Inside the Market’s roundup of some of today’s key analyst actions
Scotiabank says Canadian telecom stocks should no longer have an underweight position in portfolios thanks to more attractive valuations.
The stocks have significantly underperformed the broader market since the beginning of the year, with many stocks trading near 52-week lows. While Scotiabank says a major buying opportunity has yet to arrive, the sector isn’t expensive either, and an analysis of past interest rate cycles points to a favourable valuation backdrop. It says Canadian telecom stocks now deserve a market weight position.
“We have argued for the past six months for an underweight position in the sector due to increasing bond rates, competitive intensity, and regulatory risk. Not being permabears, we think it is always good to check whether current prices are taking future expectations into consideration,” Scotiabank analyst Maher Yaghi explained in a note to clients.
“While the sector has seen its multiple retrench since January, our analysis indicates that we have essentially moved from an overvalued to a fair value situation, and hence we believe it is time to go to a market weight position in the sector from underweight. Our conclusion comes from contrasting interest rates and EBITDA growth expectations during previous interest rate cycles,” he said.
Long-term interest rates are major drivers of the telecom sector’s valuation, given that the companies use significant leverage to finance long-term infrastructure investments. The higher the interest rate, the higher the cost of debt, and the recent surge in rates has been a major headwind.
“While the overall Canadian telecom sector’s valuation has come down since the beginning of the year, dropping from 7.9x to 7.4x, it is now trading at fair value (based on its historical record),” the analyst said.
Of the five telecom stocks he covers, Mr. Yaghi sees the greater potential in shares of Rogers Communications Inc. (RCI-B-T).
“Rogers is trading at a significant discount to fair value Enterprise Value/EBITDA multiple given expected EBITDA growth. Since the beginning of this year, the company’s multiple has come down from 7.5x to 6.7x, and given the current valuation discount, we believe there is a significant valuation upside to the stock. Given growth expectations for the company, the stock should be trading closer to 9x. However, given the company’s high leverage, we have been using a more conservative 8.5x multiple to derive our target price,” he said.
He also thinks investors should do well with Telus Corp. (T-T) in the long run. Both it and Rogers are rated “sector outperform”.
BCE Inc. (BCE-T), Cogeco Communications Inc. (CCA-T), and Quebecor Inc. (QBR-B-T) are rated by Scotiabank as “sector perform”
His price target on Rogers is $72.75. It’s $29.50 on Telus, $63 on BCE, $86 on Cogeco, and $38 on Quebecor.
Also on Wednesday, National Bank of Canada raised its price target on Rogers Communications to $79 from $76.
The average price target on Rogers shares among analysts is $73.18, according to Refinitiv Eikon data.
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Scotiabank analyst Alfonso Salazar downgraded Vale Inc. (VALE-N) to “sector perform” from “sector outperform” on concerns about Chinese steel demand. He also dropped his price target to US$16 from US$20.
“We fail to see conditions for a re-rating amid the challenging situation that we expect China’s steel industry to face,” Mr. Salazar said in a note to clients. “We think the company’s valuation remains attractive and we like Vale’s ability to pay high dividends and continue with its buyback program. Moreover, we believe the company is taking the rights steps regarding its strategy for both business units: Iron Solutions and Transition Metals. However, China’s real estate and infrastructure situation is a problem hard to ignore that should result in negative market sentiment in the near to medium term. We think it’s becoming increasingly difficult that new stimulus (if implemented) should have any meaningful impact – and in any case it may only deteriorate China’s steel demand outlook longer term.”
“While we recommend investors to stay on the sidelines for now, we anticipate an attractive entry point ahead once uncertainty related to China’s steel demand recedes, the iron ore seaborne market finds a new equilibrium level and Vale’s Transition Metals division (Ni and Cu) IPO gets closer,” he added.
The average analyst price target is US$16.80.
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Delta Air Lines Inc.’s (DAL-N) investor day on Tuesday, in which it raised its second-quarter and full-year guidance, should be perceived as positive for Air Canada (AC-T) and airline fundamentals overall, says Scotiabank analyst Konark Gupta.
The leading U.S. airline told investors that there was continued robust demand for air travel, especially for international travel, which is on pace for a record summer as well as a strong fall.
Delta believes the ongoing recovery in demand is sustainable and will last for years.
“The airline noted that air travel revenue as % of U.S. GDP is returning to the long-term trend as pent-up demand has not yet satisfied, employment remains strong and evolving consumer trends are benefiting air travel. Management also stated that the post-pandemic shift from goods towards services is a more structural trend that has been in place prior to the pandemic. Additionally, Delta noted that hybrid work flexibility is boosting demand, with typical corporate customers now spending 50% more on personal travel. We believe AC is also benefitting from these similar trends, albeit with a slight lag in Canada vs. the U.S.,” Mr. Gupta said.
The Scotiabank analyst reiterated a “sector outperform” rating on Air Canada with a $31 price target, commenting “we continue to believe that AC’s guidance is conservative and see potential for upside, particularly for 2024.”
He noted that Air Canada’s passenger traffic recovered to 87% of pre-pandemic levels in Q1/23 with an 84.8% load factor. “We estimate 91% recovery in Q2/23 and the full year, supported by recent acceleration in the number of passengers screened across Canada’s major airports,” he said.
The average analyst price target on Air Canada is C$29.37.
Meanwhile, TD Cowen raised its target price on Delta to US$60 from US$54 and BofA Global Research raised its price objective to US$50 from US$48.
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Brookfield Asset Management Ltd. (BAM-N) will benefit indirectly from the acquisition of American Equity Investment Life Holding Company (AEL–N) by Brookfield Reinsurance (BNRE–NYSE), says CIBC analyst Nik Priebe.
That’s because the transaction should produce as much as 5% upside to BAM’s fee-related earnings as soon as the deal closes, with even greater long-term upside.
“We consider BAM to be a clear beneficiary from this acquisition, despite not: 1) issuing a single share; 2) participating in the equity investment; or 3) assuming any insurance liabilities,” Mr. Priebe said in a note.
“In our view, this is a clear win for BAM shareholders and a demonstration of the unique upside potential associated with the new public entity,” he added.
Brookfield Reinsurance Ltd. announced Tuesday it has made a stock-and-cash offer to buy American Equity Investment Life Holding that values the company at US$4.3-billion.
Under the non-binding expression of interest, the reinsurance arm of Brookfield Corp. is offering US$55 for each AEL share it does not already own. The offer includes US$38.85 in cash and US$16.15 worth of Brookfield Asset Management Ltd. class A limited voting shares.
Brookfield Reinsurance would acquire the Brookfield Asset Management shares required to pay the non-cash portion of the offer from Brookfield Corp. The transaction would reduce Brookfield Corp.’s stake in BAM to about 73 per cent from 75 per cent.
Brookfield already holds about a 20 per cent stake in AEL.
Mr. Priebe has a US$40 price target on BAM and rates the stock “outperformer”. That’s above the average price target on the Street of US$35.77.
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Needham & Company analysts see greater upside in shares of Amazon.com Inc. (AMZN-Q) in the wake of the ecommerce giant’s Amazon Web Services hosting a product launch for AppFabric, a new AWS service that facilitates the integration of software-as-a-service apps.
They raised their price target to US$150 from US$120 while maintaining a “buy” rating.
“Our key economic takeaway is that AppFabric should lower AWS customer churn, by increasing exit cost,” the analysts said.
The average analyst price target is US$139.31.
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In other analyst actions:
TMX Group (X-T): Barclays initiates coverage with an “equal-weight” rating and C$30 price target
Canopy Growth Corp. (WEED-T): Jefferies cuts target price to C$0.61 from C$3.65
Stantec Inc (STN-T): ATB Capital Markets resumes coverage with “sector perform” rating and C$85 price target
Lithium Royalty (LIRC-T): National Bank of Canada initiates with “outperform” rating; PT C$20.5
Spartan Delta Corp. (SDE-T): Stifel GMP cuts target price to C$6.25 from C$18; Atb Capital Markets cuts target price to C$6 from C$16.5; Stifel FirstEnergy cuts target price to C$6.25 from C$18
Sigma Lithium Corp. (SGML-X): Cormark Securities raises target price to C$72 from C$56
Uber Technologies Inc. (UBER-N): Daiwa Capital Markets cuts to “outperform” from “buy” and raises target price to US$51 from US$42
Darcy Keith