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

Though Air Canada (AC-T) faces a “challenging” first half of 2019 due to grounding of the MAX aircraft and the impact of the coronavirus, CIBC World Markets analyst Kevin Chiang tells investors to “look past the noise."

Our long-term view on the company remains unchanged,” he said. “We continue to see the company having significant earnings potential and a de-risked operating model.”

In response to Tuesday’s release of its 2020 outlook, Mr. Chiang lowered his earnings per share projections for both this fiscal year and 2021 to $3.56 and $3.97, respectively, from $3.60 and $5.60.

“While our (and consensus) expectations assumed a stronger earnings print for this year, we acknowledge that our estimates were also stale and had not been updated since the COVID-19 breakout or the most recent MAX recertification timeline,” he said. “But if we look past the noise, AC is proving once again that it has a nimbler operating model allowing it to manage through black swan events. Arguably, it is managing through two of them right now. Despite these unexpected developments, EBITDA margins came in at 19 per cent in 2019 and the company is targeting 19 per cent in 2020. While this is the bottom end of AC’s target range of 19-22 per cent, it highlights the underlying earnings power it will benefit from once these headwinds pass.”

Maintaining an “outperformer” rating, Mr. Chiang reduced his target for Air Canada shares to $57 from $59. The average on the Street is currently $56.93, according to Bloomberg data.

“We recognize nothing is ever perfect,” he said. “AC noted that it was seeing more competition over the Atlantic and we suspect this will get incrementally worse in the near term as airlines temporarily shift capacity away from Asia into Europe. Nonetheless, we believe AC’s diverse network, ability to shift capacity to higher-yielding jurisdictions, new loyalty program, and finding ways to further segment the travellers are levers it can pull to maintain a structurally higher earnings/FCF profile than through previous cycles. We also expect AC to close on its acquisition of TRZ later this year. Its performance last year and 2020 guidance in the face of its current headwinds showcase this underlying resiliency.”


RBC Dominion Securities analyst Josh Wolfson said Agnico Eagle Mines Ltd.'s (AEM-N, AEM-T) “disappointing” fourth-quarter results and guidance have resulted in a “material” reduction to his valuation of the Toronto-based mining company.

"Improvements are guided to be realized in 2Q20 and beyond; however, AEM’s goforward growth rates decelerate, presenting a challenge to the company’s historical valuation premium," he said. "Today, we calculate that AEM shares still remain at a sizable FCF/EV [free cash flow to enterprise value] premium to the peer group on a 1–3 year basis but trade in line with peers on a P/NAV [price to net asset value] valuation."

After Agnico lowered its 2020 production guidance by 4 per cent and raised its cost guidance by 16-20 per cent last week, Mr. Wolfson reacted by reducing his FCF forecast "sharply."

“At spot gold, the net impact of these changes reduces our corporate NAV by 7 per cent, while our 2020/21/22 FCF forecasts have declined by a considerable 46 per cent/16 per cent/29 per cent,” he said. "On this basis, AEM now trades at 1.47 times P/NAV vs. the senior gold producer group average of 1.41 times, and a 2.9 per cent/4.7 per cent 2020–21 estimated FCF/EV yield, compared to peers at 5.0/5.9 per cent. AEM’s 2020 estimated FCF/EV yield is roughly half the peer average, but this improves to be 20 per cent below peers in 2021.

"Disappointing updates reported by AEM are generally out of sync with the company’s historical track record of execution success, and we do not expect its existing consistent strategy emphasis to be revised. However, we believe AEM’s recent focus on return of capital to shareholders may pause. We calculate breakeven FCF for AEM at $1,500 per ounce in 2020, after accounting for its dividend of $100 per ounce. In future years, this breakeven FCF after dividend improves to $1,375–1,400 per ounce, but it still provides limited flexibility for sizable increases after accounting for the company’s high net debt position of $1.4-billion (projected to be repaid at spot after 2023)."

With the expectation its first-quarter 2020 will be "materially weaker" than the rest of the year, Mr. Wolfson lowered his 2020 and 2021 to US$1.11 and US$1.40, respectively, from US$2 and US$1.91.

Keeping a “sector perform” rating for Agnico shares, he reduced his target to US$50 from US$61. The average on the Street is US$62.41.


Following the release of in-line fourth-quarter results on Tuesday, Raymond James analyst David Quezada said he’s maintaining a neutral view on Emera Inc. (EMA-T), due largely to both his current view on Canadian regulated utilities and the fact that its valuation sitting toward the high end of its historical range.

Before the bell, Emera posted adjusted earnings per share for the quarter of 60 cents, matching Mr. Quezada’s forecast but 2 cents lower than the consensus on the Street.

“We see much to like in EMA, including the company’s improving balance sheet and robust growth in Florida which drives the $6.9-billion capital program and supports rate base growth of over 7 per cent out to 2022,” he said.

“That said we maintain our neutral stance which is a function of valuation, with the stock’s 2020 estimated P/E [price to earnings] still within shooting distance of its cyclical peak at close to 20.8 times. We will look to the company’s Feb. 25 investor day in Tampa for further details on potential storm hardening investments and expanded solar deployment as a potential catalyst.”

Mr. Quezada raised his 2020 and 2021 EPS estimates by 2 cents each to $2.89 and $3.12, respectively.

Keeping a “market perform” rating, his target for Emera shares increased by a loonie to $61, “reflecting the low bond rate environment, which has lifted trading multiples among peers.” The average is $59.60.


After another “transitional” quarter for Neptune Wellness Solutions Inc. (NEPT-T, NEPT-Q), Echelon Wealth Partners analyst Douglas Loe said he was compelled to revisit his near-term cannabis and hemp oil projections.

On Thursday, the Quebec-based cannabinoid extraction company reported third-quarter revenue and EBITDA that fell short of Mr. Loe’s expectations. However, he did note the earnings miss was due largely to rising expenses to build its commercial infrastructure, which he said “is probably justified in the near-term and consistent with our investment thesis on Neptune’s still-evolving cannabis/hemp-based oil-extraction franchise.”

“Neptune separately provided industry commentary on the cannabis/hemp commercial macroenvironment that was predictably cautious, and we are revising our medium-term revenue growth projections for oil extraction activities at both QC-based Sherbrooke and U.S.-based SugarLeaf accordingly,” he said.

“We stand by our view that Neptune is well-positioned to exploit (and quickly) any shifts in cannabis/hemp oil demand through its existing capacity at Sherbrooke and SugarLeaf and we remain positive about the firm’s strategy to explore ways to create recognized brands in cannabis/hemp consumer markets, for which brand equity will take time to mature. Accordingly, SugarLeaf’s imminent revenue softness when taken together with US price softness in the emerging hemp-derived cannabidiol (CBD) oil market (about 60 per cent year-over-year) and with Neptune’s write-down of $44.1-million on carrying value of future EBITDA-based earn-outs (and goodwill was diminished down to $71.1-million from $115.7-million in FQ220, along with fair value on SugarLeaf contingent considerations now set at $34.0-million, down from $74.7-million last quarter), we are revising our medium-term revenue projections for SugarLeaf during the F2021-F2023 period.”

Keeping a “buy” rating for Neptune shares, Mr. Loe dropped his target to $5.50 from $10. The average is $5.42.

“Our revised PT reflects our more cautious but still positive view on Neptune’s emerging cannabis/hemp oil extraction franchise and the firm’s abilities to exploit capacity at existing facilities in coming quarters," he said. "At current levels, our revised PT still corresponds to a one-year return of 121% and we are thus maintaining our BUY rating on the stock.”


Canaccord Genuity analyst Yuri Lynk downgraded Fluor Corp. (FLR-N), a Texas-based multinational engineering and construction firm, in response to Tuesday’s disclosure that the U.S. Securities and Exchange Commission (SEC) is looking into its past accounting and financial reports for possible errors.

“Rarely does anything good for the company come out of an SEC investigation into financial reporting,” the analyst said. “An investigation such as this is particularly worrisome for an E&C company as the nature of work performed requires management to make a number of rather subjective estimates surrounding project completion and the likelihood of future collections from customers, especially related to disputes and change orders.”

Mr. Lynk did applaud the company’s concurrent announcement that it expects to retain its government unit, which it had previously decided to sell, and stop reporting it as a discontinued operation.

“We like this business as it is fairly steady (outside of FEMA) and cost reimbursable,” he said. “These are two traits sorely lacking in Fluor’s E&C, mining, and infrastructure business lines. The ability to avoid selling the Government segment speaks, we believe, to Fluor’s solid financial flexibility and perhaps its view on what its other for-sale assets (AMECO, P3′s, and real estate) might be worth. As it stands, Fluor ended 2019 with $2.0-billion in cash on its balance sheet.”

However, after reducing his 2020 and 2021 earnings expectations in response to “disappointing” initial 2020 earnings per share guidance, Mr. Lynk moved the stock to “hold” from “buy” with a US$14 target, down from US$25. The average is US$18.27.

“All told, clarity on the path back to consistent FCF generation is not what it needs to be to warrant a Buy rating, in our view,” he said.

Elsewhere, Credit Suisse analyst Jamie Cook moved the stock to “neutral” from “buy” with a US$16 target, down from US$21.

“We are downgrading Fluor to Neutral from Outperform understanding the stock is at a 52-week low and appears ‘cheap'; however, there are too many risks, which in our view leave the incremental buyer on the sideline,” said Ms. Cook. “Nine months ago, FLR was a turnaround story with a revamped and seasoned management team and a number of positive catalysts. Catalysts included meaningful asset sales, an improving portfolio with regards to problem project risk, a restructuring story and cycle tailwinds.”


In a research report released Wednesday, Canaccord Genuity analyst Dalton Baretto initiated coverage of Josemaria Resources Inc. (JOSE-T) and Filo Mining Corp. (FIL-X) with “speculative buy” ratings.

“JOSE and FIL are each developing early stage copper projects in the high Andes, in close proximity to each other near the Argentina-Chile border,” he said. “Our target price on each company is based on 1.0 times our fully risked NAV estimate, while our SPECULATIVE BUY ratings are based on the respective implied returns to target on each company (JOSE– 82 per cent, FIL-79 per cent). JOSE and FIL currently trade at 0.61 times and 0.59 times our respective NAV estimates, vs. the peer group average of 0.53 times. The ‘SPECULATIVE’ qualifier on our BUY ratings is predicated on the premise that neither company currently has a source of revenue, and that both companies face the typical permitting, financing and construction challenges to first production.”

Mr. Baretto emphasized a series of attributes shared by the companies, which he said is a “common positive.” They include: 40-per-cent ownership by the Lundin family, leading him to say they are “far better positioned to succeed than other similar junior base metals developers; proximal synergies; the potential for exemptions to the Argentine export tax and the scarcity and demand for copper.

He set a $1.20 target for Josemaria shares, which falls below the the current consensus of $1.86.

“JOSE’s Josemaria project is likely to be led up the development and funding curve by the current management team based on its current form, with a minority partner (likely a trading or smelting house) brought in as part of the funding package,” the analyst said. “Our estimates assume the sale of a 30-per-cent stake in the project, along with project financing, a precious metals stream and equity to fund construction.”

Mr. Baretto set a $3.50 target for Filo shares. The average is $4.12.

“FIL’s Filo del Sol project is likely to pivot away from the currently defined oxide resource in the near to medium term as management works to better define the emerging porphyry deposit," he said. “Future development and funding are likely to be led by a majority partner that will be brought in once definition of the porphyry has sufficiently evolved. Given very early days on the definition of the sulphide resource, however, our estimates remain based on the development of the oxides (using a similar funding strategy to Josemaria), with an in-situ valuation on our estimated sulphide resource that is based on drilling data available to date.”


CIBC World Markets analyst Dean Wilkinson initiated coverage of European Residential REIT (ERE-UN-X) with an “outperformer” rating on Wednesday, emphasizing it “provides Canadian investors with direct exposure to strong fundamentals in the Dutch residential rental market.”

“The REIT benefits from sponsorship from majority unitholder CAPREIT, a best-in-class owner/operator of Canadian residential apartment,” he said.

“Our rating reflects ERES’s solid growth runway (both internal and external), highly favourable financing dynamics, and a valuation that we believe to be at odds with that afforded to other Canadian-listed multi-family REITs.”

Mr. Wilkinson said the REIT is likely benefit from a “severe” housing shortage in the Netherlands, calling it a "favourable backdrop.

“Rising construction costs and a lack of suitable development locations are just two factors that should serve to preclude the supply/demand gap from closing materially in the foreseeable future,” he said. “Such a dynamic provides strong support for stable (with an upward bias) rental growth moving forward.”

“We see a clear path to 3-5-per-cent rental growth (the successful execution of unit liberalization will be a focus). SP-NOI growth has further upside potential given the significant scope for margin expansion on new acquisitions. Acquisition spreads are also more attractive in the Netherlands (as compared to Canada), and should help fuel further FFO growth.”

Mr. Wilkinson set a target of $5.50 per unit, which exceeds the current consensus by 6 cents.

“While we acknowledge that there are a number of differences between the Canadian and Dutch residential markets, the 16-per-cent relative valuation spread (ERES trading at a 8 per cemt premium to NAV vs. domestic Ontario-centric peers at a 24-per-cent premium) to comparable Canadian peers is unwarranted, in our view (especially in light of similar growth prospects over the longer term)," he said. “On a 2020E P/FFO [price to funds from operations] basis, ERES trades at 6 times multiple turns below its Ontariocentric residential peers.”


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