Wednesday’s analyst upgrades and downgrades

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

In reaction to a rapid rise in bond yields, National Bank Financial analysts Matt Kornack and Tal Woolley reset their return expectations across the real estate investment landscape, leading to “sizable” downward revisions to target prices for equities in their coverage universe.

“We have generally seen decreases in our near-term FFO [funds from operations] estimates to reflect higher interest costs when refinancing and increased NAV [net asset value] cap rates to reflect higher return requirements, in light of the step change in bond yields,” they said. “We believe the market is still pricing in some degree of inflation protection offered by hard assets with contracted cash flows like real estate, based on the narrower spread between implied cap rates and borrowing cost.”

In a research report released Wednesday, the analysts said average projected total returns across the sector’s asset classes are now “tight,” led by 19-per-cent gains for senior housing and healthcare and 18 per cent for multi-family and industrial.

“We have continued to lean into asset classes where we see the supply-demand balance as favourable for landlords, even if valuation is challenged in the short run,” they said. “We see average total returns of 15 per cent for Retail, which should see continued modest improvement in operating performance and might benefit from having relatively low expectations from investors, in a market that has been punishing to more highly valued asset classes. We project 8 per cent for Office, which still has to contend with an unclear demand picture.”

Seeing lowered return expectations relative to their peers, the analysts downgraded a trio of equities to “sector perform” recommendations from “outperform” previously. They are:

* European Residential Real Estate Investment Trust (ERE.UN-T) with a $3.75 target, down from $5.80. The average on the Street is $5.41.

Mr. Kornack: “The Netherlands’ complex rent control system is set to see an increase in the breadth of units captured by the regulated system (90 per cent of the market) targeted to begin in 2024, though a definitive policy is lacking. Navigating the regulatory framework has been a strength of ERES’s management team but incremental moves on this front add to an already complex story.”

“The euro has seen a sharp pullback in value as the region contends with food and energy uncertainty, rising inflation and the ongoing war in Ukraine. The winter could present broader challenges as governments struggle to meet heating needs. North American equity investors are wary of this heightened risk.”

* Nexus Industrial REIT (NXR.UN-T) with a $10 target, down from $15. Average: $14.38.

Mr. Kornack: “We are moving Nexus to Sector Perform in light of broader changes to our real estate valuation outlook and challenges for smaller-cap names with growth/repositioning ambitions as access to capital (through equity issuances and asset sales) becomes more challenging. We have a growing preference for liquidity but are also more cautious about non-core exposure.”

* Automotive Properties Real Estate Investment Trust (APR.UN-T) with a $13 target, down from $15.50. Average: $14.25.

Mr. Woolley: “We reduced both our one-year out NAV estimate (on higher cap rates) and our FFO/sh estimates modestly. We also reduced the premium to NAV we used to set the target, reflective of the current environment .... The rationale for reducing the rating is a function of our new total return expectations for APR (9 per cent), relative to the rest of our Retail coverage universe (average is 15 per cent). Importantly, our view does not signal a change in the expected near-term financial performance for APR, and investors who hold units can feel confident in the current yield on offer, and management’s sensible approach to capital deployment. We like the steady, consistent performance of APR and would consider revising our rating higher when the relative return opportunity improves.”

The analyst made target price adjustments to all 36 equities in their coverage universe, including changes to their top picks in each asset class. They are:

Senior Housing/Healthcare: Chartwell Retirement Residences (CSH.UN-T), “outperform”) to $13 from $15. Average: $14.08.

Multi-Family: Boardwalk REIT (BEI.UN-T, “outperform”) to $52 from $68.50. Average: $59.68.

Industrial: Summit Industrial Income REIT (SMU.UN-T, “outperform”) to $20 from $26.50. Average: $22.95.

Retail: RioCan REIT (REI.UN-T, “outperform”) to $23 from $27. Average: $25.67.

Diversified: H&R REIT (HR.UN-T, “outperform”) to $15.25 from $18.50. Average: $16.64.

Office: Allied Properties REIT (AP.UN-T, “outperform”) to $36.50 from $51. Average: $48.75.

Special Situations: Flagship Communities REIT (MHC.UN-T, “outperform”) to US$21 from US$24. Average: US$23.43.

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Even though Bombardier Inc. (BBD.B-T) has met or exceeded its financial targets over the past year, National Bank Financial’s Cameron Doerksen sees market sentiment remaining “excessively negative.”

“Although the stock has rebounded off recent lows, it has been very weak so far in 2022 (down 47 per cent year-to-date versus TSX down 11 per cent) even though end market conditions for the company remain favourable,” he said.

Ahead of the release of its second-quarter financial results on Aug. 4, the analyst sees “plenty of potential upside” for the Montreal-based company, however he mad a significant reduction to his target price for its shares in response to the tepid investor reaction.

“While there are legitimate concerns about a wider economic slowdown, we note that business aviation is in a significantly better position today than was the case prior to the last major industry slowdown in 2008-09,” he said. “In 2008, industry orders and deliveries were in a speculative bubble and used inventory for sale stood at 16.6 per cent of the fleet. Bombardier production in 2022 remains at trough-like levels and industry used inventory for sale is sitting at only 3 per cent of the fleet.”

Mr. Doerksen called the end markets for business jets “healthy” and expects free cash flow to exceed management’s guidance.

“Business jet flying activity is typically a leading indicator of new jet order activity and a concurrent indicator of aftermarket activity,” he said. “According to WINGX, business jet flights were up 20 per cent in the first half of 2022 and 7 per cent year-over-year in June in North America, with flights in Europe up 38 per cent year-over-year in H1 2022 and up 21 per cent year-over-year in June. In the last four quarters, Bombardier’s backlog has shown very strong growth from $10.4 billion in Q1/21 to $13.5 billion in Q1/22 (now at over 2 times annual revenue).”

“We believe management’s 2022 guidance for $50+ million in free cash flow will be exceeded. We note that in June, Bombardier announced that it would pay down an additional $350 million in debt. We believe this points to cash performance coming in better than expected in Q2. Leverage remains high, but a recent credit upgrade by Moody’s points to an improving balance sheet.”

Maintaining his “outperform” rating for Bombardier shares, Mr. Doerksen cut his target to $46 from $65 after adjusting his valuation model “to reflect multiple contraction across our coverage universe and to remain conservative.” The average on the Street is currently $55.05.

“Even using these conservative parameters, our new target is 107 per cent higher than the current share price,” he noted.

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Warning Shopify Inc. (SHOP-N, SHOP-T) can be “volatile” when it reports quarterly earnings, DA Davidson analyst Tom Forte lowered his projections for its second quarter as well as its next two fiscal years ahead of next Tuesday’s release.

“Given: 1) a growing list of macroeconomic concerns, including sustained, elevated inflation, 2)geopolitical issues, such as the Ukraine/Russia conflict, 3) a shift in near-term discretionary spending to travel and away from e-commerce, and 4) the strength of the U.S. dollar, we are making a first attempt at kitchen sinking our estimates for 2Q22, full-year 2022, and full-year 2023 for a number of covered Consumer Technology companies, including Shopify, heading into the quarter,” he said.

Mr. Forte cut his sales forecast by 10 per cent for the quarter to US$1.181-billion from US$1.312-billion previously. His adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) estimate fell 10 per cent to US$41-million from US$45-million.

Concurrently, this full-year 2022 and 2023 projections fell by 15 per cent and 20 per cent, respectively.

Reiterating a “neutral” rating for Shopify shares, Mr. Forte cut his target to US$31 from US$37.50, citing his updated discounted cash flow estimates. The average on the Street is US$54.89.

“Since going public in 2015, on the first day of trading following earnings, SHOP has moved up or down more than ten percent 14 per cent of the time and it has moved more than twenty percent 0 per cent of the time,” he noted.

“We see five potential catalysts for shares over the next 12-month period: better-than expected results from management’s increased investments in 1) international expansion, 2) the Shopify Fulfillment Network, 3) retail efforts (physical POS products), 4) Shopify Plus – two key drivers to its sustained long-term growth rate, and 5) upside to our projections from some of the company’s early-stage initiatives, including 1) augmented reality/virtual reality, 2) enabling SMB’s to exploit highly regulated markets (such as legalized cannabis in Canada).”

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Scotia Capital analyst Phil Hardie thinks “a transitioning operating environment and investor concerns related to the macro-economic outlook” are likely to continue to be a near-term valuation overhang for TSX-listed small-cap lenders

“Valuations appear discounted, but not likely pricing in a steep recessionary environment,” he said. “Near-term operating results are likely to remain solid, but we believe Street expectations for the remainder of 2022 and 2023 are too optimistic and likely to be revised downward. As the operating environment shifts, we expect the non-prime lenders to become increasingly selective and support loan growth with lower-risk loans and offerings. We anticipate the change in loan mix to help mitigate credit losses, and while we expect credit provisions to rise in 2023, we are not convinced that a deep recession is inevitable.”

In a research report released Wednesday, Mr. Hardie said the sector could generate “significant upside potential” if a severe recession is indeed avoided. He sees valuations are “looking increasingly attractive but given a growing number of uncertainties and factors driving sentiment and investor appetite likely to continue to trend negatively in the near term, we remain on the sidelines for now.”

The analyst reduced his forecasts for companies in his coverage universe, leading to a drop in target prices by an average of 12 per cent.

He said the changes reflect “a more tempered outlook” for loan growth in 2023 and an upward revision to our expectations for loan loss provisions in late 2022 and 2023.

That led to these target changes:

• First National Financial Corp. (FN-T, “sector perform”) to $40 from $38. Average: $37.67.
• Goeasy Ltd. (GSY-T, “sector perform”) to $140 from $160. Average: $200.78.
• Home Capital Group Inc. (HCG-T, “sector perform”) to $37 from $43. Average: $44.14.
• Propel Holdings Inc. (PRL-T, “sector outperform”) to $12 from $14. Average: $14.13.

“Of the Canadian mortgage lenders under our coverage, First National stock has held up the best, but still trades well below its recent highs,” said Mr. Hardie. “The relative outperformance is likely attributable to its limited credit exposure. Home Capital stock has come under significant pressure and has sold off almost 50% from its 52-week high. We estimate the stock trades at 0.66 times P/B and 4.7 times our 2023E EPS. Underlying Canadian mortgage trends remained positive through the second quarter with industry-wide residential credit expanding double digits year-over-year and delinquency rates at their lowest levels in more than three decades. That said, change is clearly in the air and top of mind for investors.”

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CIBC World Markets analyst Bryce Adams made a series of target price adjustments to miners in his coverage universe.

“Overall, we expect weaker Q2 financial results from our base metals coverage universe,” he said. “Average copper prices decreased 5 per cent quarter-over-quarter, with a low of $3.71 per pound. at quarter-end. Zinc prices were on average 5 per cent higher quarter-over-quarter; FOB Australia HCC increased 24 per cent; and, LT U3O8 increased 13 per cent quarter-over-quarter. But most commodities have weakened since June 30. At the midway mark of the year we see potential for guidance revisions, mostly to the downside, although some issuers already revised guidance with Q1 results. Inflationary pressures on cost profiles remain a key theme, and we model costs roughly 5 per cent higher in Q2 versus Q1. Our estimates highlight that Q2 profit margins and FCF remain robust, but with a weaker commodity tape since quarterend, margin and FCF compression can be an H2/22 market focus.

“Our Q2 EBITDA estimates are skewed to below consensus: we forecast misses for CS, CMMC, LUN, and SMT; essentially in-line results for FM, HBM, and TECK; and, beats for ERO and LGO. Our top picks in the space are Cameco, Teck Resources for diversification away from copper, as well as Hudbay Minerals and Capstone Copper for production growth.”

His changes include:

• Capstone Copper Corp. (CS-T, “outperformer”) to $6.25 from $7.50. The average is $7.20.
• Copper Mountain Mining Corp. (CMMC-T, “neutral”) to $2.90 from $3.50. Average: $2.90.
• Hudbay Minerals Ltd. (HBM-T, “outperformer”) to $10 from $12. Average: $11.45.
• First Quantum Minerals Ltd. (FM-T, “neutral”) to $34 from $40. Average: $37.58.
• Lundin Mining Corp. (LUN-T, “neutral”) target to $11 from $13. Average: $12.33.

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Novagold Resources Inc.’s (NG-T) Donlin Gold project in Southwest Alaska is “a rare asset in the world,” according to National Bank Financial analyst Mike Parkin, seeing an “unmatched profile with significant upside.”

In a research report released Wednesday, he initiated coverage of the Vancouver-based miner with an “outperform” rating, touting “an attractive valuation for a best-in-class asset.”

“Our investment thesis considers NOVAGOLD’s 50-per-cent owned Donlin Gold Project as a unique project based on its sheer size that offers the owner not only large volume production, which brings economies of scale, but also a very long mine life that supports the potential of capturing multiple gold bull markets if developed,” said Mr. Parkin. “We view Donlin Gold as having tremendous exploration upside as well as being located in a top-tier mining jurisdiction. Thus, we believe any major global producer would desire to own such an asset. In our opinion, given the long-dated time horizon of the Donlin Gold project, we believe an investment in NOVAGOLD is best geared to those with long-term positive views on the gold price.”

Mr. Parkin set a target of $9 per share for Novagold, which shares ownership of Donlin equally with Barrick Gold Corp. (ABX-T). The average on the Street is $8.02.

" Our model is based on a fully funded project basis. We believe that our target price is justified based on comparable transactions and the size, location and quality of reserves that Donlin Gold boasts, which should command a premium given the asset’s unique attributes,” he added.

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Precious metals equity analysts at Canaccord Genuity expect cost inflation to remain a key theme as the sector enters second-quarter earnings season.

“We forecast year-to-date cash costs averaging $843 per ounce, up 9 per cent relative to the 2021 average of $776/oz, and we forecast a number of producers coming in at the high-end or above the high end of cost guidance ranges,” the firm said.

In a research report previewing earnings season, analyst Cary McRury raised his recommendation for Eldorado Gold Corp. (ELD-T) to “buy” from “hold” based on implied return. His targets for its shares fell to $12 from $17 after the firm lowered its gold price deck forecast. The average on the Street is $16.91.

Conversely, analyst Michael Fairbairn lowered Wesdome Gold Mines Ltd. (WDO-T) to “hold” from “buy,” citing updates to his operational estimates to incorporate a delayed ramp up at its Kiena mine in Quebec, the firm’s lower precious metals price deck, and a reduction in his target multiples. His target is now $10.25, down from $14 and below the $16.22 average.

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Stifel analyst Andrew Partheniou lowered his financial forecasts for Canadian cross-border cannabis producers seeing “softer” trends this year and a “more tempered” 2023 view as new recreational markets have yet to come online, leading to significant delays to his sales expectations.

“Cannabis shares have dramatically underperformed the broader market year-to-date (down 54 per cent, S&P 500 down 19.6 per cent) amid rising interest rates with investors approaching the industry with less confidence despite many of the underlying drivers of our investment thesis remaining intact,” he said. “This is compounded by the simple fact that regulated cannabis has never been through a recession, increasing uncertainty.”

“We harmonize our market forecasts across research franchises, updating our outlook for softer trends in 2022 with pressure on consumer spending in 2023. Overall, the result is a one-year delay for the market to reach our previous $31-billion estimate, now in 2024 and up from $25-billion in 2021, representing a 7.4-per-cent CAGR [compound annual growth rate. “We note this assumes cannabis acts as a staple, as we believe it has done in the past, with a low risk of consumption declines and pricing warranting careful attention.”

Though he sees consumption as “healthy” and reiterated his view of cannabis “a staple within the CPG sector” and “a safe haven amid a recessionary environment,” Mr. Partheniou thinks U.S. federal reform remains unlikely in the near term.

He made the following target price reductions:

• Cresco Labs Inc. (CL-CN, “hold”) to $4.75 from $5. Average: $14.96.
• Curaleaf Holdings Inc. (CURA-CN, “buy”) to $9.50 from $24. Average: $18.70.
• Green Thumb Industries Inc. (GTII-CN, “buy”) to $30 from $60. Average: $40.98.
• TerrAscend Corp. (TER-CN, “buy”) to $6 from $20. Average: $8.14.
• Trulieve Cannabis Corp. (TRUL-CN, “buy”) to $40 from $125. Average: $58.25.

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In other analyst actions:

* Stifel’s Ingrid Rico upgraded Franco-Nevada Corp. (FNV-T) to “buy” from “hold” with a $206 target, up from $205. The average target on the Street is $216.31.

“Market pullback puts Franco’s valuation at an attractive level for investors to revisit an entry point into a quality name in the Precious Metals sector,” she said.

* In an earnings preview for North American waste and environmental services companies, Scotia Capital analyst Mark Neville reduced his targets for GFL Environmental Inc. (GFL-N/GFL-T, “sector outperform”) to US$41 from US$46 and Waste Connections Inc. (WCN-T/WCN-T, “sector perform”) to US$130 from US$125. The averages are US$43.71 and US$146.61, respectively.

“Our Q2 estimates for the Waste Co’s are broadly in line with consensus expectations, with our underlying assumptions around price, volume, etc. largely consistent with management commentary at the time of Q1 reporting,” he said. “For 2022, our estimates sit at the high-end of/above current guidance. In fact, we believe we could see modest upward revisions to 2022 guidance (for the group) with Q2 reporting. In our opinion, this is also likely widely expected by investors/the street. The question is, what will 2023 look like? In our opinion, the Waste Co’s will likely deliver resilient performance, almost regardless of the macro backdrop. For 2023, we have lowered our volume assumptions on recessionary concerns and increased our pricing growth expectations given ongoing inflationary pressures – the net effect is essentially unchanged consolidated estimates.”

* Scotia Capital’s Himanshu Gupta cut his targets for a trio of TSX-listed foreign residential REITs. His changes are: European Residential REIT (ERE.UN-T, “sector outperform”) to $5.25 from $6, BSR REIT (HOM.U-T/HOM.UN-T, “sector outperform”) to US$22 from US$23.50 and Flagship Communities REIT (MHC.U-T/MHC.UN-T, “sector outperform”) to US$23 from US$25.50. The averages on the Street are $5.41, US$22.85 and US$23.43, respectively.

* Desjardins Securities’ Jonathan Egilo trimmed his Americas Gold and Silver Corp. (USA-T) to $1.15 from $1.30 with a “hold” rating. The average is $1.62.

“We have updated our estimates to account for the 2Q production, cost and end-ofperiod cash balance results,” he said. “We tweaked down our 2Q adjusted EPS estimate to account for higher costs relative to our estimates. If silver and zinc prices remain compressed or fall further, we see risk of USA needing to rely on the use of the ATM; we have now baked that assumption into our new estimates.”

* Following the close of its acquisition of Nutrawise Health & Beauty Corp., which owns the youtheory brand, Canaccord Genuity’s Tania Armstrong-Whitworth raised her target for shares of Jamieson Wellness Inc. (JWEL-T) to $45 from $40.25, keeping a “buy” rating. The average is $45.58.

“Headquartered in Irvine, CA, 90 per cent of youtheory’s revenue comes from the US market, providing JWEL an established brand platform on which it plans to grow its U.S. presence,” she said.

* TD Securities’ Derek Lessard reduced his Neighbourly Pharmacy Inc. (NBLY-T) target to $33, matching the average, from $35 with a “buy” rating.

* CIBC’s Todd Coupland lowered his target for Nuvei Corp. (NVEI-Q, NVEI-T) to US$70 from US$80, keeping an “outperformer” rating, while JP Morgan’s Tien-Tsin Huang cut his target to US$63 from US$65 with an “overweight” rating. The average is US$84.43.

“Nuvei is well positioned to achieve its strategic and financial objectives, including its medium-term target for annual revenue and volume growth of 30 per cent and its long-term target for EBITDA margins of 50 per cent plus,” said Mr. Coupland. “In the short term, meaning 2022, our web traffic analysis of peers and customers suggests that Nuvei’s growth could be muted below its target, given sector headwinds from the rise of the U.S. dollar relative to the euro where the EMEA region accounted for 60 per cent of Q4/21 revenue, as well as the fallout in the crypto sector, which comprised 13 per cent of 2021 revenue.

“We maintain our Outperformer rating as our thesis remains intact. Reflecting the 2022 headwinds to growth, we have adjusted our 2022 revenue forecast by lowering growth in Q3E and Q4E to 20 per cent and 26 per cent, respectively. This also aligns with the findings of our web traffic analysis and the lower expected growth in Q2E (vs. FactSet at 29 per cent in Q3E and 35 per cent in Q4E).”

* iA Capital Markets’ Matthew Weekes raised his PrairieSky Royalty Ltd. (PSK-T) target to $23 from $21.50, maintaining a “buy” rating. The average is $23.53.

“PSK’s Q2/22 results beat estimates, driven by a beat in royalty production volumes, which included organic growth, PPA volumes related to wells brought on stream late in Q1/22 and compliance collections, and incremental acquisition volumes,” he said. “Record funds flow generated in the quarter was primarily used for debt repayment. In addition, PSK completed $16-million of acquisitions in Q2, which added 360 boe/d (86 per cent gas) of incremental GORR production in addition to undeveloped Clearwater lands. Drilling activity, though seasonally lower in Q2, increased year-over-year, while leasing activity on PSK’s lands remained strong, with 54 new leasing transactions that are expected to contribute to continued positive trends in drilling activity. We are increasing our production growth expectations through the remainder of 2022 and into 2023 on the back of the results.”

* CIBC’s Mark Petrie lowered his Restaurant Brands International Inc. (QSR-N, QSR-T) target to US$61, below the US$63.92 average, from US$70 with an “outperformer” rating.

“. We are updating our estimates to reflect FX headwinds, higher rates, and more modest same-store sales (SSS) assumptions at Burger King (BK),” he said. “We also introduce 2024, as well as our estimates of RBI’s required investments in the BK U.S. system. A more challenging macro environment and our view that a BK U.S. turnaround may take time to execute, cause us to reduce our price target. We now apply a P/E multiple of 20 times (21 times prior), applied solely to 2023, resulting in a revised target of $61 (was $70). QSR remains Outperformer-rated; we believe the primary catalyst remains a resurgence at Tim Hortons (TH) Canada.”

* Citing permitting delays at its flagship Goldboro development project in Nova Scotia, Raymond James analyst Craig Stanley downgraded Signal Gold Inc. (SGNL-T) to “outperform” from “strong buy” and lowered his target by 10 cents to $1.20, below the $1.58 average.

* Barclays’ Teresa Chen cut her TC Energy Corp. (TRP-T) target to $67 from $71, below the $71.95 average, with an “equal weight” rating.

“We look for solid 2Q Midstream earnings and expect the group to generally fare better than other energy subsectors amid a trading environment rife with volatility. We expect extremely strong Refining 2Q results and remain constructive on the S/D outlook heading into 2H22 and 2023,” she said.

* JP Morgan’s Arun Jayaram raised his target for Vermilion Energy Inc. (VET-T) to $24 from $22, keeping an “underweight” rating. The average is $37.43.