Inside the Market’s roundup of some of today’s key analyst actions
Believing they provide “value amidst the volatility,” Credit Suisse’s Andrew Kuske upgraded his recommendations for Gibson Energy Inc. (GEI-T) and Hydro One Ltd. (H-T) to “neutral” from “underperform,” citing recent weak share price performance and the underlying business fundamentals.
“Amongst Canada’s three major infrastructure sub-sectors, we continue to prefer the barbell of Power/Renewable Power and Energy Infrastructure versus the Regulated Utilities,” he said in a research note released Tuesday. “From our historical statistical and valuation work, there continue to be questions of divergence in performance compared to the moves in interest rates. Yet, we acknowledge the sector appeal in an uncertain environment and specifically highlight H’s Bloomberg beta of 0.37 and adjusted beta of 0.58 in that context. Therefore, we see some market appeal for a stock like H at a better valuation given the pullback and also being closer in time to potentially interestingly catalysts – in a sector that typically has limited events.”
For Hydro One, Mr. Kuske said there are signs of “greater growth with ongoing success in transmission licenses in southwestern Ontario that support a growing greenhouse industry along with selected automotive industry acceleration of next generation activities.”
“Moreover, we believe the current energy sector dynamics may position the business for a variety of Ontario centric growth efforts with M&A actions,” he added. “Most notably, that kind of dynamic would look to be supported by various policy objectives in the future and help with potential bill pressure (broadly). That specific area of potential upside is not part of our core forecast. Another area of potential growth is H’s small telecom business continues to be positioned for incremental growth opportunities that can be additive to the overall growth rate.”
He maintained his target for Hydro One shares of $36. The average target on the Street is $36.21, according to Refintiv data.
“Hydro One has considerable defensive appeal with a somewhat discounted valuation and a lesser degree of political and regulatory risk than in the past,” he said.
“We update Hydro One Limited to Neutral from the prior Underperform rating partly on the bases of share price depreciation along with the passage of time likely boding well for potential selected Ontario-centric growth catalysts.”
Mr. Kuske called Gibson’s business is “very resilient – more than many of the regional peers along with offering a favourable valuation and increasingly better cash flow stability.”
“To us, one of the major areas of focus for GEI is the near-term ability to grow the Diluent Recovery Unit (DRU) business that can present an interesting multiplier across several capital investment opportunities,” he said. “With rather elevated commodity prices, a degree of volumetric upside could exist with parts of GEI’s business, however, that reality is not our base case. Yet, current commodity prices should help support continued expansion efforts of the DRU businesses. Such an activity helps underpin a greater amount of stability in the overall cash flow profile – that should translate into valuation and pushing some of the company’s strategic questions to further out in time.”
His target for Gibson shares is $27, above the $26.19 average.
“We believe GEI’s core business is well positioned in Alberta and on the verge of some interesting high returning capital opportunities,” said Mr. Kuske. “Yet, from our perspective, the existing and projected differential environment does create some challenges for parts of the Marketing business.
“Partially owing to the potential return to our $27 target price arising from the recent share price performance, we upgrade Gibson Energy Inc. to Neutral from the prior Underperform rating.”
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Seeing price and volume trends remaining “strong,” ATB Capital Markets analyst Chris Murray said his bullish thesis on Cargojet Inc. (CJT-T) is “very intact as valuations test [a] five-year low.”
On Monday, Mr. Murray hosted a corporate update call with the Mississauga-based company, which he said was “positive about the demand environment, which continues to outstrip capacity.” He said its executives think it is “well-positioned in the near and longer term.”
“Management reinforced that 75-80 per cent of domestic volumes remain supported by fixed-price contracts (which include volume minimums) subject to a CPI adjustment on an annual basis, with the remaining 20-25 per cent of capacity demonstrating positive pricing trends over a multi-year period,” he added. “Demand for higher-margin ACMI [Aircraft, Crew, Maintenance and Insurance] and charter services continues to exceed supply, with management noting its ability to leverage available capacity on partner aircraft (which CJT operates on an ACMI basis) as a cost-effective way to add capacity.”
“Management noted that Amazon (AMZN-Q) is looking to add additional capacity on an ACMI basis over the near term to meet growing volumes. Management confirmed that the Company will look to serve growing demand from Amazon on an all-charter basis in 2022 before potentially adding dedicated ACMI capacity in 2023.”
Mr. Murray said Cargojet management views its shares as “significantly undervalued” and intents to increase the size of its normal course issuer bid.
“We view the potential repurchases favourably given the program provides management with a flexible option to return capital to shareholders on an opportunistic basis, particularly during periods of elevated volatility,” he said. “With leverage reported to be 1.1 times at Q1/22, we see the Company maintaining the flexibility to repurchase shares while funding its capex budget through internal sources.”
Mr. Murray reiterated his “outperform” rating and $230 target for Cargojet shares. The average on the Street is $232.58.
“With significant investments being made to expand capacity over the near term, we see the Company as increasingly well-positioned to benefit from growing domestic e-commerce demand and attractive supply/demand dynamics around international air cargo services. We see prevailing valuations as very compelling, particularly given the secular tailwinds and the strength of the Company’s competitive position domestically. With weakness in the broader markets, shares of CJT now trade at 7.8 times 2022 and 7.0 times 2023 ATB estimated EV/EBITDA multiples, near five-year lows. Management xpects to hold an investor day in September, which we expect to serve as an opportunity for the Company to lay out its medium-term outlook and strategy around capital allocation.”
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With his latest pricing survey leading him to conclude competition among Canada’s largest grocers remains “largely rational,” Desjardins Securities analyst expects the group to continue to outperform in the near term, citing “the ongoing macro uncertainties and positive near-term grocery fundamentals (high food inflation, cost pass-through, rational competition and solid food-at-home demand).”
“Within our basket of more than 200 items at seven major full-service and discount banners in Toronto (Loblaw, Sobeys, Metro, No Frills, Food Basics, FreshCo and Walmart), we observed that in February, about one-third of the items had a unit price increase and outpaced decreases by a factor of 2 to 1,” he said. ”The trend reversed in March with price reductions outpacing increases. But in our latest survey conducted in late May/early June, price increases outpaced reductions by more than 60 per cent.
“Price gap of the Big 3′s discount banners vs full-service banners has remained relatively stable at 16–19 per cent (largely in line vs historical). In this high-inflation environment, this supports trade-down to discount. However, we believe full-service also adds value through its broader SKU assortment supporting product substitution, private label and a greater fresh offering, which is often a key decision-making factor as many continue to work and cook at home.”
Also seeing the price gap between grocers’ private labels versus name brands as “compelling,” Mr. Li sees an environment that supports from premium valuations for both Loblaw Companies Inc. (L-T) and Metro Inc. (MRU-T).
However, he expressed a “slight” preference for Empire Co. Ltd. (EMP.A-T), pointing to its “its large valuation discount (13.2 times forward P/E vs 17.0 times for L and MRU), which reflects its less favourable business mix (less exposure to discount and pharmacy/front store).”
“There is potential for valuation to improve as inflation moderates starting in 4Q and investors see a clear path to 8–10-per-cent EPS growth longer-term (in line with L and MRU),” he added.
“While we do not expect EMP’s 4Q FY22 results on June 22 to be a catalyst (we are slightly below consensus), we believe it is on track to achieve its target of $3.00 EPS in FY23. This implies 11–12-per-cent growth on a same-week basis and excludes higher-than-normal earnings contributions from real estate transactions and other one-time costs in FY22.”
Ahead of Wednesday’s premarket release of its fourth-quarter 2022 results, Mr. Li raised his full-year revenue and earnings expectations for Empire. He maintained a “buy” rating and $45 target. The average is $48.44.
Mr. Li kept a “hold” rating and $105 target for Loblaw. The average is $123.20.
“L’s strong results over the past few quarters clearly show that it has been rejuvenated by a renewed focus on execution under the new management team,” he said. “We believe this is largely reflected in the valuation at 17.0 times forward P/E (in line with MRU and vs the 14–15 times long-term average). With some industry uncertainties in 2H as discussed above, we await a more attractive entry point. We continue to have a slight preference for WN over L (WN trades at a 16-per-cent holdco discount).”
The analyst maintained a “hold” recommendation and $70 target, below the $73.90 average, for Metro.
“We continue to view MRU as a high-quality company supported by its strong regional position, consistent execution and shareholder-friendly capital allocation strategy. Its premium valuation and lack of near-term catalysts keep us from being more positive,” he said.
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RBC Dominion Securities analyst Paul Treiber expects BlackBerry Ltd. (BB-N, BB-T) to report “lacklustre” first-quarter 2023 financial results before the bell on Thursday, seeing investor focus on any updates to its strategy for its delayed US$600-million patent sale.
He’s forecasting revenue of US$163-million for the quarter, down 6 per cent year-over-year and in line with the Street’s estimate of US$161-million. His adjusted EBITDA and earnings per share projections of losses of US$27-million and 6 US cents, respectively, are also declines from the previous year (losses of U$6-million and 5 US cents) and meet the consensus (losses of US$28-million and 5 US cents).
“IoT is likely to continue to benefit from recent design wins, while Cyber Security revenue may remain soft, pending contribution from new deals,” said Mr. Treiber.
He added: “We expect BlackBerry to provide additional clarity on the $600-million ($1.05/share) sale of its non-core patent assets. It is possible that either: 1) the announced buyer (Catapult IP Innovations) may secure financing; 2) BlackBerry may find another buyer; or 3) BlackBerry does not sell the patents. If BlackBerry does not sell the patents, BlackBerry may recommence its patent licensing business, which averaged $242-million revenue per annum from FY17 to FY21.”
Mr. Treiber maintained a “sector perform” rating and US$6.50 target for BlackBerry shares. The average is US$7.20.
“We believe that BlackBerry’s valuation appropriately reflects BlackBerry’s near-term fundamentals, opportunities, and potential risks,” he said. “BlackBerry is trading at 3.1 times FTM EV/S [forward 12-month enterprise value to sales], below cybersecurity peers at 6.6 times.”
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After Step Energy Services Ltd. (STEP-T) released better-than-expected financial guidance late Monday, Raymond James analyst Andrew Bradford raised his rating for its shares to “strong buy” from “outperform.”
The Calgary-based company is now projecting earnings before interest, taxes, depreciation and amortization between $42-million and $50-million. The Street had expected $28-million.
“This will be a first-ever 2Q sequential EBITDA increase for any Canadian-listed pressure pumper,” he said, “The fact that STEP’s share price has dropped 24 per cent over the last two weeks (TSX Comp down 8 per cent) makes the investment opportunity all that much more attractive.
“From our viewpoint, STEP was already fundamentally undervalued even before the guidance was issued. At last night’s close, we estimate STEP is priced at 3.1 times current year EBITDA and 2.5x 2023E. STEP’s closest comps are averaging 6.0x current year and 4.1x 2023E. We appreciate STEP’s small market float impacts its value multiples (STEP has a $296-million market cap but only $155-million float capital); but we also believe this multiple disparity is too wide considering its improved U.S. positioning and performance. Further, we believe there is potential upside with STEP’s coiled tubing businesses.”
Mr. Bradford raised his target to $7.75 from $6. The average target on the Street is $7.93.
“Sharp revenue and EBITDA growth also means STEP will be diverting the majority of its discretionary cash flow to working capital; we’re envisioning just $18-million of free cash generation in 2022 – a 10-per-cent conversion rate from EBITDA,” he said. “But as the pace of growth moderates, so will the pace of working capital investment. We envision as much as $96-million of free cash in 2023, equating to a 28-per-cent yield today and a net debt ratio exiting 2023 at approximately 0.5 times.”
Elsewhere, BMO Nesbitt Burns’ John Gibson raised his target to $11 from $7.50 with an “outperform” rating, while Stifel’s Cole Pereira bumped his target to $10 from $7 with a “buy” recommendation.
“The company remains our top pick of the Canadian pressure pumpers given its inexpensive valuation relative to Trican (TCW-T; $3.85, OP) and significant earnings upside as pricing moves higher,” said Mr. Gibson.
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Citi analyst Anthony Pettinari sees increasing pricing and volume risk for North American containerboard companies through the remainder of 2022.
Citing “cautious” commentary from in the latest issue highly respected PPI Pulp & Paper Week and “evidence of slowing demand,” he reduced his financial estimates for his coverage universe and downgraded both International Paper Co. (IP-N) and WestRock Co. (WRK-N) to “neutral” from “buy” previously.
“While Containerboard stocks have outperformed year-to-date (down 4.9 per cent vs. S&P down 22.9 per cent), we’re less confident the outperformance can continue in 2H,” said Mr. Pettinari. “Demand for durables & distribution goods (approximately 25 per cent of box demand) is slowing, and we expect year-over-year industry shipments to be negative through year-end. 1.8mmt of capacity is scheduled to be added in 2H ‘22, which we model pushing op rates less than 94 per cwent in 2023. While our base case is flat kraftliner prices through year-end, we view price erosion as a possibility, and see no real chance for another hike this year. We continue to expect producers to grow EPS in ‘23 (WRK & IP up low single digits), but at a more modest pace (down from high single digits previous estimate).”
Assuming the S&P will see further volatility, Mr. Pettinari warned containerboard stocks have historically underperformed in stock market corrections.
“While we’ve identified clear headwinds for the group (price/vol risk in a deteriorating macro environment), we see the negatives as roughly balanced by some positives,” he said. “Foremost is valuation – the stocks are not especially expensive, with IP trading 6.7 times NTM [next 12-month] EBITDA vs. its 7.9 times 5-year avg, per FactSet. PKG is trading 7.7 times vs. its 9.0 times 5-yr avg, while WRK is trading 5.3 times vs. its 6.6 times 5-yr avg. And while the stocks have outperformed year-to-date, they have underperformed over the past 30 days, suggesting some slowdown is already priced in. Containerboard producers are also benefitting from more focused, defensive models as compared to previous cycles. IP & WRK mgmt. teams have moved to de-lever balance sheets, shed lower quality businesses, and return cash. Accordingly they seem better positioned to weather a slowdown vs. previous cycle.”
Mr. Pettinari cut his International Paper target to US$46 from US$53. The average on the Street is US$51.92.
His WestRock target slid to US$45 from US$53, below the US$59.54 average.
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Touting the “best backdrop seen in uranium in over a decade, Eight Capital analyst Puneet Singh assumed coverage of four producers in a research report released Tuesday.
Believing its Arrow deposit in Saskatchewan is “hard to ignore,” he named NexGen Energy Ltd. (NXE-T) his top pick in the sector, setting a “buy” rating and $11.50, up from the firm’s previous target of $10.60. The average on the Street is $9.84.
“We believe given Arrow by itself will rival Cameco’s entire output once in production, representing 15 per cent of global supply, it should be a core holding in any portfolio with/wanting uranium exposure,” he said. “Fission lags behind peers on an EV/lb basis and is even cheaper considering a potential synergistic scenario. The rare earths opportunity at Energy Fuels is not only a crucial element providing torque in electric vehicles but also provides torque to the upside in EFR’s share price. Finally, UEC [Uranium Energy Corp.] is sitting on a lucrative 5Mlbs of uranium inventory combined with cheap/quick ISR restarts in the U.S that are ready to go once uranium prices stabilize at a higher level.”
Mr. Singh also initiated coverage of these stocks:
* Energy Fuels Inc. (EFR-T) with a “buy” rating and $16.50 target. Average: $10.71.
“EFR, a uranium producer since the last cycle, has put its uranium assets on standby awaiting higher prices. In the meantime, to keep its flagship White Mesa mill going, the Company has been processing alternate feed sources. These sources can vary, but one example involves low grade ore given to the Company to recycle (i.e. high margin since the source Company was trying to get rid of it). While the stock ebbs and flows as other uranium equities do, EFR’s share price gets an added push by its continued development of its rare earth minerals business,” he said.
* Fission Uranium Corp. (FCU-T) with a “buy” rating and $1.50 target. Average: $1.67.
“The mining sector has seen a period of increased consolidation, particularly in the gold industry. The transactions that make most sense to us have been those that put together assets that are close by (e.g. the Nevada Gold Mines joint venture) as they outline a concrete path to synergies, usually through cost savings and value creation based on shared infrastructure, streamlined operations, and shared intel. Fission’s Triple R project no doubt works on a stand-alone basis, and that’s our base case,” he said. “However, as the bull uranium market develops and demand necessitates more supply, we think consolidation will occur as companies and shareholders push for size/growth. Given that NexGen’s Arrow is also advancing a project in the Western portion of the Athabasca Basin, we think these two companies working together in the future would make a lot of sense and is likely the best route for ultimate value creation for shareholders.
* Uranium Energy Corp. (UEC-A) with a “buy” rating and US$7 target. Average: US$6.40.
“UEC has built up an inventory of 5 million pounds of uranium over the past couple years,” he said. “The average cost of these pounds is $38 per pound. These pounds are expected to be delivered until Dec/2025. We believe these pounds will prove lucrative for UEC as uranium prices are expected to trend higher in the years ahead on strong fundamentals. At our price deck ($65 per pound U3O8) these inventories are worth $325M ($1.11 per share) and help bolster UEC’s balance sheet ahead of starting idled production,” he said.
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In a separate note, Mr. Singh initiated coverage of IsoEnergy Ltd. (ISO-X) with a “buy” recommendation, calling its Hurricane deposit as “the best uranium discovery in the Athabasca Basin since NexGen’s Arrow.”
“Drilling so far has indicated high grade mineralization over mineable widths and a shallow depth (approximately 320 metres),” he sai.d “ISO has yet to compile a resource however, based on our interpretation of the drilling, we estimate ISO could potentially have up to 100Mlbs at 7-per-cent U3O8 across its claims on Larocque East. We point out that most of the drilling so far has been done on the western side of the property. The upside is that ISO recently completed geophysics on the eastern portion and is just starting to drill that side. Additionally, ISO still has to go back and do a larger infill campaign in between all the drilling done so far on the western side and in the future on the eastern side if drilling warrants. Thus, when all is said and done, it is likely that ISO may have a much larger resource than our initial estimate of Larocque East.
“Hurricane is shaping up to be a major discovery, measuring up to 12m thick and 125m wide with a strike length of 1km. The crystalline basement, unconformity hosted deposit has a fault system that is common for the Athabasca basin. Other unconformity hosted high grade uranium deposits in Saskatchewan include Cameco’s MacArthur River and Cigar Lake (highest grade uranium mines in the world). Typically, higher grade uranium deposits display mineralization close to the unconformity, which is the case here.”
He set a target of $7.10. The current average on the Street is $6.88.
“Given the backdrop for uranium and the potential for ISO to make new discoveries on Larocque East and its other properties, we expect ISO’s multiples to expand (higher than other uranium names under coverage since it’s actively exploring) as drilling results potentially drive shares higher from the just $310-million valuation the market is giving it today,” said Mr. Singh.
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Calling its new carbon platform “unique” with a “compelling” growth outlook, Raymond James analyst Steve Hansen initiated coverage of Deveron Corp. (FARM-X), a Toronto-based agriculture technology company, with a “strong buy” rating.
“In short, we believe Deveron is well-positioned to deliver outsized growth through our forecast horizon based upon the company’s unique competitive position, advanced M&A pipeline, and attractive secular tailwinds,” he said. “While still early innings, we believe Deveron is building something truly unique, underpinned by a vertically-integrated business model, the recent transformative acquisition of A&L Laboratories, and robust digital platform that bestows the firm with significant competitive advantage.”
“We believe Deveron is in the early innings of a strategic growth agenda that will see the company consolidate two highly fragmented and complimentary end-markets, namely: independent crop advisors and soil health laboratories. Not to be understated, we are equally drawn by Deveron’s compelling organic growth flywheel (2021: up 95 per cent), particularly as it relates to the company’s fledgling new carbon platform.”
Also touting its “solid M&A track record in niche, highly fragmented markets” and “strong” secular tailwinds, Mr. Hansen set a $1.10 target, which he notes represents a 161-per-cent return from the company’s closing share price on June 15. The current average on the Street is $1.43.
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In other analyst actions:
* Calling it an “established space name with exposure to long-term growth trends,” Wells Fargo analyst Matthew Akers initiated coverage of Maxar Technologies Inc. (MAXR-N, MAXR-T) with an “overweight” rating and US$39 target. The average is US$44.14.
“MAXR is the established leader in satellite earth imaging, with potential upside in space infrastructure if the LEO small satellite boom plays out as planned,” he said. “We think MAXR’s recent EOCL contract win de-risks its earth observation outlook, while its upcoming Legion satellite launches provide a catalyst and further expand its lead in high-resolution imaging. MAXR’s multiple could expand and cash flow could benefit as it de-leverages.”
* CIBC World Markets’ Mark Petrie increased his target for shares of Alimentation Couche-Tard Inc. (ATD-T) to $64, above the $62.72 average, from $56 with an “outperformer” rating.
“We are raising our Q4 EPS estimate to $0.51 (from $0.39, consensus $0.49) to reflect stronger-than-expected industry fuel margins, partially offset by higher credit card fees due to higher gas prices,” he said.
* Jefferies’ cut his Methanex Corp. (MEOH-Q, MX-T) target to US$66 from US$73, keeping a “buy” rating. The average is US$59.29.
* Barclays’ Trevor Young cut his Shopify Inc. (SHOP-N, SHOP-T) target to US$360 from US$460, below the US$587.37 average, with an “equal-weight” rating.
“We estimate SHOP could ramp to upwards of 35 million square feet of fulfillment capacity in the coming years and $1,000/sf in GMV, based on peer benchmarking,” he said. “This translates into a few billion or more in SFN run-rate revenue exiting 2024. A lot needs to go right to ramp this quickly; limited disclosure tempers our optimism.”
David Leeder