Inside the Market’s roundup of some of today’s key analyst actions
Given the lingering risk of a recession, Eight Capital analysts Phil Skolnick and Christopher True are “conservatively” lowering their near-term oil and natural gas price deck.
However, they reaffirmed their “overall bullish view on the commodities,” calling their reductions “a one step back event.”
“As laid out in our Eight Capital Equity Research Department 2023 outlook report, we see a difficult economy in H1/23 followed by a recovery in H2/23, which means we expect to see downward pressure, particularly on oil prices, in the first half of this year with a strong recovery in H2/23,thus delaying our bullish commodity outlook,” the analysts in a report released Wednesday. “Our view remains that while a recession would likely put downward pressure on prices, we do not expect these declines to last long due to low global supplies including the SPR, a persistent decline in per rig adds in the Lower 48s, and the continued underinvestment in growth (the sum of 2023E-2024E spending is roughly 40 per cent less than spending in 2014 alone)as companies remain focused on returns to shareholders. This underinvestment would be exacerbated by reactionary cuts to capex budgets and any further cuts by OPEC+ in the event of a meaningful pullback in prices. Finally, there are the tailwinds from China’s re-opening, although those could be choppy.
“On the natural gas side, we believe some assets are already uneconomic in this sub US$3.00/Mcf Henry Hub environment, which likely already puts supply at risk (the rig count has already started to decline) and thus provides support to pricing. Additionally, there still remains the expected tailwind from the restart of the 2.1 Bcf/d Freeport LNG plant. As such, with natural gas prices down 70 per cent since the recent peak seen last year, we believe there is more risk to the upside for natural gas prices at this point.”
The analysts lowered their full-year oil price forecast for Brent by 29.7 per cent to US$86.16 per barrel (from US$122.60) and WTI by 30.5 per cent to US$81.74 (from US$117.60). However, their 2024 projections rose by 17.5 per cent and 18.4 per cent, respectively, to US$80 and US$76.
“We are bullish heavy oil,” they said. “We have already seen a notable narrowing of the Brent-Dubai medium heavy oil spread over the past month, which we believe is in part due to China’s re-opening. We are also seeing WCS and Maya differentials tightening and expect to see further narrowing, especially for WCS. To that end, Mexico’s Dos Bocas refinery, which is slated to start-up in July and reach full capacity in September, has a design rate of 340 MBbl/d. We expect this to take that much Maya away from the U.S. Gulf coast, thus increasing demand for Canadian heavy oil in the U.S.. We also continue to see the expected Q4/23 TMX as another catalyst for narrowing Canadian oil differentials.
“For natural gas, we are lowering our Henry Hub and AECO H1/23 forecasts notably, in part to match Q1/23 STRIP while also tempering our H2/23 outlook; therefore our full year is reduced by about 45 per cent to US$4.55 and C$4.60, respectively. Nonetheless, we are 35-40 per cent above STRIP due to our aforementioned view as we expect a meaningful recovery in Q2 and beyond, with further upside into Q4/23 and 2024 due to new U.S. LNG capacity.”
With their price deck changes, the analysts lowered their cash flow per share estimates by 35 per cent, however they emphasized most of their coverage universe “shows positive FCF yields ranging from 13 per cent to 26 per cent among our peer groups, and we do not see a risk of dividend cuts or inability to continue with NCIBs.”
The changes led to a reduction in their target prices for energy stocks by an average of 10 per cent.
For Canadian senior exploration and production, integrated and oil sands companies, Mr. Skolnick’s changes were:
- Canadian Natural Resources Ltd. (CNQ-T, “buy”) to $105 from $118. The average on the Street is $92.19.
- Cenovus Energy Inc. (CVE-T, “buy”) to $35 from $38. Average: $32.88.
- Imperial Oil Ltd. (IMO-T, “neutral”) to $76 from $78. Average: $77.41.
- MEG Energy Corp. (MEG-T, “buy”) to $30 from $34. Average: $24.
- Suncor Energy Inc. (SU-T, “sell”) to $43 from $46. Average: $52.89.
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Ahead of the Feb. 22 release of its fourth-quarter financial results, National Bank Financial analyst Cameron Doerksen thinks the visibility on revenue and earnings growth for Exchange Income Corp. (EIF-T) in 2023 “remains solid,” leading him to reiterate his “positive outlook” for its shares.
“EIC management has guided for 2023 EBITDA of $510-540-million, up from an expected $435-445-million in 2022 (we expect EIC to maintain its guidance when it reports Q4/22 results),” he said in a note. “Visibility on this growth is solid, supported by an ongoing trend to full recovery in the company’s Legacy Airlines, new contract wins in the Aviation segment, a full year contribution from Northern Mat & Bridge, and a return to growth at the Quest Windows subsidiary, which is sitting on a record backlog.”
Mr. Doerksen expects the Winnipeg-based company to follow through on its M&A “upside” after it revealed its desire to seeking additional acquisitions. It had $951-million in total liquidity ($97-million in cash) to support transactions as of the third quarter.
“We believe the company is currently looking at several potential targets,” he said. “Our forecast does not include any unannounced M&A.”
“Our Q4/22 and 2023 estimates are unchanged. We are also introducing our 2024 estimates in which we assume only modest low single-digit revenue growth for both the Aviation and Manufacturing segments, which drives EBITDA growth of 5.6 per cent. Our Aviation segment forecast assumes 3.9-per-cent revenue growth excluding Regional One, while we assume that Regional One revenue will be slightly lower as parts sales will decline, partially offset by higher leasing revenue. For the Manufacturing segment, we see revenue growth from Quest Windows supported by the large backlog, partially offset by lower revenue at Northern Mat as its operations normalize from current peak-like activity levels.”
Seeing an attractive valuation and dividend yield of 4.7 per cent, Mr. Doerksen hiked his target for Exchange Income shares to a Street-high $67 from $61, maintaining an “outperform” recommendation. The current average is $61.64.
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Canaccord Genuity analyst Aravinda Galappatthige saw the fourth-quarter results and January update from Cineplex Inc. (CGX-T) as “encouraging,” but he emphasized near-term box office trends “should be closely watched.”
Before the bell on Tuesday, the company reported total revenue of $350.1-million, up 16.7 per cent year-over-year and ahead of the analyst’s $331.9-million forecast. Adjusted earnings before interest, taxes, depreciation, amortization and special losses of $31.2-million was also “nicely” above his $25-million expectation.
“A key takeaway from the quarterly release was the disclosure of the January box office result, which came in at 88 per cent of pre-pandemic levels,” said Mr. Galappatthige. “This was encouraging due to the notably poor trends through Oct-Dec (Q4 was 66 per cent) and our surveillance of the North American box office results which showed 72 per cent for January. Note our pre-quarter forecasts were based on an 85-per-cent assumption for F2023. The strong outperformance of Cineplex (and Canada in general) is attributable to the company’s longstanding strategy of leveraging alternative programming, which appears to be paying dividends. With that said, given the generally weak trendline, we would be closely monitoring the upcoming months as well.”
“Looking ahead, some of the key 2023 titles such as Ant-Man and the Wasp: Quantumania, John Wick: Chapter 4, Super Mario Brothers, Guardians of the Galaxy Volume 4, Spider-Man Across the Spider-Verse, and Mission Impossible 7 could drive up the attendance numbers through the year. Given the decent slate and encouraging January Box office revenues, we expect strong Q1 box office revenues at 82 per cent of the pre-pandemic levels with attendance at 68 per cent. For 2023, our forecasts indicate box office revenues and attendance at 83 per cent and 71 per cent of the 2019 levels, respectively.”
Alongside the “conservative” adjustment to his box office estimate, Mr. Galappattige also made “generally modest” revisions to revenue and adj. EBITDAal projections.
“We have also factored in some incremental costs to reflect high inflationary conditions,” he said. “On the other hand, the better media trends (including margins), robust LBE results, and solid tailwinds from ‘other revenues’ led by online booking fees have served as countervailing drivers. Notably, FCF expectations are assisted by a lower-than-expected capex guide of $60-million, which helps drive our F2024E FCF/sh to $1.50.”
With “moderating box office assumptions due to near-term uncertainty,” he cut his target for Cineplex shares to $11.50 from $11.75, keeping a “buy” rating. The average is $12.17.
“Cineplex currently trades at 7.3 times EV/EBITDAaL 2023 and 5.9 times 2024, which we view as attractive under normalized conditions,” he concluded. “In our view, what is holding back investors is clarity around de-leveraging which in turn is linked to understanding the shape of the box office recovery towards pre-pandemic levels. For our part, even our F2024E is based on only 87 per cent of pre-pandemic, which we consider to be adequately conservative. Importantly, the FCF yield on F2024 is now 16.7 per cent.”
Elsewhere, Scotia Capital’s Maher Yaghi trimmed his target to $11 from $11.50 with a “sector outperform” rating.
“The recovery in box office revenues from the pandemic has taken much longer than originally expected. Cineplex has seen a significant uptick for the Rec Room however the North American theater business is still struggling with delays in movie releases,” said Mr. Yaghu. “The 2-year delays caused by the pandemic on upstream movie production is still being felt. We expect the first half of 2023 to continue to be pressured by supply problems potentially getting resolved in 2H given the current expected release date of major blockbusters. Hence, we expect choppy trading in the stock as investors continue to watch for financials and covenant ratios. Overall, we view the stock as containing a higher-than-average risk level but also good upside in due course when movie releases return to a more normal rhythm.”
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In a research report previewing earnings season for Canadian energy infrastructure companies, Credit Suisse analyst Andrew Kuske downgraded Enbridge Inc. (ENB-T) to “underperform” from “neutral” on Wednesday.
His target for the company’s shares rose by $1 to $53. The average on the Street is $58.45.
“Our Q4 2022 results outlook leads off with a downgrade of Enbridge Inc. (ENB) to Underperform from Neutral – largely based on three dynamics: (a) both outright and relative valuation against the direct North American energy infrastructure universe and the more narrow Canadian infrastructure universe; (b) a review of the volume dynamics in Western Canada with volumetric offloading upon the start of the Trans Mountain Expansion Pipeline (TMEP); and, (c) the potential for fading returns on the Liquids system given supply-demand dynamics and the lack of future egress options,” said Mr. Kuske. “With a fairly wide dispersion in EBITDA estimates in 2023 and 2024 that will take time to converge, in our view. There are clear positives associated with the franchise, however, better relative value along with overall fundamental and thematic appeal exists in the regional exposed stocks. In this context, we highlight our Outperform rated stocks in the Canadian Energy Infrastructure sub-sector: AltaGas Ltd. (ALA); Keyera Corporation (KEY) and Tidewater Midstream & Infrastructure Ltd. (TWM).”
Mr. Kuske also made these adjustments:
- AltaGas Ltd. (ALA-T, “outperformer”) to $33 from $30. Average: $31.87.
- Gibson Energy Inc. (GEI-T, “neutral”) to $25.50 from $25. Average: $25.53.
- Keyera Corp. (KEY-T, “outperformer”) to $39.50 from $36. Average: $34.43.
- Pembina Pipeline Corp. (PPL-T, “neutral”) to $54 from $51. Average: $51.71.
- Tidewater Midstream and Infrastructure Ltd. (TWM-T, “outperformer”) to $1.50 from $1.40. Average: $1.63.
“Key themes include: (a) Volume Views: natural gas and NGL volumes look much better over the next few years versus that of crude from Western Canada; (b) Regional Reality: the nat gas and NGL flows look to favour stocks like ALA, KEY, Pembina Pipeline Corporation (PPL) and TWM with volumes, margin potential along with infrastructure expansion opportunities (with sequencing being key); (c) concerning Carbon Capture and Sequestration (CCS) with a likely fairly steady diet of related Canadian specific news flow with this important theme (ALA, ENB, KEY, PPL and, among others, TC Energy (TRP)); and, (d) Difficult Differentials: in the near term, diffs may be challenged prior to the commissioning of TMEP – that may translate into a relatively favourable set-up for Gibson Energy Inc. (GEI) at multiple levels in the quarters ahead,” he said.
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CIBC World Markets analyst Bryce Adams raised his target prices for a group of copper stocks on Wednesday. His changes include:
- Capstone Mining Corp. (CS-T, “outperformer”) to $6.25 from $5.25. The average on the Street is $6.98.
- Copper Mountain Mining Corp. (CMMC-T, “neutral”) to $2.20 from $1.90. Average: $2.54.
- Ero Copper Corp. (ERO-T, “neutral”) to $20 from $17. Average: $23.18.
- Lundin Mining Corp. (LUN-T, “neutral”) to $9.50 from $8. Average: $9.58.
- Teck Resources Ltd. (TECK.B-T, “outperformer”) to $65 from $60. Average: $60.21.
“Overall, we expect improved Q/Q financial results from our base metals coverage universe, and for most producers to end the year on a positive note,” he said. “Capstone pre-reported Q4/22 cash costs that improved 7 per cent over Q3/22 results, and we see some potential for other producers to report improved costs, but for the most part cost profiles that increased due to inflationary pressures in 2022 appear sticky, and 2023 cost guidance are mostly flat to slightly higher year-over-year. On average, copper prices increased 3 per cent quarter-over-quarter but traded from $3.32/lb to $3.92/lb and timing of sales can be a driver of earnings volatility. TECK should benefit from 11 per cent higher coal pricing, but it prereleased coal production and sales that were impacted by extreme weather events.
“We have raised our price targets for CS, CMMC, ERO, LUN and TECK. Our Q4/22 EBITDA estimates are mixed against consensus. We model beats for CS and LUN, are below the Street for CMMC and ERO, and are essentially in line for FM, HBM, and TECK. While earnings results are important, we also focus on 2023 expectations; most producers have already provided guidance updates, although CMMC and HBM should provide updates with financial results.”
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Desjardins Securities analyst Gary Ho raised his forecast for Alaris Equity Partners Income Trust (AD.UN-T) ahead of the March 9 release of its fourth-quarter results.
He’s now projecting revenue for the quarter of $47.6-million and normalized EBITDA of $43-million. Both exceed the consensus estimates on the Street ($47-million and $41.6-million, respectively).
“Our revenue forecast of $47.6-million is slightly ahead of guidance of $47.0-million due to a higher common dividend contribution,” he said. “Its common investment strategy has performed well, adding excess dividends, and we expect outsized returns upon monetization. Our 4QF SG&A expense estimate of $17.3-million matches guidance of $17.0-million.
“We estimate a modest FV loss ($1.5-million) due to the truing-up of interest rates and a slightly higher C$ vs US$. Portfolio investments remain healthy, with a majority experiencing robust year-over-year growth.”
Mr. Ho is now “anxiously” awaiting an updated on the Calgary-based private equity firm’s strategy for managing third-party capital, which he thinks “could result in a valuation re-rate.”
“AD will likely launch its strategy in 2023, which we believe will be viewed positively,” he said. “Not only does it add another funding source, it helps to generate management/performance fees, which should boost ROE and could lead to a valuation re-rate — 1.1 times P/BV [price to book value] on 4Q23 results in a potential share price of $22.70.
“The company had $219-million at 3Q22 (pro forma FNC redemption and Sagamore deployment); we expect this amount to increase in 4Q22 with strong FCF generation (and some debt repayment).”
Reaffirming his “buy” rating for Alaris shares, he bumped his target to $21 from $20.50. The average is $21.08.
“Our investment thesis is based on: (1) AD’s diverse portfolio is well-positioned to perform, even with an uncertain US macro outlook; (2) a fortified balance sheet from the Kimco and FNC redemptions, and recent debt financing; (3) a healthy 65–70-per-cent payout ratio; and (4) it is attractively valued at 0.89 times P/BV, with a 7.8-per-cent distribution yield,” he said.
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Heading into fourth-quarter earnings season for U.S. cannabis multistate operators, Stifel analyst Andrew Partheniou thinks investor enthusiasm is at “all-time lows.”
“Since the SAFE Act was not included in the NDAA this past December, MSO shares suffered another leg down of roughly 42 per cent despite no fundamental change to the operating environment, and this after the 56-per-cent loss experienced in 2022 up to that date,” he said.
The analyst now sees cash flow valuations at a “15-per-cent discount to peer industries and EV/forward EBITDA far outpacing that, demonstrating 1) further margin erosion expectations, 2) no benefit for new NY, MD, VA REC markets adding $12-$17-billion of TAM [total addressable market], and 3) no belief of Pres. Biden’s schedule review culminating next year to a 280E removal scenario.”
“Admittedly, federal reform has failed thus far, pricing pressure exceeded our early expectations and new REC markets have been slow to contribute significantly,” said Mr. Partheniou. “However, we believe this survival period could strengthen some operators by triggering strategic decisions to streamline businesses and better cash flows. Ultimately, we expect growth catalysts will come to fruition with those companies that have built enduring businesses able to fully capitalize on the opportunity, widening the gap between peers. Hence, we continue to highlight GTII as our top pick given its ROIC focus and conservative balance sheet.”
The analyst reduced his total market forecast through 2024, pointing to “worse conditions on the West Coast matched with a delay in the growth ramp of NJ & IL, more weighted in H2/23 as new stores are slow to open current.”
That led him to cut his target prices for the five stocks in coverage universe. They are:
- Cresco Labs Inc. (CL-CN, “hold”) to $2.75 from $4.75. The average on the Street is $8.74.
- Curaleaf Holdings Inc. (CURA-CN, “buy”) to $8 from $8.50. Average: $11.27.
- Green Thumb Industries Inc. (GTII-CN, “buy”) to $30 from $31. Average: $29.44.
- TerrAscend Corp. (TER-CN, “buy”) to $4.50 from $5.50. Average: $3.92.
- Trulieve Cannabis Corp. (TRUL-CN, “buy”) to $34 from $36.50. Average: $37.94.
“We believe investors could focus on guidance given Q4/22 results will be reported near the end of Q1/22,” he concluded. “We expect at minimum TRUL and CURA to offer 2023 guidance with the latter having already initiated an impressive $125-million of FCF without much detail. Aside from the ability to beat Q4/22 expectations from better FL performance and greater vertical integration, we believe TRUL could showcase its prowess with a return to meaningful OCF as the HARV integration is substantially complete ($60-million of TTM integration costs) and its FL indoor superfacility gradually increases contribution in 2023 to lower production costs (labour 4x more efficient). We believe GTII has upside to beat Q4/22 expectations from maintaining market share in NJ and perhaps gaining share in OH after doubling production in Q2/22. TER’s performance is closely tied to the NJ market where we have limited visibility while PA, MI and MD may continue to exhibit challenging dynamics. We will be looking for details on managements’ goal of having every state being cash generative, namely MI, while its proforma cash position remains in negative territory amid real estate optionality. Finally, we believe CL could post good Q4/22 results with an expanding EBITDA margin, but focus could likely be on the pending CCHW transaction with the spread meaningfully widening recently as we expect closing could exceed the Q1/23 outside date given remaining divestitures have yet to be announced. We note the agreement stipulates a 90-day extension which can be triggered by either party, delaying renegotiation risk. With both parties having a strong desire to complete the transaction, we continue to believe it could close.”
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In other analyst actions:
* Credit Suisse’s Michael Binetti raised his Canada Goose Holdings Inc. (GOOS-T) target to $36 from $30 with an “outperform” rating. The average is $29.
“We’re maintaining our FY24 estimated EPS of $1.70 and expect upward pressure on Consensus (currently $1.46) in the near-term,” he said. “We’re raising our FY25E EPS to $2.50 from $2.00, and introducing our FY28E forecast at $6.65 (guidance $6.50+). While we have somewhat lower confidence in GOOS’ out-year targets, we think above Consensus/above-algo trends in FY24 will keep pressure on the Street to keep re-evaluating GOOS’ ambitious long-term outlook, creating a positive backdrop for the stock over the medium-term.”
* With “solid” quarterly results from Topicus (TOI-X), BMO Nesbitt Burns’ Thanos Moschopoulos bumped his Constellation Software Inc. (CSU-T) target to $2,650 from $2,250 with an “outperform” rating. The average is $2,586.89.
“We have modestly raised our CSU forecasts, due to more optimistic assumptions for TOI,” he said. “We continue to view CSU’s valuation as attractive given its defensive characteristics and our view that the company can continue to sustain a healthy EBITDA and cash flow CAGR over the medium term, given its ongoing success in scaling up M&A (having completed more than 135 acquisitions in FY2022).”
* CIBC’s Jacob Bout increased his target for Finning International Inc. (FTT-T) to $45, exceeding the $42.33 average, from $43 with an “outperformer” rating, while Scotia Capital’s Michael Doumet raised his target to $45 from $44 with a “sector outperform” rating.
“The Q4 beat (the sixth consecutive beat) and the favorable 1H23 guide has driven EPS well above investor (and our) expectations: we forecast TTM [trailing 12-month] EPS of $3.50 as at 2Q23E,” he said. “That being said, we believe the lack of specific guidance for the 2H23, combined with the company’s intentions to reduce capex and focus on debt repayment gave investors pause. While we fully acknowledge the macro uncertainty, we believe FTT’s P/E multiple, which is at trough levels, is too discounted (10 times P/E on TTM 2Q23). In our view, this is not a typical cycle. Prospects of a soft landing and the China reopen underpin a supportive backdrop. Mining and oils sands customers have so far remained disciplined in terms of spend and, despite that, FTT has done well to capture incremental equipment and product support opportunities, maintain solid price/cost spreads, and drive efficiencies. Optimism that non-res (in Canada), infrastructure, mining, and energy end-markets remain relatively healthy suggest to us that FTT can remain and build off the upper-end of its EPS range ($2.50 to $3.50) and therefore, should be valued as such.”
* Mr. Doumet also hiked his FirstService Corp. (FSV-Q, FSV-T) to US$155, above the US$146.20 average, from US$137 with a “sector outperform” rating, while BMO’s Stephen MacLeod increased his target to US$161 from US$142 with an “outperform” rating.
“4Q adj. EBITDA beat the Street by 4 per cent,” Mr. Doumet said. “Several positives played in the quarter. FSB booked $85 million related to storm activity (above the $70 million guide) and management highlighted strong activity in the 1H23 (more than 20-per-cent growth in restoration). Home Improvement performed well and maintained a better-than-expected outlook. FSR [FirstService Residential] margins continued to close the gap (offset by a drag from lower home retail activity). The 2023 outlook calls for a ‘typical’ FSV year: 10-per-cent revenue growth (mid single-digits organic) and flat margins year-over-year (we forecast 15-per-cent growth in the 1H23; we do not model storm activity beyond 1H23).
“FSV shares are up more than 15 per cent year-to-date as the multiple has expanded alongside ancillary peers and what we think is a better than feared outlook in home improvement. Shares trade at 17.1 times EV/EBITDA on our 2024E compared to a historical valuation of 17.5 times; in our view, FSV’s strong organic momentum, underlevered B/S and M&A optionality, and margin expansion opportunity in FSB (in M-T) support a premium multiple.”
* In response to its post-market earnings release on Tuesday, Raymond James’ Stephen Boland raised his Intact Financial Corp. (IFC-T) target to $233 from $229, maintaining an “outperform” rating. Conversely, Cormark Securities’ Lemar Persaud lowered his target to $207 from $211 with a “buy” rating and TD Securities’ Mario Mendonca cut his target to $225 from $235 also with a “buy” recommendation. The current average is $222.92.
* Following a “favourable” ruling from the U.S. District Court of Nevada on Thacker Pass project and incorporated the feasibility study for the project, National Bank’s Lola Aganga raised his Lithium Americas Corp. (LAC-N, LAC-T) target to US$42.50 from US$38.50 with an “outperform” recommendation. The average on the Street is US$36.94.
“We maintain our Outperform rating, which is justified by LAC’s attractive asset portfolio which boasts the scale and exploration potential to meet rising lithium demand,” said Ms. Aganga.
* Oppenheimer’s Brian Nagel bumped his Lululemon Athletica Inc. (LULU-Q) target to US$400 from US$393 with an “outperform” rating. The average is US$378.13.
* Piper Sandler’s Charles Neivert raised his Methanex Corp. (MEOH-Q, MX-T) target to US$46 from US$39, keeping an “underweight” recommendation. The average is US$51.55.
* Jefferies’ Andrew Uerkwitz moved his Spin Master Corp. (TOY-T) target ( o $47, above the $46.50 average, from $46 with a “buy” rating.
David Leeder