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

While he trimmed his estimates for Air Canada (AC-T) ahead of its third-quarter earnings release, National Bank Financial analyst Cameron Doerksen continues to see its shares “more than fully reflecting market concerns around the sustainability of air travel demand and higher jet fuel costs.”

In a research note released Wednesday, he predicted “solid” earnings and free cash flow through 2024 that will drive ongoing de-leveraging.

“Investor concerns around the ability of the consumer to sustain strong demand for air travel are understandable, but air travel demand and pricing still look solid into early 2024 while capacity in the domestic and U.S. transborder markets remain constrained,” said Mr. Doerksen. “Higher jet fuel prices have also weighed on sentiment for airline stocks, but prices are off their recent peaks and Air Canada is in a much better position to manage for higher fuel prices than most of its competitors that have fewer yield levers to pull.”

Mr. Doerksen adjusted his financial projections to account for average jet fuel in third quarter of $1.14 per litre, which is down 13.5 per cent year-over-year but up 12.8 per cent from its second-quarter realized price. With the current spot price at $1.20, he lowered his estimates for the remainder of 2023 as well as 2024 with the expectation of higher costs. His third-quarter earnings per share expectation fell by 2 cents to $1.97, while his full-year 2023 and 2024 forecasts are now $3.24 and $2.87, respectively, down from $3.47 and $3.35 previously.

Despite those reductions, Mr. Doerksen thinks demand and price “still look fine,” while industry capacity will remain constrained.

“Demand for air travel continues to be resilient with passenger traffic in Canada tracking close to 2019 levels as of late and running ahead of 2019 for much of August and September,” he said. “While the most recent StatCan airfare index was down 19.9 per cent year-over-year, it was still up 4.5 per cent relative to 2019, so fares on average remain ahead of pre-pandemic levels. We also note that the index is weighted more to domestic flights, so with Air Canada being geared more to international routes than domestic, we suspect its pricing is holding up better than what the CPI data would suggest.

“Even though several airlines in Canada have aggressively added capacity this past summer, overall industry capacity remains constrained, especially on domestic and U.S. transborder routes where capacity in Q4, as measured by seats, is projected to be down 14.4 per cent and 4.1 per cent versus 2019, respectively. With labour shortages across the aviation industry impacting airlines’ ability to grow, we expect capacity to remain constrained through the remainder of 2023 and into 2024.”

Reiterating an “outperform” rating for Air Canada shares, Mr. Doerksen trimmed his target to $32 from $35 to reflect his estimate changes. The average target on the Street is $31.23.

“On our updated numbers, Air Canada shares are trading at just 3.5 times EV/EBITDA on both our 2023 and 2024 forecast, which is well below the pre-pandemic trading range of 4.0-5.0 times,” he said. “Air Canada also now sports the lowest valuation of any stock in our coverage universe. We therefore believe that the stock is more than fully reflecting market concerns.”


H2O Innovation Inc.’s (HEO-T) agreement to be acquired by New York-based private equity group Ember Infrastructure Management LP provides “a good premium and crystallizes value” for its shareholders, according to National Bank Financial analyst Endri Leno, who moved his recommendation to “tender” from “outperform” previously.

On Tuesday after the bell, the Quebec City-based water treatment solutions provider announced the deal, which will see shareholders receive $4.25 per share in cash, representing a premium of approximately 68 per cent to its closing price on the day.

“While we believe that HEO’s shareholders are getting an appropriate premium, the acquisition also appears to be a strategic fit for Ember,” said Mr. Leno. “The firm has a focus on water with three out of six portfolio companies providing water (waste, ground, storm) related solutions. The addition of HEO could provide synergies in filtering and chemical treatment technologies.”

“The acquisition price implies approximately 15.5 times EV/FY+1 EBITDA, which we view as appropriate on account of: 1) our estimate of a f2023-f2025 adj. EBITDA CAGR [compound annual growth rate] of 15 per cent; 2) the public peer group trading at an avg. EV / FY+1 EBITDA of 13.4 times; and 3) HEO’s current / historical avg. valuation of 9.8x / 10 times EV / FY +1 EBITDA. While there have been higher-priced public company acquisitions in the LTM [last 12 months] (Xylem acquiring Evoqua), we believe this is due to 1) the all-stock transaction; and 2) the target having a larger platform / footprint vs. HEO.”

Mr. Leno moved his target for H2O shares to $4.25 from $3.25 to reflect the deal. The average is $3.97.

“Our investment thesis is based on 1) HEO continuing to profitably grow as it focuses on recurring revenues and higher margin work; 2) continued multiple expansion; and 3) multiple positive macro trends including aging U.S. water infra, increasing water desalination/reuse needs, municipalities outsourcing operation and maintenance of water facilities, fragmented industry, etc.,” he said.

Elsewhere, other analysts making recommendation changes include:

* Desjardins Securities’ Frederic Tremblay to “tender” from “buy” with a $4.25 target, up from $3.50, citing “key shareholder support, a fair valuation and a low probability of a superior bid.”

“We view $4.25 per share as a fair price,” said Mr. Tremblay. “The H2O transaction is one of only a few that exceeds 15x trailing EBITDA, let alone approach 20 times. On a forward-looking basis, it finally positions what has long been one of our preferred names (eg HEO was a top pick in our 2023 outlook report) at a premium to the water peer group following years of its trading at a discount. Lastly, we believe the Québec angle of the deal (eg head office commitment) may be difficult to replicate for some potential buyers, especially those heavily focused on head-office cost synergies.”

* Acumen Capital’s Nick Corcoran to “tender” from “buy” with a $4.25 target, up from $3.75.

“We view Ember’s offer as a favourable outcome for HEO’s shareholders. A superior offer is unlikely due to the structure of the current agreement,” said Mr. Corcoran.

Meanwhile, Canaccord Genuity’s Yuri Lynk raised his target to $4.25 from $3.25 with a “buy” rating.


Eight Capital analyst Puneet Singh initiated coverage of Arizona Sonoran Copper Co. Inc. (ASCU-T) with a “buy” recommendation on Wednesday, seeing an upcoming update to its pre-feasibility study for its fully owned Cactus Project as a “key catalyst” that could attract significant attention from larger producers.

He said the company’s two-year-old preliminary economic assessment for the project is now out of date and does not include the potential gains from its Cactus and Park/Salyer deposits, which are in a large porphyry copper system.

“We envision ASCU undergoing a two year build-out starting in 2025 and costing $400-million,” said Mr. Singh. “We see ASCU starting production in 2027 and running a 30-year LOM [life-of-mine] heap leach and SXEW operation. Overall, we see ASCU producing 45ktpa (90Mlbs) of Cu at $2.08/lb AISC. This compares to the PEA, which envisioned a 28ktpa (56Mlbs) Cu plan. Primary sulphides represent another 890kt of Cu (approximately 1.8Blbs) in resources. For context, the sulphides could add another 20 years to mine life at our average run-rate of 45ktpa Cu (or be layered on for increased per annum production over the existing mine life). We’ll await more test work from Rio Tinto’s Nuton program before we look to include it in our mine plan.

“On trading comparables, ASCU trades at the bottom of the range. Post de-risking, with a 90Mlbs Cu per annum production over at least 30 years, we point out that Cactus would likely be on the takeout screen of existing producers. We believe the updated resource release in Q1/24 could be the start of a re-rating in the share price as the market starts to recognize the potential scale increase that likely occurs in ASCU’s upcoming PFS.”

Mr. Singh set a target of $3.90 per share. The average is $3.36.


Citing ongoing macro headwinds, BMO Nesbitt Burns analyst Fadi Chamoun lowered his financial projections for TFI International Inc. (TFII-N, TFII-T) ahead of its third-quarter earnings release.

“While the YELL bankruptcy provided an initial boost, the broader demand environment continues to be muted and visibility into an inflection higher—which is an important condition for pricing—is limited,” he said. “Despite this, cost initiatives, including new equipment deliveries, should position the U.S. LTL [less than truckload] segment for operating ratio improvement in 2024 even in a flat demand environment. The medium-to-longer term opportunity continues to be (i) service improvement; (2) increased density; and (3) cost reduction.”

Mr. Chamoun thinks gains from M&A activity will continue important contributor to TFI moving forward and thinks current conditions are favourable for further moves.

“TFII has likely hit its capital deployment targets for 2023 following the acquisition of JHT Holiday in August which should contribute more than $500 million of revenue and more than $55 million in EBITDA over the coming year,” he said. “While financing is more expensive, the M&A environment is less competitive than in recent years with fewer bids from private equity and strategics alike. Larger scale M&A (+$1 billion) remains a key catalyst for TFII with potential transactions likely to be in Logistics or U.S. LTL in our view.”

Cutting his earnings projections through 2025 “as the macro weighs on both consumer and industrial end marks,” Mr. Chamoun reduced his target for TFI shares to US$127 from US$130 with a “market perform” rating. The average is US$152.08.

“TFII has several levers to mitigate the slowing demand environment including self-help cost improvement opportunities and volume tailwinds from industry disruption in U.S. LTL; revenue quality enhancement initiatives; and M&A/buybacks. At current valuation levels, however, we believe the risk/reward is balanced,” he said.


RBC Capital Markets analyst Geoffrey Kwan sees EQB Inc.’s (EQB-T) purchase of a 75-per-cent stake in ACM Advisors Ltd., a B.C.-based alternative asset manager with $4.8-billion in assets., as a “lower-risk diversification of the business.”

“We think the acquisition represents a logical next step in EQB’s evolution into a more diversified bank,” he said. “Although operating in asset management is new for EQB, it is directionally lower risk given ACM manages assets that EQB is very familiar with (commercial mortgages) given EQB has provided financing to commercial borrowers for more than 50 years and has a commercial loan portfolio of $28-billion (70 per cent relating to multi-unit residential housing). Furthermore, it diversifies EQB’s earnings by providing greater fee non-interest income.

“Over time, we think some of the other potential benefits of the transaction could include: (1) the transaction would likely introduce new commercial mortgage borrower relationships that could help EQB with new commercial loan originations; and (2) EQB’s existing commercial mortgage lending business could potentially be a new source of loans used in ACM’s investment funds and therefore help accelerate their growth.”

Mr. Kwan raised his target for EQB shares to $100 from $97, reiterating an “outperform” rating. The average is $96.

“Our increased target reflects the rolling forward of our valuation as our financial forecasts increased very slightly due to the ACM acquisition,” he said.


Acknowledging the outlook for the economy “remains uncertain,” Desjardins Securities analyst Lorne Kalmar said he’s “confident” retail real estate investment trusts are “well-positioned to withstand the impact of a recession.”

“Contrary to conventional wisdom, retail REIT performance has been very resilient in past economic downturns,” he said. “Meanwhile, the year-to-date underperformance of the retail REITs has resulted in trading valuations observed during only the global financial crisis and the early innings of the pandemic. With Canadian retail fundamentals the strongest they have been in nearly a decade, and REIT portfolios comprising some of the highest-quality retail assets with the most desirable retailers in the country, we are increasingly confident that investor concerns around the impact of a recession are overblown and the current valuations overly discount the downside risk.”

In a research report released Wednesday, Mr. Kalmar said retail REITs continue to benefit from a growing demand for space, pointing to “a reinvigorated appetite for in-person shopping, a strong and healthy retail tenant base, a rapidly expanding population and under-expansion by retailers in the years leading up to the pandemic.”

“Virtually all retail REIT management teams agree that the tenant watch list is thin and largely comprises smaller, independent retailers with weaker covenants and a focus on discretionary offerings,” he said. “On the supply side, new space remains very limited, and rents are well below the levels required for development economics to penci out, which should insulate the sector from new supply for the foreseeable future. This demand/supply imbalance has led to elevated occupancies, accelerating rent growth and, ultimately, the strongest retail fundamentals in nearly a decade.”

For large-cap REITs, his pecking order is now:

  1. Primaris REIT (PMZ.UN-T) with a “buy” rating and $17 target. The average target is $17.03.
  2. First Capital REIT (FCR.UN-T) with a “buy” rating and $18.50 target. Average: $17.92.
  3. Crombie REIT (CRR.UN-T) with a “buy” rating and $17.50 target. Average: $16.82.
  4. RioCan REIT (REI.UN-T) with a “buy” rating and $24.50 target. Average: $23.94.
  5. Choice Properties REIT (CHP.UN-T) with a “buy” rating and $16 target. Average: $15.56.
  6. SmartCentres REIT (SRU.UN-T) with a “hold” rating and $28.50 target. Average: $28.69.
  7. CT REIT (CRT.UN-T) with a “hold” rating and $17 target. Average: $16.92.

“The retail sector is heading into a potential recession on its strongest footing in some time,” concluded Mr. Kalmar. “While an economic slowdown could cause some tenant closures, demand for quality retail space remains robust, which should result in a minimal impact on REIT earnings. We believe investor concerns about the impact of a recession on the retail sector are overblown, particularly when considering the performance of the retail REITs during past economic slowdowns, the improvement in quality and tenant mix that has occurred over the past several years, and the current state of retail fundamentals.”


In other analyst actions:

* Veritas Research’s Michael Dudas downgraded Barrick Gold Corp. (GOLD-N, ABX-T) to “reduce” from “buy” without a specified target. The average target on the Street is US$22.42.

* Jefferies’ Chris Lafemina cut his targets for Barrick Gold Corp. (GOLD-N, ABX-T) to US$15 from US$18 and Kinross Gold Corp. (KGC-N, K-T) to US$4.65 from US$5, keeping “hold” ratings for both. The averages are US$22.42 and US$6.18, respectively.

* Stifel’s Justin Keywood trimmed his Dentalcorp Holdings Ltd. (DNTL-T) target by $1 to $15 with a “buy” rating. The average is $13.35.

“We update our estimates, showing a moderation of growth expectations with lower M&A contributions, but double-digit growth objectives appear in-tact with 18-per-cent adj. EBITDA margins,” he said. “DNTL’s stock has seen significant pressure, down 34 per cent LTM [last 12 months] (S&P/TSX, down 1 per cent) and valuation now at 8 times NTM [next 12 month] EBITDA. The pressure includes a 20-per-cent contraction, following the conclusion of a strategic review in May, 2023 to continue operating as the largest public DSO and #1 market share leader in Canada. An NCIB was subsequently activated, outlined below but with an insider sale in August. DNTL’s balance sheet remains levered at 4.4 times net debt/adj. PF EBITDA with 80 per cent of debt locked-in at 6.4 per cent to May, 2026. Although, there are several moving parts to consider with an unfavorable market backdrop, we continue to see the business model as defensive with recent supportive dentist feedback and in-tact fundamental.”

* After holding an investor update with CEO Marc Rossiter to discuss Monday’s departure of CFO Rodney Gray, RBC Capital Markets’ Keith Mackey cut his Enerflex Ltd. (EFX-T) target to $14 from $15 with an “outperform” rating. The average is $12.92.

“We think Monday’s negative 27-per-cent stock price reaction was likely punitive, given the CFO departure was not related to the company’s financial statement integrity, as noted on the call,” he said. “We continue to believe that the positive business momentum, coupled with discounted valuation provide attractive potential returns. The payoff requires patience as Exterran integration and related near-term cash outlay will delay increased shareholder returns.”

* Following Tuesday’s release of its long-awaited maiden resource estimate for its Santana mine in Sonora, Mexico, Desjardins Securities’ John Sclodnick cut his target for Minera Alamos Inc. (MAI-X) to 80 cents from $1, keeping a “buy” rating. The average is 85 cents.

* CIBC’s John Zamparo lowered his target for Park Lawn Corp. (PLC-T) to $23.50 from $29 with a “neutral” rating. The average is $30.

“We expect PLC’s announcement to withdraw its offer to acquire Carriage Services (CSV) to be interpreted positively by the Street,” said Mr. Zamparo. “While the potentially significant EPS accretion led us to support a merger, we believe the majority of investors negatively viewed the combination due to pro forma leverage and a lack of support for the likely Brookfield terms. Meanwhile, we are reducing our Q3 estimates based on a lower mortality rate and a return to traditional seasonality. Our price target moves ... to reflect a softer environment for discretionary names. PLC’s valuation has become more compelling, and M&A targets appear abundant and at reasonable multiples. Another few quarters should see more clarity on improved industry conditions and a more favourable time for the stock.”

* TD Securities’ Brian Morrison cut his Sleep Country Canada Holdings Inc. (ZZZ-T) target to $29 from $32 with a “buy” rating. The average is $28.83.

“With growing pressure on available discretionary income to the Canadian consumer, we believe it is prudent to lower our financial forecasts for H2/23,” he said. “We believe that Sleep possesses a dominant position in the Canadian market, that should be further enhanced by its recent acquisitions. That stated, we have lowered our revenue outlook for both Q3/23 and Q4/23, as we believe consumers are increasingly likely to defer purchases of big-ticket items. This, combined with ongoing heightened marketing initiatives, especially for its growing portfolio of brands weighted toward eCommerce, justifies the lowering of our financial forecasts. Our Q3/23 EPS estimate of $0.74 compares with consensus of $0.86.”

“Due to its liquidity profile, market position, balance-sheet strength, and consistent FCF profile, we take a mid-term approach to our recommendation for Sleep. We acknowledge that the next several quarters will be challenged as the Canadian consumer pulls back on discretionary spend, and Sleep proceeds full steam ahead with its acquisition integration/optimization initiatives. It is our view that as we get into the seasonally stronger H2/23 for EPS/FCF, Sleep may become more aggressive with its NCIB. We believe that this, along with an attractive valuation and dividend yield, provides a compelling mid-term risk/reward profile. Admittedly, we anticipate progress toward our target price to be geared toward the second half of our investment horizon.”

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 11/12/23 11:59pm EST.

SymbolName% changeLast
Air Canada
Arizona Sonoran Copper Company Inc
Barrick Gold Corp
Choice Properties REIT
Crombie Real Estate Investment Trust
CT Real Estate Investment Trust
Dentalcorp Holdings Ltd
Enerflex Ltd
First Capital REIT Units
H2O Innovation Inc
Kinross Gold Corp
Minera Alamos Inc
Park Lawn Corp
Primaris REIT
Riocan Real Est Un
Sleep Country Canada Holdings Inc
Smartcentres Real Estate Investment Trust
Tfi International Inc

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