Inside the Market’s roundup of some of today’s key analyst actions
Raymond James analyst Andrew Bradford downgraded TC Energy Corp. (TRP-T) to “market perform” from “outperform” due to the stock’s recent outperformance, which he thinks leaves other names in the pipelines and midstream energy sector with greater upside.
He also cut his price target on TC Energy to C$68 from C$73. The average analyst price target is C$72.15, according to Refinitiv Eikon.
TC Energy has been the best performing Canadian energy infrastructure stock so far this year, gaining 12%. The group overall is down 2%, with utilities are off 5%.
Mr. Bradford still likes TC Energy, even with the downgrade in rating.
“The long-term outlook for TRP remains strong. TC Energy’s above average exposure to natural gas with the build out of North American LNG should enable the company to deploy significant capital for many years to come. Moreover, we consider Bruce Power to be one of the best energy transition assets in our coverage universe,” he said in a note to clients.
But Mr. Bradford lowered his price targets on TC Energy and several other pipeline and midstream stocks within his coverage because of the impact of rising interest rates, which he believes will result in multiple compression. In other words, investors will start paying less for their earnings going forward.
Enbridge Inc.’s (ENB-T) price target went from C$58.50 to C$55.00. A “market perform” rating was reaffirmed.
Gibson Energy Inc.’s (GEI-T) target went from C$27.00 to C$25.00. He still rates the stock “outperform.”
Pembina Pipeline Corp. (PPL-T)’s target went from C$50.00 to C$45.00.
The Raymond James analyst suggests investors shift their focus to smaller caps in the sector given that these stocks have trailed the performance of larger companies of late.
“In no way are we calling the bottom for Midstream and Pipelines. If interest rates continue increasing and commodity prices continue declining, the group will almost certain encounter further selling pressure. That said, we expect the pressure will be a function of multiple compression and not a reflection of perceived cash flow risk,” Mr. Bradford said in a note to clients.
“In our view, the volume and cash flow outlook for midstream and pipelines has only improved over the course of 2022. We expect there will be a steady pace of project approvals over the 2H22 to meet the growing production demands, albeit not at the same pace of past cycles. Keyera and Gibson are being priced in the market as though their multiples were compressed and their estimates revised downward, which is not what we’re seeing for 2022/23. We recommend investors use this opportunity to add to positions,” he said.
His rating on Keyera Corp. (KEY-T) remains “strong buy”, with an unchanged price target of C$34.
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BMO Capital Markets analyst Jenny Ma is taking a much more conservative view on the Canadian real estate investment trust sector because of the surge in interest rates that has limited expected rate of returns. Higher interest rates also tend to temper the outlook for internal and external growth at REITs.
The following changes were made to her ratings and price targets:
Artis REIT (AX-U-T): Downgraded to “market perform” from “outperform”; target price cut to C$12 from C$14
Automotive Properties REIT (APR-U-T): Downgraded to “market perform” from “outperform”; target price to C$13.50 from C$14.85
Boardwalk REIT (BEI-U-T): Upgraded to “outperform” from “market perform”; price target to C$53 from C$60
Northwest Healthcare Properties REIT (NWH-U-T): Upgraded to “outperform” from “market perform”; target price to C$13.75 from C$15
Slate Grocery REIT (SGR-U-T): Downgraded to “market perform” from “outperform”; target price cut to $11.50 from $12.50
Ms. Ma said the changes in ratings reflect shifts in expected returns, rather than material changes in the bank’s investment thesis for the sector.
“The key risk factor impacting Canadian REITs is the dramatic spike in interest rates alongside accelerating inflation in Canada and globally,” Ms. Ma said in a note to clients. “Consequently, this casts uncertainty on cap rates (a key input in real estate valuation), pressuring asset prices and putting upward pressure on interest expense/downward pressure on cash flows.”
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Raymond James analyst Craig Stanley downgraded RIO2 Ltd. (RIO-X) to “market perform” from “strong buy” due to permitting uncertainties at the company’s Fenix Gold Project in Chile.
The Chilean Environmental Assessment Service has recommended to reject the Environmental Impact Assessment (EIA) at Fenix, known to be the largest undeveloped gold heap leach project in the Americas with estimated gold resources of 6.4 million ounces. It is aiming to become the first run-of-mine gold heap leach mine in Chile.
It’s now up to Chile’s Comision de Evaluacion Regional to vote on the EIA. This body includes 11 governmental institutions with environmental competencies, including the Ministry of Mining and the Environment Ministry. A decision on the EIA is expected within the next two weeks and is based on a simple majority. A 30-day period will follow in which the losing side can object.
Even if the Fenix EIA is denied, the company can resubmit once extra information is provided, according to the analyst. The construction permit was originally expected to be obtained in the third quarter of this year.
Mr. Stanley said he is now assuming Fenix is granted EIA approval in July, but he has delayed his expectations for first gold production to the third quarter of 2023. He also upgraded his cost estimates given inflation, and lowered his net present value valuation of the company.
He slashed his price target on RIO2 to 40 cents Canadian from C$1.50. The average analyst price target is $1.28.
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At least two analysts cut their price targets on Mdf Commerce Inc (MDF-T) after the provider of e-commerce hosted computer technology reported weak fiscal fourth quarter results. Acumen Capital lowered its target to C$2.50 from C$9, and downgraded its rating to “hold” from “buy”. BMO cut its target price to C$3 from C$4.
The average analyst price target is C$4.20.
Revenues in the quarter ended March 31 were $30-million, up 36% from a year earlier, but missing the consensus estimate of $32.7-million. The company reported a quarterly loss of 21 cents per share, much worse than the Street expectation of a loss of 8 cents.
“Given the near-term risks in the business model, we move to the sidelines until management can demonstrate profitable growth,” said Acumen analyst Nick Corcoran.
BMO analyst Deepak Kaushal, who is maintaining a “market perform” rating on the company, said he is lowering his estimates and target price because of slower revenue and higher costs that have arisen from ongoing deployment delays and high debt levels. He expects these issues to persist through fiscal 2023 before beginning to improve.
“Although default risk continues to appear low, we prefer to remain on the sidelines until either growth, margin and cash flow improve, or management pursues other strategic options to surface value and decrease equity risk,”. Mr. Kaushal said.
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Scotiabank analyst Orest Wowkodaw is placing his “sector perform” rating on Nevada Copper Corp. (NCU-T) under review due to heightened liquidity risk at the company amid weakening copper prices. He also cautioned that his previous estimates, and 70 cents per share target price, for the company should not be relied on.
On Friday, Nevada Copper disclosed that it was suspending most mining activities at its Pumpkin Hollow underground copper mine in Nevada to preserve cash. The company has not made payments due to certain creditors and vendors, including its mining contractor and working capital provider, and is currently in discussions with them.
Nevada Copper also disclosed that it is currently in default of its obligations under certain financing and contractual arrangements. If the company is unable to secure sufficient additional capital, Nevada Copper warned that it may need to enter creditor protection.
Mr. Wowkodaw noted that he previously estimated that Nevada Copper would require incremental capital of $100-milion to complete the ramp-up of the underground mine and to meet scheduled financial obligations. Nevada Copper exited the first quarter of this year with only $12-million in cash, and a net debt position of $180-million, he noted.
The average analyst price target is 64 cents.
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Canopy Growth Corp.’s (WEED-T) deal to exchange about $255-million of convertible debt into equity contains some positive and negative aspects, said CIBC Capital Markets analyst John Zamparo.
“The positive is that, without action, Canopy’s balance sheet had the potential to become even more leveraged given ongoing cash burn in excess of $100-million a quarter, and transferring about 17% of its total debt into equity provides some future relief. This is particularly true when raising equity, both in this industry and in a challenged market for equities overall, is quite difficult,” Mr. Zampara said in a note.
“The primary negative takeaway is that this deal contains a clause that the remaining balance (about $345-million) must be redeemed in cash in July 2023; we believe WEED may approach its US$200-million minimum liquidity covenant by late calendar year 2024,” he said.
Mr. Zampara reiterated an “underperformer” rating and cut his price target to C$3 from $5. The average analyst price target is $5.98.
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In other analyst actions:
First Quantum Minerals Ltd (FM-T): JP Morgan cuts target price to C$40 from C$45
Lundin Mining Corp (LUN-T): JP Morgan cuts target price to C$12.6 from C$14.3
Tecsys Inc (TCS-T): BMO cuts target price to C$47 from C$54; Cormark Securities cuts target price to C$47.50 from C$50
Apartment Income REIT Corp (AIRC-N): JP Morgan cuts target price to US$50 from US$56
Celanese Corp (CE-N): Scotiabank cuts target price to US$133 from US$170
Eastman Chemical Co (EMN-N): Scotiabank cuts target price to US$117 from US$131
Ferrari (RACE-N): Jefferies upgrades to hold rating; raises target price to US$180 from US$140
Kilroy Realty Corp (KRC-N): RBC cuts target price to US$68 from US$80
Kohls Corp (KSS-N): Citigroup cuts price target to US$30 from US$39
With files from Reuters
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Darcy Keith