Inside the Market’s roundup of some of today’s key analyst actions
In reaction to a 15-per-cent jump in share price last week, iA Capital Markets analyst Elias Foscolos lowered his rating for Inter Pipeline Ltd. (IPL-T) to “hold” from “speculative buy” on Monday as the stock passed his $19.75 target price. The average target on the Street is $18.21.
“Last week, PPL announced that it had entered into an arrangement agreement with IPL in a share-for-share transaction valued at $19.50,” he said. “The announcement of an increased offer by BIP trumping PPL’s current offer with IPL was not unexpected. For the PPL offer to proceed, it will need a reaffirmation by IPL’s Board and BIP’s support as a shareholder. As a result, we believe PPL’s offer is unlikely to be successful. However, PPL anticipated this and should pocket a $350-million break fee. Subsequent to BIP’s increased offer, IPL announced that it is committed to standing by PPL’s offer, stating that it believes the proposed PPL transaction is financially superior and in the best interests of IPL’s shareholders compared to BIP’s bid.”
Also, in a research note reviewing the performance of TSX-listed energy infrastructure companies, Mr. Foscolos lowered Keyera Corp. (KEY-T) to “hold” from “buy” in the wake of “a very strong week.” His $33 target exceeds the $31.75 average.
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Following second-quarter earnings season, Credit Suisse analyst Mike Rizvanovic raised his financial expectations and target prices for several Canadian banks, seeing the consensus expectations on the Street for provisions for credit losses (PCLs) remaining too high.
“The Canadian banks put up another strong quarter with an across-the-board EPS beat that was once again anchored predominately by lower PCLs,” he said. “With the economic outlook in both Canada and the U.S. improving further since the end of Q2 (both GDP growth and unemployment rate expectations), and no major signs of concern in Canadian insolvency trends, we have revised our PCL estimates lower for the group through F2022 as we incorporate a higher level of reversals on performing loan reserves. Based on our closer look at trends in write-offs and the relative change in balance sheet reserves since the onset of the pandemic, we believe that consensus PCL expectations through F2022 are too high, particularly for BMO, CM, and NA (our fiscal 2022 estimated EPS has increased the most for those three banks).
“Aside from taking our PCLs down, our base case for the group on other drivers has not changed materially as we have modeled very modest margin expansion, which should benefit from a gradual recovery in higher-spread loans, elevated Capital Markets for longer (fee-based revenue helping to offset more normal trading), and rising fee-based revenue in Canada as the banks push ahead with another round of pricing increases across the majority of services.”
Mr. Rizvanovic’s target changes were:
- Bank of Montreal (BMO-T, “outperform”) to $138 from $131. The average on the Street is $133.59.
- Bank of Nova Scotia (BNS-T, “neutral”) to $85 from $84. Average: $86.28.
- Canadian Imperial Bank of Commerce (CM-T, “neutral”) to $149 from $142. Average: $149.99.
- National Bank of Canada (NA-T, “outperform”) to $104 from $100. Average: $101.09.
- Royal Bank of Canada (RY-T, “outperform”) to $135 from $132. Average: $134.60.
- Toronto-Dominion Bank (TD-T, “underperform”) to $87 from $82. Average: $92.38.
- Laurentian Bank of Canada (LB-T, “underperform”) to $42 from $38. Average: $46.
“Valuation on a forward PE basis (on FactSet consensus F2022 EPS) for the group is only slightly elevated vs. historical levels, although we believe that the next leg up for share prices will rely predominately on further upward earnings revisions should the macroeconomic backdrop improve further. Among the Big Six our preference coming out of Q2 is in the following order: NA, RY, BMO, CM, BNS, and TD. Among the smaller banks, we prefer CWB despite the solid quarter that was reported by LB due largely to relative valuation,” he said.
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After analysts at Raymond James raised their forecasts for Canadian oilfield services activity based on both rig count increases and fracturing demand while reducing U.S. expectations, Andrew Bradford said he “strongly” recommends investors look at CES Energy Solutions Corp. (CEU-T), Secure Energy Services Inc. (SES-T) and Trican Well Service Ltd. (TCW-T), pointing to “their favourable combinations of operational/ cash flow momentum, potential for upward consensus revisions, and fundamental value.”
“The market is well on its way to pricing OFS companies based on 2022 financial expectations. In this sense, FY2021 numbers are important to valuation only inasmuch as ’21 exit rates provide baselines for reasonable 2022 expectations,” he said.
In a research note released Monday, Mr. Bradford raised his target prices for all three. His changes were:
* Secure Energy Services Inc. (SES-T, “strong buy”) to $6.75 from $5.50. The average on the Street is $5.64.
“Secure’s stock is up 14 per cent over the last 4 weeks, but based on our math, the stock is really only 10 per cent higher than where its implied price should have been immediately after the Tervita deal announcement, giving effect to nameplate accretion and to risked value for synergies,” he said. “We are raising our estimates, primarily based on a higher outlook for drilled and completed wells. Investors can remain confident in SES’s free cash generation and in the durability of its near-maintenance-level capital budget: in simple terms, capacity utilization at its facilities is sufficiently low that expansion capital isn’t required. We estimate Secure will convert 71 per cent of 2021 and 63 per cent of 2022 EBITDA into discretionary cash flow.”
* Trican Well Service Ltd. (TCW-T, “strong buy”) to $3.25 from $3.05. Average: $2.49.
“The increase in the offseason rig count through May and early-June is setting 3Q up to be a busier quarter than we had anticipated,” said Mr. Bradford. “As the high estimator in the consensus range, investors may look askance at our 3Q and 4Q numbers; but our conviction remains as high as ever - we are even increasing our estimates and wouldn’t be surprised if we’ll need to raise them again before the summer is out.
“Trican enjoys unique competitive positioning: (a) it operates solely in Canada and so is exposed to the most rapidly growing oilfield in North America; (b) it is the largest player in Canada, and; (c) it has the strongest balance sheet in Canada, which enables it to react to opportunities not generally accessible by its competitive group. TCW should convert 63 per cent of its 2021 into discretionary cash flow - 35 per cent of which is allocated to converting a frack spread to run on up to 80 per cent natural gas.”
* Ensign Energy Services Inc. (ESI-T, “market perform”) to $1.75 from $1.30. Average: $1.62.
Concurrently, Mr. Bradford lowered his rating for three stocks in his coverage universe:
* Precision Drilling Corp. (PD-T) to “outperform” from “strong buy” with a $55 target, up from $47. The average on the Street is $43.46.
“PD had been lagging U.S. peer group performance before coming alive this past week, effectively doubling average OFS stock performance on both sides of the border,” he said. “This is sufficient for us to reduce our rating to Outperform from Strong Buy, but we’d be remiss if we didn’t highlight PD’s investment attributes: (1) We see the potential for upward revisions in 2022 consensus expectations, (2) We expect PD will convert 47 per cent of 2022 EBITDA to discretionary cash flow, and will use 80 per cent to 85 per cent of this cash flow to reduce net debt to 3.5 times trailing EBITDA by year-end 2022.”
* Calfrac Well Services Ltd. (CFW-T) to “market perform” from “outperform” with a $4.50 target, down from $5.85. Average: $5.23.
* STEP Energy Services Ltd. (STEP-T) to “market perform” from “outperform” with a $2 target, up from $1.75. Average: $1.83.
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Though it recorded “strong first-quarter outperformance,” BMO Nesbitt Burns analyst Gerrick Johnson warned “supply chain pain” lingers for BRP Inc. (DOO-T).
On Thursday before the bell, the Quebec-based recreational vehicle manufacturer reported earnings per share of $2.53, up from 26 cents during the same period a year ago and exceeding both the analyst’s $1.41 estimate and the consensus projection of $1.34. Revenue jumped 47 per cent to $1.81-billion, also topping forecasts ($1.62-billion and $1.65-billion, respectively).
“Retail demand continues to offset supply chain challenges and dealer inventory constraints,” said Mr. Johnson. “Share losses in the higher-growth ORV business continue to be a concern; increased production is hoped to reverse that trend by FY-end. DOO’s FY2022 guidance increase only flows through one-third of the 1Q EPS beat relative to consensus, which likely exacerbates existing investor hand-wringing over the current demand cycle. We suspect management is being conservative given low inventory levels and uncertainty regarding ongoing supply headwinds.”
With the results, Mr. Johnson raised his 2022 EPS estimate to $9 from $7.75, prompting him to increase his target for its shares to $100 from $98 with a “market perform” recommendation. The average on the Street is $114.
“Investor concern regarding sustainability of demand as well as production and supply constraints seem to be limiting the multiple that investors are willing to assign to leisure stocks in the near to intermediate term,” he said. “We sense that many investors are now more interested in TSA passenger screening data than powersports retail data. While the historical average for leisure companies tends to be around 15x, they will range from approximately 12 times to 18 times depending on macro conditions and investor enthusiasm.
“Despite growing investor discontent, we are still believers in the long-term growth story for outdoor recreational products, including those sold by DOO. We think the many new customers who tried out DOO’s products as a socially distant escape from the home during the pandemic will continue with the lifestyle and become lifetime customers, while bringing friends and family along with them. We think DOO has done an excellent job in design and innovation of new products enhancing its position with solid execution.”
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Pointing to its “strong project economics with potential synergies” H.C. Wainwright analyst Heiko Ihle initiated coverage of Integra Resources Corp. (ITR-X) with a “buy” rating on Monday, emphasizing its “history of developing synergistic opportunities across multiple assets.”
“Integra Resources maintains a series of precious metal projects within Idaho that range from exploration stage to the PEA level,” he said. “Notably, the company’s flagship DeLamar project has seen a significant amount of development over the past three years, while Integra previously published a FY19 PEA on the asset outlining robust economics with strong growth potential through new discoveries. The PEA includes consideration for the development of the Florida Mountain deposit, as well as the DeLamar project. Looking ahead, however, we believe that the current resource estimate at site may represent just the “tip of the iceberg” in terms of growth potential.
“The company’s focus on synergistic opportunities within the region is highlighted through its War Eagle project, which sits just 3 kilometres south of Florida Mountain and 9 kilometres east of DeLamar. We note that Integra currently maintains exploration rights to a 30 square kilometre land package known as the Black Sheep property, where multiple targets are beginning to show geological resemblances to both the DeLamar and Florida Mountain deposits. In our view, the company’s strong foothold in the Owyhee Mountain range of southern Idaho should ultimately play into Integra’s hub and spoke strategy for potentially processing ore from DeLamar, Florida Mountain, War Eagle, and eventually Black Sheep.”
Mr. Ihle also emphasized the past success of Integra’s management team in asset sales, pointing to the $590-million sale of Integra Gold Corp. to Eldorado Gold Corp. in 2017 during a “less favourable” gold price environment.
“Based on strength in current precious metal prices, we anticipate asset consolidation within geopolitically favorable jurisdictions to carry strong premiums,” he said.
The analyst set a target of US$7.25 for shares of the Vancouver-based company. The current average is $7.62 (Canadian).
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Following its US$375-million acquisition of Texas-based Hixson Lumber Sales., several equity analysts raised their target prices for shares of Doman Building Materials Group Ltd. (DBM-T), formerly known as Canwel Building Materials Group, on Monday.
On Friday, the Vancouver-based company announced it will complete the acquisition, which will have the ability to triple its U.S. business, by utilizing cash on hand and existing senior credit facilities. It also increased its senior revolving loan facility limit from $360-million to $500-million.
“We believe the significance of the transaction is threefold: 1) It significantly expands DBM’s US business. Hixson is expected to have current run-rate revenues of approximately US$900-million, which would on a combined basis result in an effective tripling of DBM’s U.S. market exposure,” said Stifel analyst Anoop Prihar. “The acquisition also allows DBM to immediately scale up its presence within Central U.S., including in fast growing states such as Texas. 2) It strengthens the company’s higher-margin wood treatment business. Post the transaction, DBM expects to be one of the largest pressure-treated lumber producers in North America, with 32 treating plans and approximately 2 billion board feet of annual capacity. 3) Transaction is financially attractive and is expected to be accretive on an EPS basis.”
After raising his 2021 and 2022 revenue and earnings estimates, Mr. Prihar bumped up his target to $14 from $11.80 with a “buy” recommendation. The average on the Street is $12.54.
Others making changes include:
* Raymond James’ Steve Hansen to $13.50 from $12.25 with an “outperform” rating.
“While precise financial data was not provided, our initial impressions suggest this transaction offers a broad range of strategic and financial benefits, including: 1) complimentary scale in attractive, high-growth U.S. markets; and 2) attractive earnings and free cash flow accretion, conservatively estimated by management at more than 55 per cent on normalized earnings. Coupled with better-than-expected macro tailwinds in North American housing and building materials markets, we are increasing our target price,” said Mr. Hansen.
* National Bank Financial’s Zachary Evershed to $13.50 from $12.50 with an “outperform” rating.
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Touting its “methodical” approach to unlocking the country’s “golden opportunity,” Hannam & Partners analyst Roger Bell initiated coverage of Japan Gold Corp. (JG-X) with a $1.20 target price on Monday.
The Vancouver-based company holds rights to over 30 project areas in Japan.
“JG’s strategy is to capitalize on its first mover advantage to jointly explore 29 of these assets in an alliance with Barrick Gold Corp, who is solely funding exploration and evaluation costs with the option to earn a 75-per-cent interest in each project by completing a Bankable Feasibility Study (BFS),” said Mr. Bell. “With Japanese base metal smelters hungry for silica rich ore – negating the need to produce a concentrate – we expect the economics of a developed project to be best in class amongst global gold producers. We take a probability-weighted approach to our valuation, with three conceptual project scenarios, to derive a $1.20 target price, implying 215-per-cent upside.”
Mr. Bell’s target exceeds the $1 average on the Street. He did not specify a rating for Japan Gold shares.
“In partnership with Barrick, we believe JG’s chances of developing an economically attractive project are strong,” he said. “Sumitomo Metal Mining’s Hishikari operation – one of very few active gold mines remaining in Japan – enjoys an all-in sustaining cost of just US$450 per ounce, amongst the lowest in the world. This is by virtue of the fact that low-sulphidation epithermal gold deposits – the kind that JG is targeting – typically yield ore that is rich in silica, which is used as flux in the smelting process. Ore from Hishikari is, therefore, directly shipped to the smelter with minimal processing required, reducing both capital and operating costs. Even without this advantage, we believe there is value to be unlocked in JG’s portfolio; however, we expect JG should enjoy a similar benefit to Hishikari, driving best-in-class economics from a developed project, if suitable deposits can be identified through the drill-bit.
“While the Barrick Alliance exploration programme is at a relatively early stage and has yet to identify specific deposits to develop, we see a strong chance that JG’s enormous, prospective land package will yield at least one, if not multiple, attractive projects.”
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In other analyst actions:
* RBC Dominion Securities analyst Greg Pardy increased his target for Baytex Energy Corp. (BTE-T) to $2.20 from $1.80 with a “sector perform” rating. The average on the Street is $1.87.
* JP Morgan analyst reduced its Emera Inc. (EMA-T) target by $1 to $58, falling short of the $59.82 average, with a “neutral” rating.
David Leeder