $8, below the $8.52 average, from $9 with an “outperformer” rating..

* KBW’s Rob Lee dropped his CI Financial Corp. (CIX-T) target to $19 from $25 with an “outperform” rating. The average is $21.44.

* TD Securities’ Sam Damiani lowered his Firm Capital Mortgage Investment Corp. (FC-T) by $1 to $14.50, maintaining a “buy” rating. The average is $14.88.

* Scotia Capital’s Mario Saric raised his H&R Real Estate Investment Trust (HR.UN-T) target to $16.50 from $15.25, remaining below the $16.96 average, with a “sector perform” rating.

“We took time to again consider an upgraded rating ... and there would be support for it,” he said. “That said, we ultimately felt the 8-per-cent out-performance since last Thursday (uo 11 per cent vs. 3 per cent for sector) is a good start to H&R ‘Growth’ REIT, our revised 27-per-cent NTM [next 12-month] total return matches sector avg., and we’re not quite ready to downgrade one of our Sector Outperforms. That said, H&R valuation still looks cheap vs. our Shadow REIT and importantly, we think the re-positioned portfolio (focus on residential/industrial) can structurally deliver 4 per cent-plus SSNOI growth through 2023, a big improvement from historical results and the ultimate driver of unit price growth. Bottom-line, H&R is one of our favoured ‘Sector-Perform’ REITs and announcements last week (aside from a near-term pause on broader market transactions) reinforces it is on the right path to better investor sentiment. We feel comfortable buying H&R here.”

* CIBC’s Bryce Adams lowered his target for Hudbay Minerals Inc. (HBM-T) to $11.50 from $14, keeping an “outperformer” rating. The average is $12.92.

* Mr. Adams reduced his Largo Inc. (LGO-T) target to $16 from $18, below the $18.60 average, with an “outperformer” rating.

* BoA’s Lorraine Hutchinson cut her Lululemon Athletica Inc. (LULU-Q) target to US$400 from US$450, maintaining a “buy” rating. The average is currently US$425.48.

* TD Securities’ Craig Hutchison cut his Mag Silver Corp. (MAG-T) target to $28 from $31 with a “speculative buy” rating. The average is $26.53.

* National Bank Financial’s Rupert Merer cut his target for NanoXplore Inc. (GRA-T) to $8 from $10 with an “outperform” rating, while Raymond James’ Michael Glen reduced his target to $6 from $8.50 with an “outperform” rating. The average is $9.38.

* Raymond James’ Craig Stanley lowered his target for shares of Skeena Resources Ltd. (SKE-T) to $20 from $22, maintaining a “strong buy” rating. The average is $22.59.

* Raymond James’ Brad Sturges moved his Tricon Residential Inc. (TCN-N, TCN-T) target to US$17 from US$18.50, above the US$16.67 average, with an “outperform” rating.

“We expect that Tricon’s U.S. initial public offering (IPO) completed in late 2021 may somewhat constrain its 2022 AFFO/share growth year-over-year,” he said. “However, we expect the company’s 2023E AFFO/share growth year-over-year to accelerate, driven by solid organic growth prospects, a growing management fee income stream with greater 3rd-party assets under management (AUM), and due to expected expansion in its U.S. SFR portfolio by 60 per cent from 31k homes at March 31 to 50k homes by 2024E

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