Inside the Market’s roundup of some of today’s key analyst actions
Scotia Capital analyst Jason Bouvier continues to see “significant tailwinds” for the Canadian energy industry stemming from surging commodity prices.
“Capital discipline remains strong and balance sheets continue to strengthen at a rapid pace. Dividends have been on the rise and we expect a shift to special/variable dividends (ie: more investor returns) in 2023,” he said.
With stocks in his Canadian oil-weighted coverage universe are up 64 per cent thus far in 2022, Mr. Bouvier expects the trend upward to continue, leading him to raise his target prices by an average of 17 per cent on Wednesday.
“In our view, on balance, the robust commodity price environment, continued capital discipline, and strengthening balance sheets outweigh the headwinds industry is facing,” he said.
“We continue to believe Canadian Energy trades at a steep discount to its U.S. peers. With recent wins to egress (we believe Canada will be long pipeline capacity for many years to come) and de-carbonization coupled with strong capital discipline and healthy balance sheets, we like what we see. Our Canadian oil weighted large caps trade at an average 2023 DAFCF (strip) yield of 16 per cent vs. its U.S. peers at 13 per cent and our Canadian oil weighted SMID caps trade at 25 per cent.”
Mr. Bouvier upgraded a pair of stocks:
* Crescent Point Energy Corp. (CPG-T) to “sector outperform” from “sector perform” with a $15 target, up from $11.50. The average on the Street is $14.29.
“We have CPG trading at a 2023 estimated DAFCF [debt-adjusted free cash flow] (strip) yield of 27 per cent, one of the highest in our coverage universe,” he said. “The company’s Duvernay acquisition has played out nicely for the company, as commodity prices/netbacks continue to rise and the company become more efficient operating in the area. Management remains capital disciplined and the balance sheet is improving quickly. We estimate the company will hit its debt target of $1.3-million in Q3/22 (strip). This should pave the way for increased shareholder returns. We believe the stock has underperformed over the past few months on fears that CPG may overpay for additional Duvernay assets. Although asset prices have certainly increased over the past year, we believe management remains disciplined and would not use a price deck above US$75 WTI. As such, we feel their current discounted valuation is unwarranted and are upgrading the stock to Sector Outperform.”
* Enerplus Corp. (ERF-T) to “sector outperform” from “sector perform” with a $25 target, rising from $20 and above the $22.50 average.
“ERF has meaningfully underperformed its peers in 2022 and is trading at a 2023E DAFCF yield (strip) of 30 per cent vs the Canadian oil-weighted SMID cap average of 24 per cent (ex. ERF),” he said. “We believe ERF’s underperformance is unwarranted as management has maintained capital discipline and is focused on increasing shareholder returns. Further, the sale of its non-core Canadian assets could be a catalyst for the stock. The current commodity environment should enable ERF to realize a robust price for its Canadian assets. The proceeds from a potential sale could be used to enhance shareholder returns.”
Conversely, he lowered his recommendation for two stocks:
* Canadian Natural Resources Ltd. (CNQ-T) to “sector perform” from “sector outperform” with a $91 target, up from $88. The average is $90.48.
“We continue to believe CNQ is the lowest cost operator in the basin,” he said. “The downgrade is a relative call versus its Canadian peer group (we still think CNQ screens well versus its US peer group). CNQ has minimal exposure to downstream and with current crack spreads at very high levels and the outlook for crack spreads robust, we believe its Canadian peer group has more exposure. In addition, we expect heavy oil differentials to be wider over the next several months and CNQ has more exposure to heavy barrel pricing. This is partially offset by very high natural gas prices, as CNQ remains long natural gas, while several in its peer group are net natural gas consumers. However, the lack of exposure to downstream and increased exposure to heavy oil pricing, coupled with an already elevated valuation, lead us to downgrade the stock at this time.”
* MEG Energy Corp. (MEG-T) to “sector perform” from “sector outperform” with a $26 target, up from $23. The average is $25.46.
“We continue to like MEG’s strong capital discipline and dedication to improving the balance sheet,” he said. “However, we believe heavy oil differentials and natural gas prices are likely to be elevated over the next several quarters which will be some pressure (on a relative basis) on MEG’s cash flows. In addition, MEG shares have outperformed nicely over the past 6 months and its valuation is now significantly below the other SMID cap oil producers. Although MEG’s valuation is above its large cap oil sands peers, the peer group is largely cash taxable, whereas MEG is not yet (expected to be taxable in 2028 using strip prices in 2022 and US$80/bbl WTI thereafter).”
For large-cap stocks, his target changes were:
- Cenovus Energy Inc. (CVE-T, “sector outperform”) to $34 from $25. Average: $28.50.
- Imperial Oil Ltd. (IMO-T, “sector outperform”) to $80 from $72. Average: $67.72.
- Suncor Energy Inc. (SU-T, “sector outperform”) to $57 from $46. Average: $52.42.
For oil-weighted E&P stocks, his changes were:
- Baytex Energy Corp. (BTE-T, “sector perform”) to $9 from $6.75. Average: $8.61.
- Ovintiv Inc. (OVV-T, “sector outperform”) to US$70 from US$60. Average: US$64.33.
- Whitecap Resources Inc. (WCP-T, “sector perform”) to $13 from $12. Average: $14.92.
For international-focus companies, his target changes were:
- Africa Oil Corp. (AOI-T, “sector perform”) to $3.25 from $3. Average: $3.10.
- International Petroleum Corp. (IPCO-T, “sector outperform”) to $17 from $14. Average: $15.83.
- Parex Resources Inc. (PXT-T, “sector outperform”) to $38 from $37. Average: $41.90.
- Vermilion Energy Inc. (VET-T, “sector perform”) to $36 from $30. Average: $36.11.
For royalty companies, his changes were;
- Freehold Royalties Ltd. (FRU-T, “sector perform”) to $18 from $17. Average: $20.14.
- Prairiesky Royalty Ltd. (PSK-T, “sector perform”) to $21 from $20. Average: $22.77.
“Our favorite stocks are: Large Cap — CVE, IMO, and OVV; SMID Cap — CPG and ERF,” he said.
Citing rising interest rates and an “oncoming” recession, iA Capital Markets analyst Johann Rodrigues expressing concern about investing in long duration office real estate, instead he feels “safer watching ... from the sidelines.”
In a research report released Wednesday, he initiated coverage of Slate Office REIT (SOT.UN-T) and True North Commercial REIT (TNT.UN-T) with “hold” recommendations, seeing both struggling to rebound from pandemic-related downturns.
“Like many other asset classes, the pandemic has been tough on Canadian suburban office, weakening fundamentals across the board,” he said. “Not only have vacancy rates crept higher throughout the last two years, Q1/22 set new highs, both nationally and in Toronto. According to CBRE, suburban vacancy is 16 per cent nationally and 19 per cent in the GTA, both peaks not seen since 2003. Additionally, sublet space has spiked to decade-highs, at 22 per cent nationally and 18 per cent in the GTA. As a result, rent growth has been minimal, though this follows a trend that started prior to the pandemic. In fact, five-year compounded growth in net rents (0.2 per cent nationally and 0.8 per cent GTA) has been roughly half that of the previous ten-year period. The lone spot of good news is that there is a minimal amount of new suburban construction, with less than 1.0 per cent in the GTA (30-per-cent pre-leased) and 1.7 per cent nationally (38-per-cent pre-leased); both 15-year low.”
Mr. Rodrigues also emphasized long duration real estate underperforms in a rising rate environment, declaring we have “clearly entered an inflationary period.”
“In the last 20 years prior to the current period, there have been six distinct periods of sustained rising rates (200-plus days) and not only did the TSX Capped REIT Index lag the broader market (12 per cent vs. 30 per cent on average), short duration real estate (less than 4-year WALTs) almost tripled the performance of long duration peers (less than -year WALTs), with medium duration property (4-8 years) splitting the difference,” he said. “Both Slate and True North have WALTs that approach 5 years and as such, we believe they will underperform the broader market as long as rates continue to rise and until the BoC has reined in inflation.”
With the threat of a recession intensifying, Mr. Rodrigues noted the work-from-home trend has been damaging to both REITs, adding: “Most businesses are having trouble finding and retaining talent these days, as employees enjoy options and flexibility borne out of a labour shortage. As such, employers who might not otherwise be keen to offer work-from-home (WFH) flexibility have their hands tied. Should a recession hit in the next 12-18 months, this dynamic would substantially change though it remains to be seen whether this would be a net positive for office landlords. Having employees return to the office in a more permanent fashion would help ensure space is not given back on renewal, though a recession is evidently a negative for broader office fundamentals. In speaking with Slate and True North, both management teams believe a recession will come with a reversal in the WFH trend and view this as a positive for their businesses. While we tend to agree, this does not necessarily mean a recession will be a positive for their stocks. Investor sentiment generally moves against office equities in recessionary environments and though their yields should be safe, providing unitholders with a decent place to park cash, on a total return basis, both REITs are likely to underperform the broader TSX.”
Calling it “a NAV-focused suburban office play,” Mr. Rodrigues set a target of $5.25 for units of Slate Office, seeing an emphasis on value creation and “sizeable” NAV upside. The average target on the Street is $5.27.
“Though many institutions avoid looking at Slate Office due to the external structure, high leverage, thin liquidity and suburban focus, they are missing out on a name with 20-per-cent-plus NAV upside, a juicy yield, and a management team focused on increasing that figure,” he said.
Mr. Rodrigues thinks True North Commercial is “trading NAV growth for a sector-leading distribution,” setting a $7 target for its units. The average is $7.13.
“While primarily designed as a retail vehicle, True North has a place in the portfolios of certain institutions,” he said. “The REIT pays a massive 9.1-per-cent yield, an 350 basis point premium to the Canadian office average and 500 basis points over the broader Canadian REIT sector on average. While we would not expect above-average growth or NAV creation, those wanting to hide out and earn a stellar distribution should circle True North.”
Canaccord Genuity analyst Carey MacRury thinks the logic behind Gold Fields Ltd.’s US$6.7-billion takeover offer for Canada’s Yamana Gold Inc. (YRI-T) “continues to make sense.”
“The combined company provides investors with a larger, more liquid, diversified global platform with near-term growth and a solid balance sheet,” he said. “The combined company would be the world’s fourth-largest gold producer and ... the increased scale has been rewarded with higher valuation multiples. We suspect that as investors digest what we viewed as a surprise combination, this transaction is likely to go through, and we see the probability of an interloper as low. Gold Fields shareholders will own 61 per cent of the pro forma company and Yamana shareholders 39 per cent, which is in line with our NAV estimates.”
That led Mr. MacRury to raise his recommendation for Yamana shares to “buy” from “hold” on Wednesday, noting: “YRI sees the acquisition as accelerating value to YRI shareholders via the premium (which admittedly may take some time to prove out), the ability to realize better value from MARA residing in a larger company, and benefit as a larger, more diversified global producer given the relative valuation gap between the smaller and larger senior producers. Both management teams noted the evaluation of other alternatives but ultimately both viewed this combination as the best fit.”
From Gold Fields’ perspective, Mr. MacRury thinks the deal “bulks up” its development and exploration potential, provides regional scale in South America and a strategic foothold into Canada. It also creates a “larger, more diversified, and liquid global producer with near-term growth, a stronger pipeline and balance sheet, with a global portfolio across key mining regions that compares well to its larger peers.”
The analyst raised his target for Yamana shares to $10.50 from $7.50. The average target on the Street is $8.92.
RBC Dominion Securities analyst Sam Crittenden downgraded Nevada Copper Corp. (NCU-T) by two levels to “underperform” from “outperform” after it revealed “operational and geotechnical challenges” in the East South area of its Pumpkin Hollow underground copper mine in Nevada.
“The ramp up of the underground mine remains challenging which leaves uncertainty around near term liquidity, and future production and cost projections. We continue to see value in the open pit project, although this is clouded by near term issue,” he said.
Reducing his production estimates, Mr. Crittenden cut his target in half to 50 cents from $1. The average is 69 cents.
“With a fully permitted open pit project in a good location, we believe there is long term value in the Company; however, it may be difficult to surface until the underground and liquidity concerns are addressed,” he said.
Ahead of the June 23 release of its fourth-quarter financial results and expected close of its $435-million acquisition of Rubicon Pharmacies four days later, National Bank Financial analyst Zachary Evershed sees “significant growth potential” for Neighbourly Pharmacy Inc. (NBLY-T), calling it “a roll-up story” with further expansion to come.
However, he currently thinks the potential growth of the Toronto-based pharmacy operator “seems fully valued in the context of greater uncertainty.”
In a research report released Wednesday, he trimmed his quarterly estimates for Neighbourly.
“C-19 infections rose sharply through the back half of December, peaking in late January, and remained elevated into February,” said Mr, Evershed. “Reading through from companies that have already reported results for the January-March period, and comparing to the 40 basis points quarter-over-quarter headwind experienced by NBLY in FYQ3/22 attributable to cases only through December, we believe higher levels of absenteeism drove incremental costs q/ q. We therefore lower our profitability assumptions to account for relief pharmacist costs, as we believe our initial assessment was too optimistic, seeing our Adj. EBITDA forecast drop to $11.2-million, below the Street’s $14.5-million, and our Adj. EPS fall to a loss of 2 cents, also below consensus of a 3-cent profit.”
Mr. Evershed added that he’s “cautiously optimistic” about the impact of the potential adoption of the Canada Pharmacare Act, but he said it does “notably increase uncertainty” in company’s operating environment.
“Likewise, the announcement of only partial implementation of 2019 reforms to the Patented Medicine Prices Review Board (positive), April 29 adjustments to some Select Molecule pricing under the pan-Canadian Pharmaceutical Alliance-Canadian Generic Pharmaceutical Association agreement (negative), and the agreement’s expiry in 2023 (?) highlight the capacity for regulatory and legislative elements to introduce volatility to NBLY’s earnings,” he added. “Considering this in tandem with the cooling of equity markets and the rising cost of capital, we adopt a more conservative stance and tilt our valuation methodology toward nearer-term metrics.”
That led him to lower his target for Neighbourly shares to $28 from $35.50, reiterating a “sector perform” rating. The average on the Street is $37.
Elsewhere, iA Capital Markets analyst Chelsea Stellick maintained a “buy” recommendation and $40 target for Neighbourly shares.
“This [Rubicon] deal further cements Neighbourly as the leading and fastest-growing pharmacy acquirer in Canada, with the addition of 100 pharmacy locations to the Neighbourly portfolio materially increasing the Company’s scale and brand in Western Canada,” she said. “There remain around 3,600 potential acquisition targets across Canada with no antitrust risk, and we expect continued aggressive expansion during and following the integration of Rubicon. We foresee a significant negative omicron wave impact in Q4/F22 on revenues and expenses but note this will be a one-time phenomenon as we expect a bounce back in Q1/F23, both operationally and with continued favourable year-over-year comparisons through F2023 as acquisitions layer into the financials.”
Scotia Capital analyst Konark Gupta is “even more confident” in his positive thesis on CAE Inc. (CAE-T) after a tour of its New Jersey-based business jet training center and investor day event.
“Senior management, segment heads, and all other executives we interacted with were nothing but bullish on the company’s recovery and growth prospects over the next several years,” he said. “While the Defense segment got most attention, given the macro backdrop and renewed leadership, we were impressed by the deep bench and growth opportunities across all three segments as CAE has been expanding its addressable markets and positioning to increase market shares.”
The analyst sees the Montreal-based company “firing on all three cylinders,” expecting double-digit growth from its Civil and Healthcare segments and “above-industry growth” for its Defense business.
“Based on this segment outlook, the company is targeting a three-year EPS CAGR of mid-20 per cent, implying $1.60-$1.70 in adj. EPS in F2025, slightly ahead of our prior estimate of $1.58 (limited consensus was $1.70),” said Mr. Gupta. “We were in line with Civil and Defense guidance but a bit conservative on Healthcare, which causes us to more aggressively increase our Healthcare assumptions for a slight increase in our EPS estimates. The key underlying drivers for CAE’s bullish growth expectations for all three segments are cyclical recovery, secular tailwinds, new capabilities from recent acquisitions, M&A integration, and better execution. There is potential for further upside risk to our estimates, particularly for Civil or Healthcare growth and for segment margins, depending on recovery, secular tailwinds and execution. Potential M&A would also point to incremental upside risk.”
Reaffirming CAE as one of his top picks with a “sector outperform” rating, Mr. Gupta raised his target for its shares to $43.50 from $43 after slightly increasing his long-term earnings per share forecast. The average on the Street is $40.32.
“Valuation is attractive at 21 times P/E and 11 times EV/EBITDA on calendar 2024 estimates, relative to typical pre-pandemic ranges of 22-25 times and 12-14 times, respectively, for a long-term secular growth story with a strong moat,” he said.
“The company has shown stronger resilience in earnings and cash flows relative to other aviation sub-sectors during the pandemic, continues to generate strong FCF, has strengthened its dominating market position through capital deployment even during the pandemic, and has a readily deployable balance sheet for further growth opportunities. We continue to view CAE as a long-term growth compounder with a strong moat, defensive attributes, dominating position in almost every segment, and positive long-term secular trends in the civil, defense and healthcare end-markets.”
Elsewhere, BMO Nesbitt Burns’ Fadi Chamoun cut his target to $42 from $45 with an “outperform” rating.
“We came out from CAE’s Investor Day with greater confidence in our positive thesis on the stock. Two factors stood out for us coming out of the event: (1) strong management team and deep bench; and (2) through recent acquisitions and organic investments, CAE has created a market-leading position in several high growth segments of the aviation and defense markets that have the potential to support well-above-average revenues and earnings growth over the medium-to-long-term,” said Mr. Chamoun.
Calling it “an attractive proxy to the rise of the Ethereum ecosystem and Web 3.0 technologies,” Stifel analyst Bill Papanastasiou initiated coverage of Ether Capital Corp. (ETHC-NE) with a “speculative buy” rating.
“The company has acquired one of the largest holdings of Ether tokens (ETH) as a public issuer (more than $100-million) and generates income via staking (currently 4.2-per-cent APR), while earning consulting fees from Purpose Investments for co-managing two crypto-focused ETFs with a combined $2.0-billion AUM,” he said. “With newly appointed executives, the company aims to internally-develop and incubate Web3.0-based projects which in our view provides compelling long-term upside as these projects could generate incremental income or ultimately be spun out. The recent pullback presents an attractive entry point given what we view as upcoming transformational changes to the Ethereum ecosystem that should further drive innovation and value creation, thus benefiting ETH with price appreciation.”
Mr. Papanastasiou set a target of $4.25 per share, below the $5.50 consensus.
Separately, he also initiated coverage of Tokens.com Corp. (COIN-NE) with a “speculative buy” recommendation and 70-cent target.
“Tokens.com (COIN) is a rare pure-play on the growth of the nascent Web3.0 market. The company has built a diversified portfolio of major cryptocurrencies that generate a steady revenue stream via staking and is leveraging strategic non-fungible token (NFT) assets to build relationships with leading companies as they carve out their position as the go-to market partner for brands exploring a Web3.0 strategy. While crypto markets have peeled back, interest remains strong. We view the current entry point as attractive for investors given our long-term view that brands will leverage this new immersive technology to drive engagement amongst their following and be part of their customers’ identity in the digital world. We see near-term potential upside on COIN’s ability to sign new virtual lease arrangements and enter into bespoke contracts that offer asymmetric upside on branded NFT
In other analyst actions:
* Barclays’ Matthew Murphy trimmed his targets for Agnico Eagle Mines Ltd. (AEM-N/AEM-T, “over weight”) to US$70 from US$71, Newmont Mining Corp. (NEM-N/NGT-T, “equal-weight”) to US$68 from US$69 and Teck Resources Ltd. (TECK.B-T, “equal-weight” to $50 from $53. The averages are US$76.16, US$79.46 and $60.73, respectively.
* RBC’s Paul Treiber cut his Coveo Solutions Inc. (CVO-T) target to $14 from $18 with an “outperform” rating. The average is $13.72.
“Shares of Coveo have materially contracted year-to-date and are now well below peers despite likely strong growth momentum,” he said. “We anticipate the company to report solid March-quarter results and provide guidance that brackets consensus, with SaaS growth likely remaining more than 30 per cent. Healthy quarterly results and guidance may improve investor sentiment and help narrow the discount on the stock, in our view.”
* RBC’s Sam Crittenden raised his Major Drilling International Inc. (MDI-T) target to $15 from $14, exceeding the $14.67 average, with an “outperform” rating.
“We expect a positive reaction from MDI shares to FQ4 results which came in above our estimates and consensus. The stronger than expected results were driven by higher top line revenue and slightly better margins than we expected. MDI generated $26-million in FCF (excluding impacts from WC) in the quarter compared with our estimate of $19-million. Drilling activity continues to ramp up and we reiterate our Outperform rating and increase our price target,” he said.