Inside the Market’s roundup of some of today’s key analyst actions
Raymond James analyst Frederic Bastien downgraded Aecon Group Inc. (ARE-T) a notch to “outperform” from “strong buy” with a C$26 price target, citing a contractual dispute flaring up on the Coastal GasLink Pipeline project.
Aecon released earnings last week that Mr. Bastien described as “a wee bit light on revenue, but slightly ahead on EBITDA and EPS,” as compared to Street expectations.
Aecon announced that SA Energy Group, its 50/50 joint venture with RB Somerville, has started an arbitration to resolve significant scope changes, delays, and COVID-19 impacts on the Coastal GasLink Pipeline project.
“As we understand it, the project owner instructed SAEG to carry out a material change order without agreeing on the price for that work, and without making any additional payments to cover the increased costs. At issue is RB Somerville’s inability to continue funding its share of the cash flow requirements beyond 1Q22 should the situation not improve, at which point ARE’s obligation to fund further shortfalls would double,” Mr. Bastien said in a note.
“We do not know how this commercial dispute will shake out, but one would think Aecon holds the big end of the stick given today’s tight labour market and rising gas prices,” he added.
Elsewhere, ATB Capital Markets cut its price target on Aecon Group Inc to C$21 from C$24; TD Securities cut its target to C$22 from C$24; and Laurentian Bank Securities downgraded its rating to “hold” from “buy” while lowering its price target to C$20 from C$24.
But Desjardins Securities analyst Benoit Poirier thinks investors are overly concerned about the arbitration process on the Coastal GasLink Pipeline project, and that has created a buying opportunity.
“While 3Q results were decent, the stock was down almost 10% on October 29 (vs -1% for the S&P/TSX) following the disclosure of an arbitration process on the Coastal GasLink Pipeline project. We believe this is exaggerated in light of management’s strong operational track record and the importance of the project for the client. Hence, while we acknowledge the stock could track sideways until the situation is resolved, we believe the pullback offers an attractive entry point for long-term shareholders,” Mr. Poirier said in a note.
He has a C$25 price target and a “buy” rating on Aecon shares.
The average price target is now C$22.77, according to Refinitiv Eikon data.
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The “stars are aligning” for Home Capital Group (HCG-T), said BMO analyst Étienne Ricard in upgrading his rating for the stock to “outperform” from “market perform.”
“Shares are in the early innings of an outperformance period with HCG striving towards high teens return on equity potential via the return of excess capital, in our view” Mr. Ricard said in a note to clients.
“2022 is set to be rich in financial performance improvements, underpinned by accelerating Alt-A mortgage growth, funding diversification and the return of excess capital becoming more tangible,” he added. “The net result is potential for rising return on equity could act as a lever for multiple expansion.”
Alt A mortgages are those with a risk profile falling between prime and subprime and are a focus for Home Capital.
He has a C$49 price target on Home Capital. The average price target among analysts is $48.50.
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At least three analysts sharply cut their price targets on Hexo Corp (HEXO-T) after the cannabis producer’s auditors cautioned high debt levels are putting the company at risk of failing.
The company reported fiscal fourth quarter financial results last week that came in above Street expectations for revenues but margins were disappointing.
“The company’s audit opinion included a risk disclosure over the ability for the entity to continue as a going concern, predominately due to ~C$400M of senior secured convertible notes (issued as part of HEXO’s 2021 M&A activity). Management stated it has already entered into a number of amendments with the lender; however, also noted that sizable cash outlays may be required under existing terms,” Canaccord Genuity analyst Matt Bottomley said in a note.
Another concern with the company is recent material changes to its executive leadership, including the abrupt departure of Co-Founder and Chief Executive Officer Sebastien St-Louis and the resignation of the company’s Chief Operating Officer, Donald Courtney. The company introduced Scott Cooper as President/CEO, who joined HEXO from the company’s beverage joint venture with Molson-Coors.
Mr. Bottomley’s price target went to C$2 from C$7, with a “hold” rating. Elsewhere, ATB Capital Markets cut its target price to C$1.50 from C$6.
And at CIBC, analyst John Zamparo downgraded his rating to “neutral” from “outperformer” while reducing his price target to $2 from $5. “Concerns about HEXO’s balance sheet are growing and management’s inability to address those concerns creates a lack of confidence another equity offering can be avoided. We believe the stock will sharply recover, but a material decline before then is possible and we await visibility on addressing the balance sheet,” Mr. Zamparo commented.
The average price target among analysts is $3.78.
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Scotiabank analyst Konark Gupta trimmed his price target on shares of Air Canada (AC-T) to $28 from $31 ahead of its Tuesday’s earnings report to reflect higher fuel costs. But he thinks a lot of the negative effect of higher fuel costs are priced into shares already and the stock is poised to reap the benefit of demand bouncing back.
“We believe the market is already pricing in the fuel headwind given the stock is down 12% since late July vs. JETS ETF at -3% and XAL at -9% (jet fuel price is +20% in the past three months),” Mr. Gupta said in a note. “While fuel could potentially keep cash flows from breaking even in the near term, we are encouraged by recent demand and pricing trends as industry load factor reached 78% in August, even before Canada eased travel restrictions for non-U.S. residents and resumed direct flights to/from India in September,” he said.
“Similar to what we are currently witnessing in the freight markets, we think air travel demand and pricing have potential to accelerate quickly as soon as border restrictions or testing rules are fully lifted. Thus, we maintain our sector outperform rating to reflect a significant upside potential in fundamentals over the next 12 months,” Mr. Gupta said.
The average analyst price target is C$28.91.
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RBC analyst Greg Pardy upgraded Imperial Oil Ltd (IMO-T) to “outperform” from “sector perform” in the wake of solid quarterly results. He also raised his price target to C$51 from C$47, and he wasn’t alone: JP Morgan raised its target price to C$49 from C$44.
“We have upgraded Imperial Oil ... given the company’s strong leadership team, favourable long-term operating outlook, strong balance sheet, commitment to shareholder returns and attractive one-year potential return,” Mr. Pardy said in a note to clients.
On its third-quarter conference call, Imperial emphasized its commitment to returning cash to shareholders, and indicated a preference for doing share buybacks versus a special dividend, Mr. Pardy noted.
Imperial also indicated that it does not expect to pay material cash taxes in 2022. “This dynamic is the main driver of our cash flow revision for next year as well as a higher target price,” he said.
The analyst also believes the stock’s valuation is attractive: “Imperial is trading at a debt-adjusted cash flow multiple of 3.0x (vs. our global integrated peer group avg. of 4.1x), and at a free cash flow yield of 24% (vs. our peer group at 17%) in 2022E. In our opinion, Imperial should trade at an above average multiple given its low decline upstream portfolio, cash flow diversification via its refining and chemical segments, and impressive operating performance over the past few years,” he said.
The average price target among analysts is C$46.58.
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CIBC analyst Anita Soni downgraded Newmont Corp. (NEM-N) to “neutral” from “outperformer” while cutting her price target to US$69 from $81, citing “concerning commentary” provided on the company’s earnings call.
“After a downward 2021 guidance revision, NEM indicated in its [earnings] release it would address its longer-term outlook in December, but indicated on the call that 2022 production would be lower at costs similar to 2021 (which are elevated at $790/oz vs. prior 2022 expectations of $700/oz). NEM also noted that it believes that this inflationary cycle will last longer than normal and that cost improvements will come in late 2023 to 2027,” Ms. Soni said in a note to clients.
“The recent revisions to our 2021-2023 estimates would have changed our price target by $4/sh. However, the longer-term outlook remains unclear and, in our view, NEM will not outperform its peers with this uncertainty. Thus we prefer to remain on the sidelines pending NEM’s update in December 2021,” she added.
The average analyst price target is US$69.16.
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RBC analyst Drew McReynolds downgraded Thomson Reuters Corp. (TRI-N,TRI-T) to “sector perform” from “outperform.” The action was mostly related to recent strong performance of the stock, rather than any concerns about the company’s financials, and he raised his price target to US$122 from US$118.
“We continue to view Thomson Reuters as a high-quality core holding with an ability to compound returns for investors,” Mr. McReynolds said in a note. “With underlying valuation at 22.3x forwards twelve months EV/EBITDA (a notable premium to information publishing peers of ~17x), we see more limited near-term potential for further multiple expansion, and would look for more attractive and/or timely entry points. Fundamentally, we believe the company remains firmly on track to deliver on its previously provided financial outlook through 2023 (with potential for further upward revisions) and beginning as early as 2022 we expect the company to enter a new era of +8%-12% annual dividend growth underpinned by a step-up in free cash flow generation.”
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Mercer International Inc. (MERC-Q) was downgraded by RBC to “underperform” from “sector perform” with the price target being cut to US$8 from US$10.
Analyst Paul Quinn commented: “We believe that the next year will be challenging for Mercer’s pulp business given the potential combination of a negative demand shock (Chinese energy curtailments) and a sharp rise in low-cost BEK capacity. While these may not all directly impact Mercer, we believe that BSKP prices are likely to be pulled down by BEK given the potential for fiber substitution which should keep relative pricing in check. Given our negative industry outlook, the company’s leverage to pulp pricing, and relatively higher debt levels, we are reducing our rating to underperform.”
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In other analyst actions
* Agnico Eagle Mines Ltd (AEM-T): Cormark Securities cuts target price to C$93 from C$100
* Bombardier (BBD.B-T): Vertical Research raises target price to C$2.20 from C$1.60
* CAE Inc (CAE-T): TD Securities raises target price to C$42 from C$40
* Cameco Corp (CCO-T): RBC raises target price to C$29 from C$26
* Exxon Mobil (XOM-N): JP Morgan raises target price to US$77 from $65; Scotiabank raises target price to $70 from $66
* Facebook Inc (FB-Q): Independent Research cuts price target to US$270.00 from $300.00; rating sell
* Amazon.com Inc (AMZN-Q): Independent Research cuts PT to US$3900.00 from $4100.00;rating buy
* Chevron Corp (CVX-N: CFRA raises target price by $2 to US$127; Cowen and Company raises target price to $117 from $110; JP Morgan raises target price to $129 from $111; Raymond James raises target price to $137 from $134
* Eastman Chemical Co (EMN-N) JP Morgan cuts target price to US$110 from $130 and downgrades rating to “neutral” from “overweight”
* Newell Brands Inc (NWL-Q): JP Morgan raises target price to US$27 from $26 and upgrades rating to “overweight” from “neutral”
* Starbucks Corp (SBUX-Q): Citigroup cuts price target to US$129 from $144; Stephens raises target price to $130 from $118 and upgrades rating to “overweight” from “equal weight”
With files from Reuters
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Darcy Keith