Wednesday’s analyst upgrades and downgrades

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

RBC Dominion Securities analyst Greg Pardy expects to see a pause in debt reduction when first-quarter earnings season for Canadian energy producers kicks off later this month.

“First-quarter results for energy producers should continue to showcase their commitment to return free cash flow to shareholders, albeit at a slower pace amid commodity price headwinds, downstream operating challenges and current tax payments in some cases. In contrast to a string of recent quarters, we anticipate that first-quarter net debt levels will rise sequentially for a number of companies, in part due to large negative working capital movements. Still, we estimate that Canada’s oil sands weighted majors—Canadian Natural Resources, Suncor Energy, Cenovus Energy and Imperial Oil—generated free cash flow (before dividends and working capital movements) of $5.4 billion in the first-quarter, repurchased $1.6 billion of their common shares and paid/accrued cash taxes (to all jurisdictions) of about $1.7 billion

With lower earnings and cash flow estimates for both 2023 and 2024, Mr. Pardy trimmed his target prices for companies in his coverage universe by an average of 5 per cent.

He also downgraded a pair of stocks “solely in connection with higher relative returns elsewhere.” They are:

* Imperial Oil Ltd. (IMO-T) “sector perform” from “outperform” with a $78 target, down from $82. The average on the Street is $78.56.

“.Our Sector Perform recommendation on Imperial Oil reflects the stock’s healthy performance over the past year or so (and relative valuation) which has been fueled by impressive operating performance and its commitment to shareholder returns (including some $4-billion of SIBs in 2022),” said Mr. Pardy. “The company continues to possess a very capable leadership team, strong balance sheet and long-life-low-decline upstream portfolio. Our rating change on Imperial Oil comes alongside our firstquarter fine-tuning work and estimate revisions in connection with our Global Energy Research Commodity Price Update.”

* MEG Energy Corp. (MEG-T) to “sector perform” from “outperform” with a $25 target, up from $23 and above the $24.83 average.

Mr. Pardy’s target adjustments are:

• Canadian Natural Resources Ltd. (CNQ-T, “outperform”) to $85 from $89. Average: $91.50.
• Cenovus Energy Inc. (CVE-T, “outperform” to $29 from $32. Average: $32.03.
• Enerplus Corp. (ERF-N/ERF-T, “outperform”) to US$20 from US$21. Average: $25.42.
• Ovintiv Inc. (OVV-N/OVV-T, “sector perform”) to US$48 from US$55. Average: US$56.95.
• Suncor Energy Inc. (SU-T, “outperform”) to $52 from $55. Average: $53.28.
• Vermilion Energy Inc. (VET-T, “sector perform”) to $24 from $27. Average: $28.88.

“Our favorite producer remains Canadian Natural Resources (Global Top 30 and Global Energy Best Ideas lists), with Suncor Energy (Global Energy Best Ideas list) our favorite integrated and Enerplus Corporation (Global Energy Best Ideas list) our favorite intermediate producer. Baytex Energy and Cenovus Energy round out our Outperform roster,” he concluded.

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Seeing “plenty of powerful potential,” Credit Suisse analyst Andrew Kuske raised TransAlta Corp. (TA-T) to “outperform” from “neutral” and raised his target to $17 from $15. The average is $15.83.

He also increased his target for TransAlta Renewables Inc. (RNW-T) to $14.50, above the $13.35 average, from $14 with a “neutral” rating (unchanged).

“That upgrade is a function of Alberta power prices, TA’s absolute and relative stock market performance that includes negative 1.32 per cent on year-to-date performance and the outlook for near-term power prices in the company’s core Alberta market ... For TA, we continue to view support from the RNW ownership and a better overall appreciation of the ‘two TransAltas dynamic’,” he said.

“Ultimately, we continue to believe the ‘two TransAltas’ will become one entity – albeit that view does not occur within our forecast period and baseline assumptions. To us, some of that potential deal related noise is better understood at this juncture and we focus on an Alberta power market that averaged $172/MWh in Q1 2023 up from the Q1 2022 $103/MWh and the Q4 2022 $210/MWh. Preliminarily, the pricing set-up into the remainder of the year looks interesting to us – even with greater generation in the market dampening down pricing.”

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National Bank Financial analyst Adam Shine sees Quebecor Inc. (QBR.B-T) “poised to get [a] bigger price (at least more slices) of [the] $55-billion Canadian telecom market” as it emerges from Quebec and steps into “a psedo-national footprint” following its $2.85-billion acquisition of Freedom Mobile.

While he does not expect management to provide guidance alongside the release of its first-quarter financial results on May 11, Mr. Shine said he expects details as to “how it will frame the material opportunity at and to exit Quebec and pursue a new growth story in other parts of Canada while reducing debt from a pro forma level near 4.0 times.”

“There are some obvious building blocks to be explored whose timing could all unfold over coming months,” he added. “We are approximately four months away from the important back-to-school selling period for telecom with a further buffer to the November-December push.

“Starting with the Freedom acquisition, we await how marketing will unfold and to what degree pricing plans will change. It was said during the Competition Tribunal late in 2022 that 5G would get rolled out at Freedom within a few months after closing. Additionally, bundling via TPIA and using VMedia is to be expected, but it remains to be seen how quickly such offerings get introduced and whether these will initially come only to Toronto or more broadly across Ontario and even in Alberta and British Columbia.”

Seeing upside to his “conservative” estimates for the company outside Quebec, Mr. Shine projects “at least $4 per share of added wireless value by 2027 ($3 on discounted basis) without including low-margin equipment sales or raising the segment’s multiple and another at least $4 per share ($2.75 on discounted basis) of added wireline value that could be added by achieving a 5-per-cent share in each of Ontario, Alberta, and British Columbia.”

Maintaining an “outperform” rating for Quebecor shares, he raised his target to $40 from $36. The average on the Street is $37.17.

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Seeing its pending US$2.6-billion acquisition of Kentucky Power “lacking customer support,” RBC Dominion Securities analyst Nelson Ng thinks it’s increasingly probable Algonquin Power & Utilities Corp. (AQN-N, AQN-T) won’t be able to close the deal by an April 26 deadline and will then likely walk away.

“Two groups submitted filings petitioning the Federal Energy Regulatory Commission to reject the pending KP transaction,” he said in a note released Wednesday. “The parties claim that AQN and AEP’s [American Electric Power] second application did not demonstrate that the proposed transaction will not increase consumer rates. One main focus has been the potential impact on transmission rates, and the parties have requested more analysis and further commitments.”

“We believe AQN and AEP may file a rebuttal to the comments in the coming weeks, but it will likely be difficult to satisfy the two groups’ concerns and information requests, obtain FERC approval, and close the KP transaction by April 26, 2023 (Outside Date). As a result, we think shareholders generally expect AQN to exercise its option to terminate the transaction and pay a $65 million termination fee as it would lead to a more resilient balance sheet, eliminate the need (and pressure) to raise $1 billion through asset sales, and reduce the valuation discount to peers.”

If the acquisition goes through, Mr. Ng said Algonquin will need to draw down US$1.4-billion on its credit facility to fund the purchase and assume an additional US$1.2-billion in debt. He thinks those obligations “places strain on the company’s balance sheet until the company executes on its plan to raise $1 billion through asset sales in the current uncertain environment.”

“Based on discussions with investors, we believe that shareholders want, and expect, AQN to exercise its option to terminate the Kentucky Power transaction and pay a $65 million termination fee because it would lead to a more resilient balance sheet and eliminate the need for asset sales to maintain its credit rating,” the analyst said. “However, we believe the Kentucky Power transaction could be attractive for AQN if i) Kentucky Power can be purchased at a lower price and ii) management has a high degree of confidence that at least $1 billion can be raised from asset sales (may potentially receive attractive bids for its 43-per-cent stake in Atlantica, which is undergoing a strategic review). We believe that divesting Atlantica (mostly contracted generation and infrastructure assets) and acquiring Kentucky Power increases the regulated utility weighting of AQN, potentially increasing the attractiveness of AQN to utility investors.”

Maintaining a “sector perform” recommendation for Algonquin shares, Mr. Ng raised his target to US$9 from US$8. The average is US$9.32.

“We have updated our model to assume that the Kentucky Power acquisition does not close, and that AQN retains its stake in AY as pressure to sell assets subside,” he said. “Our 2023/24 EPS forecasts are unchanged, as the EBITDA reduction is offset by lower finance and depreciation costs.”

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Scotia Capital analyst Tanya Jakusconek thinks Wheaton Precious Metals Corp.’s (WPM-N, WPM-T) “strong” cash flow growth is likely to lead to dividend increases.

“We expect sustainable annual operating cash flow of $800-million-$1-billion over the next five years (average of approximately $885-million), resulting in an increase in the dividend (we believe a 17-per-cent increase from current levels is reasonable in the next 12-18 months, and potentially more long term),” she said.

“We believe strong management, combined with a high-quality asset base, growing production profile (more than 50-per-cent growth) and dividend, and robust balance sheet (for transactions), should be a recipe for success. Exploration and expansion on existing assets provides further upside optionality.”

In a research report released Wednesday, Ms. Jakusconek resumed coverage of Vancouver-based company with a “sector outperform” rating, emphasizing its “high-quality portfolio with upside optionality” and its presence in low-risk mining jurisdictions.

“WPM’s portfolio consists of 32 assets (20 operating assets and ~12 development and exploration projects) with a mine life of over 30 years,” she said. “Key assets include Salobo, Constancia, Stillwater, Peñasquito, Antamina, and Voisey’s Bay, with key operators such as GOLD, NEM, TECK.B, and Vale. Further upside and optionality exist from mine development and exploration projects.”

“Precious metals comprise 98 per cent of the WPM portfolio (about 40 per cent of revenue from silver) and this is expected to grow both organically and from M&A deals (currently in the $150-million-$350-million range). While WPM prioritizes precious metals and is focused on the Americas, it is open to non-precious metal assets and opportunities in Europe and Africa. WPM has $700-million in cash and an undrawn $2.0-billion revolving credit facility, with total liquidity of $2.3-billion for transactions (net of commitments).”

Expecting 2023 production to exceed 2022 results with the first-quarter likely the low point of the year, Ms. Jakusconek set a US$60 target for Wheaton shares. The average is US$53.36.

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Analysts at Scotia Capital raised their gold and silver price forecasts on Wednesday, leading to a series of target price changes for equities in the Ms. Jakusconek’s precious metals coverage universe

The firm’s gold projection for 2023 and 2024 rose to US$1,900 per ounce, up 9 per cent from its previous estimate of US$1,750. For 2025 and beyond, its assumption increased 6 per cent to US$1,700 per ounce from US$1,660.

“The increase in gold price accounts for a higher fair value estimate based on updated economic forecasts and a 4-per-cent premium (to spot gold price) to reflect current economic and geopolitical risk and uncertainty,” Ms. Jakusconek said. “With the change in commodity prices, our overall valuations (NAV) and target prices (TP) have increased by 10 per cent and 12 per cent, respectively. There were no rating changes; coverage of WPM has been resumed with a SO rating. Gold stocks continue to trade at a discount to spot pricing (17-per-cent average and 11-per-cent weighted average), offering good value and further upside. Our top-rated stocks are GOLD, AEM, and KGC in the operators and WPM and TFPM in the streamers.

For silver, Scotia raised its 2023 forecast to US$23.75 per ounce from US$20.75 with its 2024 and long-term estimates moving to US$23.75 and US$23, respectively, from US$22.50 for both.

With those changes, the analyst made these target changes for TSX-listed senior and intermediate gold producers as well as royalty companies:

• Agnico Eagle Mines Ltd. (AEM-N/AEM-T, “sector outperform”) to US$71 from US$64. The average on the Street is US$63.13.
• Barrick Gold Corp. (GOLD-N/ABX-T, “sector outperform”) to US$26 from US$24. Average: US$22.02.
• Eldorado Gold Corp. (EGO-N/ELD-T, “sector perform”) to US$12 from US$10.50. Average: US11.04.
• Franco-Nevada Corp. (FNV-N/FNV-T, “sector perform”) to US$169 from US$160. Average: US$145.42.
• Iamgold Corp. (IAG-N/IMG-T, “sector perform”) to US$3.25 from US$3. Average: US$2.95.
• Kinross Gold Corp. (KGC-N/K-T, “sector outperform”) to US$6.25 from US$5.50. Average: US$5.53.
• Triple Flag Precious Metals Corp. (TFPM-N/TFPM-T, “sector outperform”) to US$18.50 from US$17.50. Average: US$18.85.

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Raymond James analyst Brad Sturges sees Primaris Real Estate Investment Trust (PMZ.UN-T) “uniquely positioned as one of Canada’s largest enclosed mall owners” and believes its “well-structured, low-leverage vehicle [is] well positioned to consolidate” the sector.

Touting a “blue chip Canadian enclosed retail mall opportunity at a pedestrian price,” he initiated coverage of the Toronto-based REIT with an “outperform” recommendation on Wednesday.

“Primaris represents a unique, albeit perhaps a contrarian opportunity, to exclusively invest in the Canadian enclosed mall sector,” he said. “Primaris’ portfolio is geographically diversified across Canadian secondary (approximately 75 per cent of net operating income) and primary (25 per cent of NOI) retail property markets. The REIT’s largest operating regions include Ontario (39 per cent of NOI) and Alberta (34 per cent of NOI). Primaris’ retail tenant base is fairly balanced across multiple retail categories including a healthy mix of necessity-based retailers.

“Primaris completed its spin-out from H&R REIT on December 31, 2021, while simultaneously acquiring a Canadian enclosed mall portfolio from Healthcare of Ontario Pension Plan (HOOPP), which owns an 27-per-cent interest in the REIT. Primaris has been well-structured from the outset last year, with low financial leverage metrics, internalized asset and property management structure, and strong HOOPP institutional sponsorship to capitalize on the material consolidation opportunity in the Canadian enclosed mall sector that totals $50-billion in aggregate value. We expect that Primaris may benefit from a possible future Canadian enclosed mall acquisition pipeline that meets its investment criteria, particularly if certain institutional property owners seek to reduce their respective overweight positioning to Canadian retail properties.”

Believing rental income gains “could be augmented by its active capital allocation strategy to drive greater future net asset value per unit and adjusted funds from operations per unit growth,” Mr. Sturges set a target $16.50 per unit. The average on the Street is $17.40.

“Primaris re-emerged back into public life in 2022 by generating the highest Canadian REIT sector total return in a challenging capital markets environment,” he concluded. “Primaris’ strong foundation out of the gates places the REIT on solid footing to pursue its various growth plans. While private market pricing discovery for Canadian enclosed malls remains still limited, we believe that Primaris’ relative P/AFFO multiple discount valuation, its active capital allocation strategy, and potential for continued NOI growth year-over-year can help offset any possible future going-in cap rate increases.”

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The longer-term growth outlook for Anaergia Inc. (ANRG-T) “appears increasingly challenged,” said Canaccord Genuity analyst John Bereznicki.

On Monday, the Burlington, Ont.-based clean-technology waste processor reported fourth-quarter revenue of $40.6-million, down 9 per cent from the previous quarter and below the expectations of both Mr. Bereznicki ($44-million) and the Street ($42-million). An EBITDA loss of $15.4-million also fell short of projections (losses of $3.4-million and $4-million, respectively).

“While Anaergia has reiterated its 2023 revenue and EBITDA guidance, it has nonetheless lowered its run-rate proportionate EBITDA outlook to $70 million on its 12 BOO [Build Own Operate] facilities (from $130 million on 13 facilities previously),” the analyst said. “In our view, this reduced cash flow expectation and the company’s increased cost of equity are likely to reduce its growth profile significantly through (at least) 2024. We also continue to believe the company faces significant execution risk in a challenging macro environment characterized by inflationary pressures, rising interest rates, and weakened natural gas pricing.”

Lowering his estimates to reflect the sale of its Envo Biogas plant in Tønder, Denmark as well as its EBITDA BOO guidance and a slower pace of organic capital deployment through 2024, Mr. Bereznicki cut his Street-low target for Anaergia to $2.10 from $2.75 with a “hold” rating (unchanged). The average is $5.36.

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JMP Securities analyst Andrew Boone upgraded Shopify Inc. (SHOP-N, SHOP-T) to “outperform” from “market perform,” touting “long-term tailwinds around the broader mix-shift to digital, its leadership position within commerce enablement, and potential additional product sales including advertising.”

Mr. Boone said the size of the Ottawa-based ecommerce giant ‘s investments related to Shopify Fulfillment Network (SFN) are less than previously feared, and he sees “upside” for gross merchandise volume growth as it gains traction with larger enterprise businesses

“Our OpEx analysis suggests Shopify has the opportunity to execute on cost synergies with Deliverr and third-party traffic data suggests it continues to take share,” he added.

His target of US$65 tops the consensus of US$49.36.

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In other analyst actions:

* Piper Sandler’s Charles Neivert upgraded Methanex Corp. (MEOH-Q, MX-T) to “neutral” from “underweight” with a US$49 target, up from US$46. The average on the Street is US$55.91.

* CIBC World Markets’ Todd Coupland downgraded E Automotive Inc. (EINC-T) to “neutral” from “outperformer” and cut his target to $3.50 from $7. The average is $6.33.

* Raymond James’ Frederic Bastien raised his target for Aecon Group Inc. (ARE-T) shares to $20 from $17, keeping an “outperform” rating. The average is $16.20.

“We are revisiting our valuation of Aecon Group in the wake of two value-surfacing transactions last month —the sale of a minority interest in Bermuda Skyport and the outright divestiture of Aecon Transportation East (ATE),” he said. “While these arrangements lead us to lower our financial forecasts, they underscore the significant strategic and financial value hidden in the stock price. They also put the contractor in a much stronger position to see through its challenging fixed-price work, address its maturing convertible debentures, and pursue new avenues for growth. Our target price moves from $17 to $20, leaving patient and risk-tolerant investors with a potential gain of 48 per cent over the next 6-12 months. We still see our Outperform recommendation as appropriate for a company that is miles ahead of the competition when it comes to sustainable construction.”

* Barclays’ Brandon Oglenski trimmed his targets for Canadian National Railway Co. (CNI-N, CNR-T) to US$126 from US$127 with an “equalweight” rating and Canadian Pacific Railway Ltd. (CP-T) to $89 from $90 with an “overweight” rating. The averages are US$129.45 and $116.15.

* CIBC’s Cosmos Chiu increased his Dundee Precious Metals Inc. (DPM-T) target to $11.50 from $10 with a “neutral” rating. The average is $12.17.

* CIBC’s Jacob Bout cut his target for Nutrien Ltd. (NTR-N, NTR-T) to US$105 from US$106, remaining above the US$95.70 average, with an “outperformer” rating.

“We lower our 2023/2024 estimates for NTR/MOS reflecting the faster-than-forecast decline in fertilizer prices,” said Mr. Bout. “That said, a bottom in near-term pricing may be in place and in fact may see a snap-back in fertilizer prices, in particular the U.S. given expectations of a large North American crop and improved weather during the planting season. For chemical stocks (typically early cycle plays), the outlook is uncertain given the increasing probability of an economic recession.”

* ATB Capital Markets’ Waqar Syed lowered his Step Energy Services Ltd. (STEP-T) target to $8 from $8.50 with an “outperform” rating. The average is $8.71.