Inside the Market’s roundup of some of today’s key analyst actions
While crude oil prices have fallen as low as US$65 per barrel during the current quarter and domestic gas prices are “nosediving,” National Bank Financial analysts Travis Wood and Dan Payne remain confident in the “financial strength and resiliency” of stocks in their coverage universe.
“The new reality is that companies within the sector are now much more comfortable at mid-to-low cycle pricing with sustainable payout ratios (average POR less than 100 per cent at US$65/bbl prices based on current capital budgets), historically low debt levels and reduced AECO exposure,” they said.
“In addition, despite what feels like mounting negative sentiment in both the energy space and the economy in general (maybe we are turning a corner with the wave of rate cuts?), we remain constructive on the fundamentals (inventories, exports, OPEC+ restraint (although less clear today), etc.), although we appreciate the growing uncertainty around the rapidly changing dynamics into year-end and have updated our assumptions to capture this growing uncertainty and volatility. Given the recent stagnation in gas prices, our outlook for natural gas remains unchanged and largely longer-term constructive (implicit in the forward curve).”
In a research report released Friday, the analysts made the analysts upgraded their commodity price assumptions to reflect their current macro views on conditions surrounding oil and gas. Their WTI forecast for 2024 fell by 5 per cent to US$75.50 per barrel (from US$79.50 previously) with their estimates for 2025 and 2026 and beyond dropped by 6 per cent and 10 per cent, respectively, to US$75 and US$70 (from US$80 and US$77.50). For NYMEX natural gas, their projection for the current fiscal year dropped 11 per cent to US$2.40 per thousand cubic feet (from US$2.70), while their 2025 and long-term expectations remained unchanged at US$3 per thousand cubic feet.
“Since we last updated our price deck as part of our Q2 preview, crude prices have backed off significantly (still down almost 20 per cent since July 1 despite the recent claw back), while natural gas prices, at least in the U.S., continue to firm up as winter heating season approaches and storage fills slower than expected (we’re ready whenever you are AECO),” they said.
“Zooming out, macro-related fears and uncertainty surrounding both sides of the supply-demand balance continue to whipsaw investors, with conditions in financial markets muddying the tangible dynamics present in the physical market. This uncertainty, largely related to the unwinding of OPEC+ voluntary cuts, continues to befuddle investors, with mixed messaging and speculation exerting downward pressure on price. Despite the noise, with interest rate cuts underway around the globe (the Fed recently committed to a 50 basis point cut, its first since 2020, with more expected later this year), we believe product demand should firm up in the coming months (crack spreads currently approaching COVID lows) as the easing of rates drives a ramp-up in industrial and consumer activity, which in turn should help buoy crude demand. While underwhelming Chinese demand data has added apprehension to the market, we believe upside risk exists as the Chinese government tries to kickstart growth, in addition to the growing risk of a larger, regional conflict across the Middle East.”
With the price deck changes as well as an adjustment to their valuation approach, the analysts made notable price reductions to stocks in their coverage universe on Friday.
“Even with the recent sell-off in crude, the set-up for the space remains compelling with our coverage group now trading at 2025 estimated EV/DACF [enterprise value to debt-adjusted cash flow] multiples of 6.3 times for the seniors, 4.3 times for the oil peers and 5.6 times for the gas peers (and FCF yields of 6 per cent, 6 per cent and 2 per cent, respectively.),” they said. “However, largely a result of our commodity price deck update, our 2024 and 2025 total cash flow estimates are down by 11 per cent and 10 per cent, respectively, driving our target prices lower by 7 per cent on average. The updated target prices imply a total return of 49 per cent, with the Outperform and Sector Perform names returning 56 per cent and 33 per cent, respectively. We have made no rating changes at this time.”
For senior and integrated companies, their changes are:
- Canadian Natural Resources Ltd. (CNQ-T, “sector perform”) to $52 from $58. The average on the Street is $55.23.
- Cenovus Energy Inc. (CVE-T, “outperform”) to $31 from $38. Average: $33.45.
- Imperial Oil Ltd. (IMO-T, “sector perform”) to $112 from $115. Average: $98.38.
- Suncor Energy Inc. (SU-T, “outperform”) to $73 from $77. Average: $60.69.
For large and mid-cap stocks, their changes are:
- Advantage Energy Ltd. (AAV-T, “outperform”) to $11.50 from $13. Average: $13.85.
- ARC Resources Ltd. (ARX-T, “outperform”) to $31 from $32. Average: $30.47.
- Athabasca Oil Corp. (ATH-T, “outperform”) to $6.50 from $7.50. Average: $6.56.
- Birchcliff Energy Ltd. (BIR-T, “sector perform”) to $6 from $6.50. Average: $6.77.
- Baytex Energy Corp. (BTE-T, “outperform”) to $7.50 from $8. Average: $6.35.
- Freehold Royalties Ltd. (FRU-T, “outperform”) to $16.50 from $17. Average: $17.61.
- Headwater Exploration Inc. (HWX-T, “outperform”) to $9.50 from $10.50. Average: $9.88.
- Kelt Exploration Ltd. (KEL-T, “outperform”) to $8.75 from $9. Average: $8.82.
- Meg Energy Corp. (MEG-T, “sector perform”) to $31 from $35. Average: $33.96.
- Nuvista Energy Ltd. (NVA-T, “sector perform”) to $14.50 from $15. Average: $16.95.
- Ovintiv Inc. (OVV-N/OVV-T, “outperform”) to US$55 from US$66. Average: $58.91.
- Peyto Exploration & Development Corp. (PEY-T, “outperform”) to $18.50 from $18. Average: $17.85.
- Prairiesky Royalty Ltd. (PSK-T, “sector perform”) to $33 from $31. Average: $30.02.
- Spartan Delta Corp. (SDE-T, “outperform”) to $5.50 from $6. Average: $5.82.
- Tamarack Valley Energy Ltd. (TVE-T, “outperform”) to $6.75 from $7.25. Average: $5.36.
- Vermilion Energy Inc. (VET-T, “outperform”) to $15.50 from $19. Average: $20.48.
- Veren Inc. (VRN-T, “outperform”) to $15.50 from $19. Average: $14.38.
- Whitecap Resources Inc. (WCP-T, “outperform”) to $14.50 from $15.50. Average: $13.79.
Elsewhere, Wells Fargo’s Roger Read cut his targets for Canadian Natural Resources to $47 from $52 and Suncor to $60 from $68 with “overweight” ratings for both after updates to his firm’s commodity price deck.
=====
Desjardins Securities analyst Jerome Dubreuil sees Telus International Inc.’s (TIXT-T) free cash flow as “attractive, especially given the reassuring backstop Telus provides.”
However, he’s “cautious” on its investment case, believing the Street’s 2025 margin expectations are “looking too ambitious,” expecting increasing leverage and having a “low conviction” in his financial forecast due to “uncertainty about the impact of AI.” That led him to initiate coverage with a “hold” recommendation on Friday, seeing it “under significant disruption but still relevant.”
Andrew Willis: How market realities have tossed a wrench into Telus’s spinout plans
“Silicon Valley’s increased focus on cost control in the last few years, as well as the accelerated usage of AI in general customer experience management (CXM), has created a perfect storm affecting TIXT’s profitability,” said Mr. Dubreuil. “TIXT’s response to the innovator’s dilemma is to embrace change, invest significantly in AI and accept the need to cannibalize a portion of its business in order to remain at the forefront of CXM innovation. It is difficult to predict the ultimate impact of AI on the CXM business, but we are confident that most companies will continue to require professional CXM help from companies such as TIXT to assist them in their digital evolution. That said, the deterioration of results in the customer base (excluding TIXT’s top two clients) is a concern for us. In the AI data solutions service line, we believe the strong Google partnership speaks to the high quality of TIXT’s offering.”
Mr. Dubreuil does think Telus International’s valuation would be seen as “low enough” if the Street’s expectations were more “appropriate.”
“TIXT’s valuation has adjusted to reflect lower growth expectations and higher uncertainty,” he said. “TIXT now trades at an attractive 18-per-cent FCF yield (using our definition, which is more conservative than the company’s) and 5.9 times EV/2025 adjusted EBITDA on our numbers (5.3 times on consensus). However, we believe the recent changes to the definition of EBITDA and its new profitability paradigm are not yet fully reflected in the Street’s margin forecast, which looks too optimistic to us. We do not expect TIXT to be privatized in the medium term, although such a scenario offers downside protection, in our view.”
He added: “.Among the top arguments we see for investing in TIXT is the belief that it is predominantly a contact centre company; in reality, contact centre revenue represents less than 10% of consolidated revenue. Hence, we believe predictions of a downward step function in revenue stemming from AI disruption are unlikely to materialize. Moreover, we anticipate there is an opportunity for the CXM industry to eventually capture a part of the value that genAI will create for the global customer relationship market. In addition, we believe the pace of growth in TIXT’s relationship with Google puts TIXT in a position to better understand the AI revolution and possibly foresee some of the innovations coming to the AI space. We also highlight that TIXT’s relationship with TELUS protects the downside of the story. TIXT being taken private is also a possibility, although this is not our base-case scenario. Finally, the 18-per-cent FCF yield (our definition) is robust and offers strong share price growth potential if the company manages to show it can grow earnings in an AI-filled world.”
He set a 12-month target of $5.20 (Canadian) per share. The current average is US$6.99.
“Overall, we argue that TIXT will eventually turn the corner and harness the power of AI in many of the solutions it offers, but we do not believe the current consensus fully reflects the negative financial adjustments required to transition the model in 2025,” he said.
=====
National Bank Financial analyst Maxim Sytchev sees Wajax Corp. (WJX-T) as “not expensive,” however he warns its return profile is “generally commensurate with current share price.”
“With $2.1 billion top line (largest Hitachi dealer in North America), the company is still sub-scale vs. CAT/Komatsu players, with a leadership position solely in mining shovels. Our due diligence/industry dynamics suggests that systems investments/CAPEX intensity might need to rise despite current management making the company more efficient; lagging ROIC [return on invested capital] vs. best-of-bread is a function of lower Product Support & Rental Penetration. Canada-only/(with a heavy dose of Western Canada) also makes the shares dependent on WTI,” he noted.
In a research report released Friday titled Valuation alone is not a catalyst, the analyst initiated coverage of the Mississauga-based dealer and distributor of industrial parts and equipment with a “sector perform” recommendation, seeing its growth strategy become less cyclical through M&A activity but warning competition is “quite fierce in most verticals.”
“Given WJX’s exclusive distribution rights with many key vendors (including Hitachi at approximately one-quarter of overall revenues) and OEMs carefully segmenting geographic coverage for their dealers/distributors (i.e., CAT with FTT and TIH in Canada), we do not foresee any major acquisitions in the Equipment Sales vertical and expect management to focus on organic market share growth for new equipment sales and broadening/lengthening the significant associated Product Support tail (for context, Hitachi estimates total parts and services sales for a mining excavator to be 3 times that of the original purchase price over a 15-year service life),” said Mr. Sytchev. “On the other hand, the market for both Industrial Parts and Engineered Repair Services remains highly fragmented, and we expect M&A-driven growth to come from this vertical. Geographically, the focus will likely remain on Canada for the time being. While we suspect opportunities similar to Tundra Process Solutions (in terms of magnitude) will be more challenging to source, we see a long runway for smaller tuckin acquisitions given the multitude of small, private and family-owned businesses in this space that can be acquired at reasonable (likely mid-single-digit EV/EBITDA multiples) prices. Progressively lower rates/financing costs should also improve the extent of EBITDA, margin and EPS accretion attributed to future acquisitions.”
In justifying his cautious stance, Mr. Sytchev said he needs to see “more to have a structural positive skew (or [a] lower entry point).”
“There are two camps when it comes to WJX,” he said. ”The first (bullish one) looks at the business in isolation and compares it to the overly levered dynamic of circa 2016 (or points of the pandemic). In that prism, the business is objectively better (i.e., less geared), while the promise of less cyclical ERS growth appears to be compelling, in addition to Hitachi now controlling its manufacturing and distribution destiny post Deere JV dissolution. When, however, examining the thesis in the context of larger equipment distribution peers, the subscale nature of operations (only mining shovels deliver true differentiation), lack of meaningful recent organic growth in ERS, post-pandemic equipment pricing normalization (hence our below-consensus 2025E projections), negative macro indicators in Canada and returns that place the company in a generally challenging light, we adhere to the ‘cheap for a reason’ argument here. As a result, we launch coverage of Wajax shares with a Sector Perform rating ...as we see better risk / reward opportunities elsewhere in our coverage universe at the moment. At the same time, we acknowledge management’s drive to improve the business; as a result, we remain open-minded, but price/entry point sensitive.”
He set a target of $26 per share. The average on the Street is $28.25.
=====
Calling Royal Gold Inc. (RGLD-Q) “under the radar and underappreciated,” TD Cowen analyst Derick Ma named it to the firm’s “Canada Best Idea” list.
“RGLD has underperformed most of its streaming and royalty peers year-to-date,” he said. “We attribute underperformance to past transactions which were viewed as expensive at the time of acquisition and a lack of investor attention due to its U.S.-only listing. There are now a number of asset-specific catalysts ahead, in our view, and RGLD trades at a larger than normal valuation discount to larger royalty peers.”
Mr. Ma thinks the Denver-based company is “well-positioned to outperform” its peers,” including its “Goldilocks size” given “it has enough cash flow and liquidity to support $500-million-plus sized deals; however, it is small enough that midsized deals in the $100-300-million range can still make a significant impact to its GEO growth profile.”
He has a “buy” rating and US$169 target for its shares. The average is US$158.73.
“We believe RGLD’s potential catalysts are largely underappreciated, as RGLD continues to be penalized for a series of relatively expensive deals,” said Mr. Ma. “RGLD completed several transactions within a 12-month period (August 2021 through 2022), resulting in mixed market reactions due to relatively expensive initial deal valuations based on the known mine plan at the time. More than 24 months later, we believe the growth potential of these assets is beginning to surface, especially at Cortez and Great Bear. While the management team is largely unchanged, we believe RGLD has received a lot of investor feedback and will likely approach and present their transactions differently going forward. Furthermore, RGLD has effectively repaid all of its debt and is well positioned to fund the next leg of its growth in a strong deal environment.”
=====
National Bank Financial’s Jaeme Gloyn said he came away from Element Fleet Management Corp.’s (EFN-T) recent analyst presentations in Mexico “even more confident in the long-term organic growth outlook, operating leverage and balance sheet optimization themes” that form the basis for his “outperform” rating for its shares.
“EFN has ample opportunity for growth in Mexico,” he said. “EFN is set to benefit from macro tailwinds in Mexico including near-shoring driving foreign direct investment and increased investments in transportation and mobility. Opportunity for further market share growth as 65 per cent of fleets are self-managed and 20 per cent of the market is banks and OEMs not offering fleet services. EFN noted capturing 10 per cent of self-managed fleets represents $175-million in incremental revenue (131 per cent of 2024 Mexico revenue). Share of wallet growth in Mexico as services penetration lags Canada and U.S. EFN has proven their success in adding services revenue as EFN has invested in the sales structure and operations and advisory teams. There is opportunity for further penetration as 59 per cent of fleets have more than 2 units per VUM.”
While he’s bullish on its prospects in Mexico, Mr. Gloyn emphasized the global growth opportunity is “even bigger,” noting management has “strong conviction” in its ability to reach a 6-8-per-cent organic revenue growth target and suggesting further upside is possible.
“We see lots of low-hanging revenue/expense saving fruit as EFN executes the digitization and automation vision,” he said. “The Autofleet acquisition is an important accelerator.”
Mr. Gloyn raised his Street-high target for Element Fleet to $37 from $34. The average is currently $30.81.
“Element is a Top Pick that we view as a core holding,” he concluded.
=====
In other analyst actions:
* Eight Capital’s Adhir Kadve moved Payfare Inc. (PAY-T) to “under review” from “buy” and removed his target price for its shares (previously $13). The average is $9.71.
“[Thursday] night, Payfare announced that the company and its largest customer, DoorDash (Not rated), will not be renewing their partnership in 2025,” he said. “There is no denying that this is a negative event for the company and one that changes the company’s financial profile on a fundamental level. The company will now be left with the majority of its revenue from its recently renewed Lyft (Not Rated) contract and from the recently launched Uber Pro Card with Uber in Canada. Based on the press release below DoorDash will allow the contract to play out until its end date of February 2025 and then will not renew. As such, we do not believe that our Q3/Q4 estimates are impacted, but we see a significant impact on our F25 estimates.”
* Ahead of its Oct. 10 quarterly release, Canaccord Genuity’s Luke Hannan raised his Aritzia Inc. (ATZ-T) target to $56 from $52 with a “buy” rating. The average is $50.50.
“For the quarter, we forecast net revenue of $588 million, above consensus’ $584 million and at the high end of management’s guidance of $570-$590 million,” he said. “We also forecast adjusted EBITDA for the quarter of $48 million, above consensus’ $44 million, and Q2/F24′s $21 million.
“Recall, Aritzia began Q2/F25 with year-over-year sales growth pacing at the top end of the 7-10% guidance range. Bloomberg Second Measure credit and debit card data (Figure 2) suggests US sales continue to be robust, which we believe is driven by (1) resonance of newness in assortment with Aritzia’s clientele, and (2) softer comps; considering the company is also lapping softer comps in Canada (Q2/F24 Canadian sales declined 2.7 per cent year-over-year), we expect Aritzia to deliver healthy top-line growth for Q2/ F25, which should allow the company to meet or exceed the top end of its $570-$590 million revenue guidance for the quarter.”
* In reaction to its inaugural Investor Day event on Tuesday, Mr. Hannan also increased his target for Kits Eyecare Ltd. (KITS-T) to $14.50 from $12.50 with a “buy” rating. The average is $14.36.
“In our view, KITS remains well-positioned to maintain its current growth trajectory, driven by its state-of-the-art manufacturing operations, product innovation, and focus on high-return customer acquisition channels such as influencer marketing,” he said. “A deeper dive on each of the above topics throughout the day led us to come away with greater conviction that the company can achieve its internal goal of generating $500 million of annual revenue in five years’ time, implying a revenue CAGR [compound annual growth rate] of 25-30 per cent, realizing ample margin expansion through operating leverage over that period as well.”
* BMO’s Ben Pham raised his Fortis Inc. (FTS-T) target by $1 to $62, exceeding the $60.19 average, with a “hold” rating.
“FTS five-year capex program (up 4 per cent) and dividend increase of 4 per cent highlight that infrastructure growth remains robust across its diversified regulated utility footprint,” said Mr. Pham. “Focus on organic growth is creating a lot of value for shareholders and external equity needs are contained given above-average DRIP participation. With the stronger rate base CAGR outlook and more favorable interest rate backdrop, we are nudging up our target ... maintain our Market Perform rating largely on relative return.”
* Calling it “a rapidly advancing gold developer preparing to commence construction, with high-grade regional exploration upside that we expect to add value and enhance the Company’s market valuation over the coming months,” Ventum Capital Markets’ Alex Terentiew initiated coverage of Montage Gold Corp. (MAU-X) with a “buy” rating and $2.90 target, exceeding the $2.59 average.
“At the current 0.53 times P/NAV valuation and with financing and exploration catalysts pending, we view the current share price as an attractive entry point to gain ownership of one of Africa’s most attractive gold companies,” he said.
* Following the announcement of a $17.8-million funding award from the U.S. Department of Defense, TD Cowen’s Aaron MacNeil bumped his Street-low Nano One Materials Corp. (NANO-T) target to $1 from 90 cents with a “hold” recommendation. The average is $3.03.
“This funding announcement follows a recent workforce reduction of 20 per cent and provides Nano One with an additional cash runway during a time of slowing EV demand,” he said. “That said, this capital is committed to specific growth spending objectives, and we believe that Nano One will still require additional financing to support its ongoing operations.”
“Nano One continues to be the recipient of non-dilutive government grants which are earmarked for specific development initiatives that are being contemplated for its Candiac facility. After achieving commercialization, we believe there is a possibility that the U.S. Department of Defense could become a Nano One customer that purchases its LFP cathode active materials. We highlight the next phase of Candiac’s capacity expansion will primarily feature automation technology, increasing its production to 200 tonnes per annum at a cost of $10-million to $15-million.”
* Following this week’s Investor Day, CIBC’s Sumayya Syed raised her Primaris REIT (PMZ.UN-T) target to $18 from $17 with an “outperformer” rating, while Canaccord Genuity’s Mark Rothschild moved his target to $19.50 from $18 with a “buy” rating. The average is $17.46.
“Primaris is unique as Canada’s only REIT focused on enclosed malls. It further differentiates itself with a more conservative financial structure with both lower leverage and payout ratio,” said Mr. Rothschild.
* After updating his forecast, Raymond James’ Brian MacArthur raised his Teck Resources Ltd. (TECK.B-T) target to $73 from $71 with an “outperform” rating. The average is $73.72.
“We believe Teck offers good exposure to coal, copper, and zinc. We also expect significant growth in copper with the start up of QB2,” he said.