Inside the Market’s roundup of some of today’s key analyst actions
Scotia Capital analyst Konark Gupta is taking a “favourable” long-term view of the North American environmental services sector, citing “its proven ability to consistently price above cost inflation due to high market concentration, ongoing momentum in merger and acquisition (M&A) activity supported by solid free cash flow (FCF) generation, potential for volume rebound as industrial activity recovers, upcoming margin accretion from sustainability investments, and strong capital discipline that rewards shareholders.”
In a research report released Friday titled The Environment Is Right For Processing Sustainable Long-Term Profits, he initiated coverage of five companies in the sector, seeing the potential for “significant value creation.”
“Waste companies have outperformed benchmarks over the long term, driven by their ability to compound earnings and deploy FCF toward inorganic growth and shareholder returns,” he said. “While valuation multiples are rich today, we see potential for more value creation over time as pricing discipline remains strong, price/cost spread is sustained, volumes are due for a rebound, sustainability investments generate higher-margin returns, automation and energy transition improve efficiencies, and solid FCF generation drives more deleveraging, M&A, and shareholder returns. Based on our forecasts for 2024-2026, we see all five environmental services stocks potentially generating double-digit returns over the next two years, led by SES and GFL, followed by WCN, RSG, and WM.”
Mr. Gupta warned of its high concentration and barriers to entry but also touted “predictable earnings and cash flows with annuity-type revenues due to multi-year contracts that have a significant portion of pricing linked to cost indices.”
“While we have a positive thesis on the sector, we are also mindful of some key risks, including the potential for compression in valuation multiples given they are rich in a historical context, increasing commodity exposures from sustainability projects, and the potential for normalization in price/cost spreads,” he said. “Thus, we have a greater preference for our top picks, GFL and SES, which we think offer stronger value creation potential over the next few years, driven by either re-rating, strategic actions, or shareholder returns. GFL not only has an attractive valuation compared to its larger peers, but it also offers more upside from potential M&A and FCF acceleration, aided by ongoing deleveraging toward an investment grade rating. Similarly, we think SES’s valuation could re-rate higher, as investors understand its recent transition to waste management from energy services. SES also offers M&A potential, but we think it is more likely to pursue buybacks in the near term due to its attractive valuation.
“We also like various attributes of the larger waste management companies, RSG, WCN, and WM, although we are taking a neutral view on them due to either expensive valuations, the lack of a differentiated positive catalyst, or company-specific risks (e.g., WM’s pending Stericycle acquisition). However, we expect these larger players to continue to create value for shareholders through their organic and inorganic initiatives.”
Mr. Gupta initiated coverage of these stocks:
* GFL Environmental Inc. (GFL-N, GFL-T) with a “sector outperform” rating and US$50 target. The average on the Street is US$46.09.
* Republic Services Inc. (RSH-N) with a “sector perform” rating and US$224 target. Average: US$216.55.
* Secure Energy Services Inc. (SES-T) with a “sector outperform” rating and $16 target. Average: $14.41.
* Waste Connections Inc. (WCN-N, WCN-T) with a “sector perform” rating and US$196 target. Average: US$197.52.
* Waste Management Inc. (WM-N) with a “sector perform” rating and US$220 target. Average: US$225.85.
Mr. Gupta added: “Valuations are rich but opportunities exist. EV/EBITDA multiples have expanded since the 2007-2009 global financial crisis (GFC), driven largely by price-led margin expansion, increasing FCF generation, and industry consolidation. Consequently, FCF yields have compressed, further affected by the recent rise in interest rates and increased capital intensity (due to sustainability investments), pushing the spread between FCF yield and U.S. 10-year bond yield to negative lately. While we expect a decline in the U.S. 10-year yield to benefit FCF-generating waste stocks, we don’t see a significant upside risk in EV/EBITDA multiples, particularly for the larger companies – RSG, WCN, and WM. However, we believe GFL and SES have the most potential to re-rate higher, which, along with their organic and inorganic growth, could drive share price outperformance. GFL’s re-rating is likely more dependent on potential asset sales, deleveraging, and investment-grade rating as compared to organic and inorganic growth. SES’s valuation has a lot more upside risk, in our view, but it could take longer to narrow the gap to the Big 4 given its focus on the niche end-markets.”
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n a research report released Friday titled Damocles’ Sword, energy equity analysts at BMO Capital Markets blamed the decline in crude oil over the past month on the combination of “tepid demand growth and the prospect of excess supply.”
“The OPEC+ group’s intention to bring back curtailed production in December is now a ‘Sword of Damocles’ overhanging the oil market, exacerbated by fears that Saudi Arabia could move to defend market share as they did in 1985, 2014 and 2020,” they said. “At the same time geopolitical risk appeared to fade into the background as crude oil market speculators-built record short positions. It didn’t last long. The recent increase in hostilities between Israel and Iran has brought geopolitical risk back into focus and led to a modest recovery in oil prices.
“The near-term outlook for crude oil prices is highly uncertain, balancing weak fundamentals against possibility of escalating hostilities in the Middle East. We expect Brent/WTI crude oil prices to trade in the US$75/US$70/bbl range over the balance of the year if the Saudi’s maintain their current level of support and hostilities between Israel and Iran do not escalate; however, prices could easily be US$10+/bbl higher or lower if either of these assumptions prove wrong. From a fundamental perspective, the global crude oil supply-demand balance could begin to tighten in the second half of 2025 if China’s recent fiscal stimulus program and U.S. interest cuts spur incremental economic growth. This could allow the OPEC+ group to stick with their plan of unwinding their production cuts; however, a material improvement in crude oil prices is probably more of a story for 2026.”
Updating their commodity price outlook, they dropped their Brent and WTI price assumption for 2026 to US$81.25 and US$76.25 per barrel, respectively, down 6 per cent from their previous forecast. Their Henry Hub projections also slipped through the end of next year.
“North American oil and gas equities delivered relatively strong performance up until September, led by the Canadian oil and gas group,” the analysts said. “The plunge in crude oil prices over the last month spurred a sell-off in oil and gas equities, which has now translated to year-to-date underperformance. Relatively stable natural gas prices have outperformed falling oil prices and, correspondingly, natural gas weighted equities are now outperforming oil-weighted equities. We expect oil prices to remain the primary driver over equity performance over the balance of the year. We continue to believe that the group will be able to maintain reasonably high levels of cash distributions to shareholders, even during temporary periods of oil prices weakness.”
They added: “Valuations for the North American oil and gas group were attractive; now they are compelling if you believe our oil price outlook. Our top oil and gas recommendations are ARC Resources, Athabasca, Cenovus Energy, ConocoPhillips, Chord Energy, EQT, Headwater, Imperial Oil, MEG Energy, NuVista Energy, Permian Resources, Suncor and Veren. Among the oilfield services companies our top recommendations are Baker Hughes, CES Energy Solutions, Enerflex and Secure Energy. Our top U.S. refining pick is Valero.”
With the changes to their price estimates, analyst Jeremy McCrea upgraded Tamarack Valley Energy Ltd. (TVE-T) to “outperform” from “market perform” with a $4.50 target. The average on the Street is $5.32.
“Tamarack Valley has been one of the most acquisitive E&Ps over the last few years,” he said. “The repositioning into the Charlie Lake and Clearwater has materially improved the company’s inventory duration, as well as its go-forward profitability. As the company continues to monetize infrastructure and show improvements in operational efficiencies, investor interest should increase over time - especially as we continue to see the positive impact of waterfloods.”
“Tamarack Valley is seeing a meaningful drop in risk as its balance sheet improves and operational enhancements are implemented. Ultimately, we see a higher growth potential outlook that hasn’t been reflected in its valuation yet and hence, this is why we are raising our rating to Outperform.”
Conversely, Mr. Gibson downgraded a pair of stocks:
* Source Energy Services Inc. (SHLE-T) to “market perform” from “outperform” with a $14 target, down from $20. The average is $18.50.
“SHLE has been an incredible turnaround story over the past few years, particularly with regard to its balance sheet (net debt/EBITDA expected to fall below 1.0 times in 2025),” he said. “The company now sits in an enviable position given its dominant position in the WCSB proppant market, which continues to exhibit a new level of stability. That said, we are taking a more neutral stance on the company given expectations for slowing growth into 2025.”
“While we expect Canadian activity levels to remain solid into 2025, we now prefer the Canadian drillers over the pressure pumpers. WCSB oilfield activity has been very robust during 2024, driven in part by stronger heavy oil and Clearwater directed drilling, although these plays tend to be less frac intensive relative to the Montney/Duvernay. Note that we now hold Market Perform ratings on each of SHLE, STEP and TCW, which underpins our preference for the Canadian drillers (ESI/PD, which remain Outperform rated).”
* Trican Well Service Ltd. (TCW-T) to “market perform” from “outperform” with a $5.50 target, down from $6 and below the $5.91 average.
“TCW represents the highest quality pressure pumper in Canada, given its pristine balance sheet and top-tier return of capital program. That said, the lack of growth into 2025 combined with TCW’s relatively expensive valuation causes us to take a more neutral approach to the shares. We are downgrading TCW,” he said.
Analyst Jeremy McCrea lowered Vermilion Energy Inc. (VET-T) to “market perform” from “outperform” with a $16 target, down from . The average is $19.81.
“Our thesis on VET has focused on its profitability with a high degree of inventory in conventional formations, which generally have higher returns vs. resource style plays,” said Mr. McCrea. “That said, the share price has seen plenty of volatility due to uncertainties, particularly with European gas prices and restrictions on production flow in Germany. We believe as those uncertainties linger, growth potential will be limited.”
He added: “The potential of the German wells has been a factor many investors have been looking forward to, and although VET announced that its first German well was a success last month, we are seeing the wells face flow restrictions and hence limiting the near-term cash flow. Despite the fact that those wells have the potential to realize outsized returns, the high well costs at ~$35 million (and risk of exploration) and the prolonged flow restriction extending over the next couple of years, have us revising and postponing our expected payout on those wells. Overall, in the context of lower commodity prices, despite an inexpensive valuation, we believe investors could remain sidelined for now until we see positive follow-up results from Germany and quicker payouts.”
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Stifel analyst Ian Gilllies thinks government spending is likely to “remain the gift that keeps on giving” for Canadian engineering and construction firms, predicting organic revenue growth tailwinds are going to continue longer than previously expected.
“In the U.S. and Canada, we continue to expect rising capital investments from the government to support near-shoring and population growth,” he said. “Our analysis of four key agencies in the United States would indicate that a long-tail of spending will occur as budgeted dollars have been slow to translate into committed dollar. As this occurs, it should propel government non-resi spending higher. In Canada, government budgets depict spending growth of 12 per cent which should drive higher demand for E&C services. Changes to UK policy are another positive harbinger for spending. Government spending is the gift that keeps on giving for E&Cs.
“Private sector capex healthy, but there is nuance. We use the S&P 500 as a proxy for private sector capex, and the 2024E-2026E capex CAGR [compound annual growth rate] is 5 per cent, which helps support out view of above-average organic revenue growth for the E&Cs in our coverage. However, this capex CAGR excluding the Mag 7 is only 3 per cent. As such, it will be important for E&Cs to have exposure to key tech themes such as data center growth, semiconductor plant development; utility work resulting from higher power demand; and power plant work. To varying degrees, all the companies we cover that are in this report have exposure to this theme which is a net/net positive.”
In a report released Friday, Mr. Gillies said stocks’ valuations are “still reasonable-to-attractive given elevated EPS growth rates and expanding return metrics.”
“The one key change to our thesis is that we believe ‘above trend’ organic growth should be possible past 2026. whereas we had previously anticipated a return to more normalized organic growth in 2026 and beyond,” he explained.
“ARE is our best near-term investment idea to generate alpha, while STN and WSP should continue to be core holdings in portfolios given the compounding nature of each stock.”
Mr. Gillies raised his targets to the five stocks he covers in the sector to highs on the Street. They are:
* Aecon Group Inc. (ARE-T, “buy”) to $31 from $30. The average is $22.09.
Analyst: “Turnaround story that should benefit from MSD to HSD [mid-to-high single digits] organic revenue growth and substantial margin expansion. Utility focused M&A remains a key focus. 2024-2026 estimated EPS to go from -$0.46 to $2.50, while P/E in 26 is inexpensive at 8.4 times.”
* Badger Infrastructure Solutions Ltd. (BDGI-T, “buy”) to $56 from $55.50. Average: $50.06.
Analyst: “We expect growth to re-emerge in 2025E as several Canadian infrastructure projects ramp up. Keys to drive a recovery in share price include: (1) market share capture; and (2) continued cost management to help drive margin enhancement. Offers a 24-26 estimated EPS CAGR of 29.9 per cent.”
* Bird Construction Inc. (BDT-T, “buy”) to $34 from $31. Average: $29.38.
Analyst: “Company being recognized for executing a significant turnaround over the last three years. We are expecting more of the same over the next two years (24-26 estimated EPS CAGR: 25.8 per cent), should continue to deliver a meaningful valuation re-rating (2025/2026 estimated P/E: 9.6 times/7.9 times).”
* Stantec Inc. (STN-T, “buy”) to $145 from $130. Average: $126.
Analyst: “High-quality earnings and top-tier management, while offering a 24-26 estimate EPS CAGR of 14.5 per cent. Valuation is reasonable at 19.5 times 2025 P/E, but this should compress as M&A is announced. The two key catalysts are (1) re-affirmation of the EBITDA margin expansion targets and (2) M&A.”
* WSP Global Inc. (WSP-T, “buy”) to $285 from $260. Average: $258.38.
Analyst: “Well-defined M&A flywheel, excellent exposure to growing end-markets and strong management, while offering a 24-26 estimated EPS CAGR of 13.8 per cent. We believe this will ultimately result in organic revenue growth of 5-7 per cent with EBITDA margins expanding towards 19-19.5 per cent by 2026E.”
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While acknowledging Aecon Group Inc. (ARE-T) has already been “a stellar performer” in his coverage universe, Desjardins Securities analyst Benoit Poirier predicts there is “further momentum ahead” as “the 2024‒25 worst-case scenario in relation to legacy projects released in 2Q has derisked the story in investors’ minds, acting as a clear demarcation point.”
“We believe most are now pricing on 2026 estimates as the legacy noise should dissipate, giving a more normalized view of ARE’s earnings potential,” he added in a research note.
Introducing his 2026 forecast for the Toronto-based construction company, Mr. Poirier said he expects “a step-up in 2025‒26 when progressive design-build contracts (GO Rail, Scarborough, Contrecœur, Virgin Islands, Darlington and Winnipeg) begin construction.”
“We believe ARE’s backlog could double over the next two years,” he said. “Excluding legacy charges, ARE has delivered 8.0-per-cent TTM [trailing 12-month] construction EBITDA margin (highest level since 2008)—combined with improved project selection and the new non–fixed price model, this gives us greater confidence that ARE can achieve at least 7 per cent in 2026 (we conservatively estimate 7.3 per cent, providing a buffer for some potential execution risk).”
Arguing sector returns “should be favourable” and touting bullish internal signals, the analyst hiked his target for Aecon shares to $27 from $19 with a “buy” rating after rolling his valuation forward. The average on the Street is $22.09.
“U.S. contractor peers are up 116 per cent over the last year, outperforming the S&P 500 (35 per cent),” he said. “Sentiment toward the industry has shifted as cost inflation is now in check, project borrowing costs are down, government spending continues to be a tailwind and investors rotate into smaller caps. Moreover, we believe ARE is well set up to outperform given its expertise in demand sectors—utilities (22 per cent of revenue) and nuclear (19 per cent of revenue).”
“ARE repurchased 53,000 shares in August and 98,000 shares in September. Additionally, several insiders have purchased shares in the open market, most notably newly appointed CFO Jerome Julier ($310,000) and board member Eric Rosenfeld ($324,000).”
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According to National Bank Financial analyst Dan Payne, Logan Energy Corp.’s (LGN-X) recently completed $50-million equity financing should “support accelerated development and new play development in support of a greater depth of shareholder value as reflected by outsized growth.”
He resumed coverage of the Calgary-based exploration and production company, which is a spin-out of Spartan Delta Corp., with an “outperform” rating, seeing it positioned for “accelerating and deepening value capture for shareholders.”
“First, we highlight plans towards its accelerated development plan at Pouce Coupe, where the forthcoming investment in a 40 million cubic feet per day gas plant and associated infrastructure (at a cost of $32-million), should facilitate a step-change in production (2 times from 3.5 mboe/d [thousand barrels of oil equivalent per day] to 7 mboe/d) through mid-25 upon commissioning and ultimately towards its critical mass of 10 mboe/d.”
“Second, the company unveiled a newly aggregated Duvernay position throughout the greater-Kaybob region, with 140 prospective drilling locations identified across more than 150 sections of land.”
Mr. Payne also emphasized Logan increased its budget relative to his forecast by $20-million in both 2024 and 2025, including a goal of higher-than-anticipated infrastructure spending, in association with its financing and accelerated development plan.
“That program is intended to set the stage for its program, supporting 30-per-cent PPS growth and 80-per-cent CFPS growth (at company assessed price deck), as contribution to the long-range plan targeting outsized and compounding 30-per-cent PPS and 50-60-per-cent CFPS CAGR [compound annual growth rate] towards its critical mass at 20-25 mboe/d through 2028,” he said. “The program should continue to yield strong operating momentum and catalysts to come, where next updates on its Lator test and Simonette three-well pad should continue to validate its geologic and development model in support of its long-term depth of value. Recall, liquids and costs should continue to be augmented through the outlook (costs expected to be cut in half through the long-range outlook; expected down 35 per cent in H2/24). Funding of this program remains well-supported through its noted equity raise in addition to a newly minted $125-million credit facility (including $50-milllion in term debt).”
Mr. Payne has a $1.50 target for Logan shares. The current average on the Street is $1.61.
Elsewhere, other analysts resuming coverage include:
* Eight Capital’s Phil Skolnick with a “buy” rating and $1.85 target, rising from $1.70.
“LGN screens at the top on absolute production and production per share growth. It also screens amongst the top on a RLI and capital cost efficiency basis, which justify its premium EV/DACF multiple,” he said.
* TD Cowen’s Aaron Bilkoski with a “buy” rating and $1.50 target.
“Logan revealed a significant land position in the Duvneray,” he said. “This is in-line with its strategy of amassing a sizable position in underappreciated areas then proving up the resource. While its early days, this asset has the potential to bring significant volume growth. LGN also announced full-field development at Pouce and has greenlit an owned/operated gas plant in the area.”
“Logan’s capital program and valuation are defensive to near-term commodity prices as its equity upside resides in its ability to demonstrate repeatable performance, drive down capital costs, and de-risk the assets for a future inventory-seeking acquirer.”
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Propel Holdings Inc.’s (PRL-T) US$71-million acquisition of QuidMarket, a leading U.K. digital direct lending platform focused on the short-term subprime consumer loan market, is “chock-full of synergies” and brings focus on its “global expansion ambitions,” according to Eight Capital analyst Adhir Kadve.
“We like the acquisition for several reasons,” he said..” Primarily, it is immediately accretive (5 per cent by our estimate). Secondly, it adds an asset with a tremendous synergy potential. Thirdly, it opens up yet another attractive avenue of profitable growth for Propel in an attractive jurisdiction.
“While shares are up nearly 120 per cent year-to-date, we continue to see several opportunities for growth, including the core U.S.-based lending operations, the Canadian FORA operations (now bolstered with the KOHO partnership), and a key re-rate catalyst in scaling the LaaS partnership.”
From Thursday: A Scotia analyst upgrades Propel
Noting the Toronto-based financial technology company’s loan book has historically been internally funded, Mr. Kadve sees the deal, which was followed by a $115-million equity offering, as “an immediate opportunity for Propel to introduce debt financing and be able to supercharge growth.”
“QuidMarket’s adjudication model has largely been paper-based and each loan was evaluated individually,” he said. “As Propel is able to integrate its AI-powered model, we see that also supporting a strong growth trajectory. Finally, we see several opportunities for new product development, including risk-based pricing programs and thus introducing graduation programs and sharing best practices, including new partnerships on marketing channels.”
Maintaining a “buy” rating for its shares, the analyst increased his target by $3 to $38. The current average is $34.80.
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In other analyst actions:
* Citing volume and cost pressures, BoA Securities’ Ken Hoexter downgraded Canadian Natural Railway Co. (CNI-N, CNR-T) to “neutral” from “buy” with a US$122 price objective, down from US$129 and below the US$130.20 average.
“We lower our rating on Canadian National’s shares ... given below-estimate 3Q volumes and sustained network performance challenges post its August Conductor/Engineer labor lockout,” he said. “We lower our ... on our reduced EPS estimates and valuation multiple given rising earnings pressure. Our PO is based on 20 times (from 20.5 times) our 2025e EPS, the midpoint of its 5-year 18-22 times range. We lower our 3Q24/2024/2025 EPS estimates 7 per cent/3 per cent/3 per cent to C$1.64/C$7.26/C$8.25 from C$1.77/C$7.45/C$8.50. We estimate 2024 EPS growth of negative 0.3 per cent, from up 2.0 per cent, below CN’s low-single digit guidance, which it lowered from mid-single digits on Sep. 10, following months of labor uncertainty and a 4-day shutdown on its Canadian network. CN previously noted it expects 3Q24 EPS to be impacted by C$0.20/sh from the impact of labor uncertainty/work stoppage and Alberta wildfires.”
* Following Thursday’s announcement of a US$57-million deal with Editas Medicine Inc. for a share of its annual license fees for the Cas9 gene-editing technology, CIBC’s Scott Fletcher raised his DRI Healthcare Trust (DHT.UN-T) target to $18.50 from $17.50 with an “outperformer” rating, , while Raymond James’ Michael Freeman increased his target to $23 from $20 with an “outperform” rating. The average is $18.68.
“We like deal’s elegant structure, its engagement with a highly innovative counterparty (potential for repeat business), and what it says about DRI’s dealmaking engine: it’s fully intact, and it’s revving high,” said Mr. Freeman.
* CIBC’s Anita Soni cut her target for Equinox Gold Corp. (EQX-T) to $8.80 from $9.50 with a “neutral” rating. The average is $10.22.