Inside the Market’s roundup of some of today’s key analyst actions
Though fundamentals in the lithium sector remain “favourable,” National Bank Financial analyst Lola Aganga warned price volatility is likely to persist through the year.
In a research report released Thursday, she upgraded her price deck assumptions in response to that turbulence, which has seen battery-grade lithium carbonate and hydroxide prices jumped 300 per cent and 260 per cent in 2021 with further gains early this year.
“Prices were buoyed by tight supply, which was exacerbated by COVID-related disruptions to freight distribution channels, Chinese restocking pre-Lunar New Year, record motive battery production in China as well as a general steady improvement in demand as developed economies outlined more aggressive ESG targets and developing economies recovered from the slowdown of the previous year,” she said.
“In 2022, we expect these factors to continue impacting the market through at least the first half of the year - since the start of 2022, battery-grade lithium carbonate and hydroxide are already up 30 per cent and 10 per cent, respectively, as domestic brine output in China has been affected by seasonal production cuts in December 2021 through January 2022. However, record prices in the last 12 months have incentivized new supply and accelerated brownfield capacity additions. Several projects are scheduled to be commissioned in the second half of 2022 and we expect incoming supply to ease market tightness and could result in cooling prices, addressing some concerns of rising material costs impeding EV cost parity – the point at which an automaker can theoretically build and sell an EV with the same margin as a comparable combustion vehicle, without the cushioning effect of green subsidies.”
Ms. Aganga touted the demand stemming from the global push for electric vehicles, expecting it to comprise 60 per cent of lithium chemical demand in 2022 and rise to 70 per cent to 2025.
“Nearly 35 countries have pledged towards sales of all new cars and vans being zero emission by 2040, as well as to set ‘more ambitious’ medium-term goals for emissions in 2030, by the end of 2022. The conclusions from the COP26 summit reinforced the underlying thesis for the green energy revolution as governments take measures to incentivize electrification in the transportation and manufacturing sectors, to meet reduced emissions targets for their jurisdictions. These developments have led to an increase in the consensus base case demand scenario for 2022 and 2023 of 57 per cent and 55 per cent, respectively.”
The analyst expects markets to be “tightly balanced” despite an estimated 220,000 tonnes of LCE capacity coming online this year and 135,000 planned by the end of 2023. She also warned of a “notable” supply deficit emerging by the end of 2025.
With that view, Ms. Aganga made a pair of target price changes to stocks in her coverage universe:
* Lithium Americas Corp. (LAC-T, LAC-N) to US$40 from US$38.50 with an “outperform” rating. The average on the Street is US$40.20.
“LAC remains our top pick as a fully-financed, near-term producer advancing the largest new brine operation in the last decade on track for initial production in H2/22, situated in the bottom quartile of the total cash cost curve,” she said. “Although there remains some headline risk pending a federal BLM ruling on its Thacker Pass project in Q1/22, we see a limited impact to the overall development timeline of the project which is currently on track for construction to begin in 2022.”
* Sigma Lithium Corp. (SGML-X) to $17 from $13 with an “outperform” rating. Average: $13.
“Low-cost spodumene developer, expected to achieve initial production at its flagship Grota do Cirilo project in Brazil by Q2 2023 at our estimates,” she said. “Our positive outlook on the company is partially offset by its tightly restricted share liquidity as well as our delayed production timeline given local reports of significant torrential rainfall in Minas Gerais, Brazil in the past month impeding mining and construction operations and SGML’s ongoing negotiations of EPCM contracts to complete construction and operation of Grota do Cirilo.”
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Seeing its valuation as “too attractive to ignore,” Scotia Capital analyst Orest Wowkodaw raised his rating for Ero Copper Corp. (ERO-T), touting its growth prospects.
“In our view, Ero’s historical valuation premium was largely driven by the very prospective exploration upside of the Curaca Valley, combined with a strong and highly aligned management team, a first quartile operating cost position, a solid operating track record, and a low risk balance sheet,” he said. “Although the greenfield exploration has taken longer than anticipated to bear meaningful fruit (ie. more investor patience is required), brownfield efforts have been wildly successful to date, as demonstrated by the discovery of the large and high-grade Pilar Deepening zone (P&P reserves of 11.0Mt at 1.76-per-cent Cu [copper]). ERO has consistently delivered on its operational guidance with extremely competitive costs (2021 Cu output of 46kt exceeded guidance by 5 per cent at estimated C1 costs of $0.69/lb). The balance sheet has never been healthier (net cash of $58M as at Q3/21).”
Mr. Wowkodaw also called the outlook for the Vancouver-based company “attractive,” noting: “In 2022-2024, Ero is planning to significantly re-invest in its flagship MCSA asset and develop the Boa Esperanca Cu project, driving peer leading Cu growth by 2025. While planned capex was markedly higher than anticipated, resulting in negative projected FCF ahead, we forecast a peak net debt of only $115-million in Q4/23 and a return to net cash by year-end 2024. In our view, the company’s ongoing exploration upside and significant growth prospects warrant a premium valuation. However, even if investors were to conservatively assign zero value to exploration potential, a 1.0 times P/NAV multiple (in-line with peers) would suggest fair value of $21.46 per share (a 24-per-cent return).”
Moving the stock to “sector outperform” from “sector perform,” Mr. Wowkodaw raised his target to $24 from $22. The average is $26.
““ERO shares are currently trading at a very attractive P/NAVPS multiple of 0.81 times, well below the shares historical average of 1.32 times (range of 0.70 times to 2.00 times),” he said. “Relative to the mid and large cap peers, ERO shares are now trading at a meaningful discount to the average P/NAV of 1.03 times. Moreover, we estimate that ERO shares are trading at a relatively modest implied copper price of $3.61/lb, well below the peer group average of $4.09/lb (only TECK.B-T is cheaper).
“The shares also look attractive on a 2022E-2023E EV/EBITDA basis, trading at 4.1 times and 4.2 times, vs. the peers at 4.5 times and 4.4 times.”
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Believing its recent valuation pullback offers an “excellent buying opportunity,” Raymond James analyst Brad Sturges upgraded Nexus Real Estate Investment Trust (NXR.UN-T) to “strong buy” from “outperform,” touting its “improving FD AFFO/unit growth outlook, and several possible near-term positive catalysts that may support a further re-rate in Nexus’ P/AFFO multiple.”
Mr. Sturges emphasized industrial acquisition activity is “off to a fast start” in 2022 after Nexus “achieving transformational external growth” last year.
“Earlier this week, Nexus provided an acquisition update,” he said. “In 4Q21, Nexus completed various transactions in Montreal, London, Windsor, Regina, Moncton, and Alberta, totaling approximately $416-million (average cap rate: 5.3 per cent). In 2021, Nexus bought 24 industrial assets comprising 4.7 million square feet of GLA, for $685-million (average cap rate: 5.8 per cent). In 2022 year-to-date, Nexus has acquired or intends to buy various industrial properties in London, ON, Montreal, QC, Regina SK, and Edmonton, AB for $237-million (average cap rate: 5.1 per cent). In 2023, Nexus also has under contract to buy newly constructed Ontario industrial assets for $167-million (estimated cap rate: 5.1 per cent).”
Seeing the planned sale of non-core office and retail assets a “key potential near-term positive catalyst,” Mr. Sturges maintained a target of $14.50 for Nexus units. The current average on the Street is $14.45.
“Pending TSX approval, Nexus intends to change its name to Nexus Industrial REIT to reflect its ongoing transformation into a pure-play Canadian industrial REIT, he said. “We believe Nexus still offers attractive P/AFFO multiple expansion potential, which may be supported by several near-term positive catalysts, including: 1) increasing its industrial facility weighting to over 90 per cent; 2) the execution of non-core asset sales; 3) improving organic and FD AFFO/unit growth year-over-year in 2022; and 4) the completion of ongoing and identified value-add redevelopment and expansion projects.”
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RBC Dominion Securities analyst Ken Herbert thinks MDA Ltd. (MDA-T) is poised for “significant top-line growth” as it “executes on its three flagship programs and pursues material new business opportunities.”
Seeing its stock currently presenting an “attractive” entry point, he initiated coverage of Brampton, Ont.-based company, which began trading in early April of 2021 after its $400-million initial public offering following its separation from Maxar Technologies Inc. (MAXR-T), with an “outperform” rating.
“As a leading merchant supplier to the legacy and emerging space ecosystem, we believe MDA is well positioned to benefit from continued market growth,” said Mr. Herbert. “Coming off a 2020 $412-million revenue trough, the company currently projects 50-60-per-cent top-line growth in 2022, with consensus implying another 50-per-cent growth in 2023. Management has provided a revenue forecast of $1.5-billion in 2025 based on upside in its flagship programs ($350-million) and new business ($775-million) relative to the 2020 trough. We fear the 2025 growth expectations may be overly ambitious, but near-term upside should be a positive.”
While MDA recently lowered its 2022 revenue guidance to account for program delays and supply chain issues, the analyst said its three flagship programs - Robotics & Space Ops, Satellite Systems and Geointelligence - “appear well funded and supported even with incremental timing risk.”
“To support the revenue growth, the company is in the early stages of a significant investment cycle,” he noted. “The company plans $650-million in capital investments over the next five years to support primarily its CHORUS earth observation system and expanded satellite manufacturing capacity. The company also plans to hire 600 people and to invest in its program execution and management capabilities. We expect investors to focus on top-line growth and adjusted EBITDA, but eventually FCF will become a bigger focus for investors. The investments and mix are expected to limit margin upside, with adj. EBITDA margins of 21 per cent in 2020 moving to 18-20 per cent in 2025, according to the company.”
With the uncertainty brought by the investment cycle, Mr. Herbert thinks margin assumptions “reflect conservatism,” but he thinks “near-term upside should be a positive even if management walks off its 2025 outlook.”
He set a target of $13. The average target on the Street is $17.90.
“The unwinding of the Maxar relationship is a net positive for MDA. We believe the company is now better positioned to pursue a range of space opportunities, and the company has a leadership position as a merchant supplier in a range of space markets. Our valuation multiple represents a discount to defense primes, but is in line with MAXR. The higher top-line growth offsets investment and margin risk, in our view,” said Mr. Herbert.
Concurrently, he initiated coverage of Maxar Technologies Inc. (MAXR-N, MAXR-T) with an “outperform” recommendation and US$42 target.
“After multiple delays on the launch of its WorldView Legion satellite constellation, the expected 2022 launch of the six-satellite constellation will be a positive catalyst,” he said “The company remains well positioned for the upcoming US Government EOCL contract, even with additional competition. The stock is a core holding for exposure to legacy and ‘NewSpace’ markets. The current valuation of 9.2 times 2022 EBITDA reflects the risk to the 2023 outlook, and provides a compelling risk-reward.”
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National Bank Financial analyst Cameron Doerksen remains bullish on the Canadian commercial Aerospace industry, seeming the Omicron variant as a “short-term setback.”
Pointing to “positive” trends in global passenger traffic prior to onset of the latest slowdown, he remains “confident” air travel will rebound in 2022 with a full recovery by 2024.
“Aircraft deliveries at bellwethers Airbus and Boeing rebounded significantly in 2021 with 951 total deliveries versus 723 in 2020,” the analyst said. “New aircraft order activity also rebounded in 2021 and the combined Airbus and Boeing backlog sits at 12 years of production which will support production rate increases in 2022 and beyond, which is positive for both HRX and CAE.”
“On a global basis, in 2021, business jet flights grew 7 per cent relative to the pre-pandemic levels in 2019 according to WingX, reaching an all-time record. High business jet utilization as well a very few jets available on the used market points to a continuation of strong new jet order activity and potentially higher production rates for Bombardier.”
Mr. Doerksen also thinks the outlook for the defence sector “remains positive” as military spending increases to address “growing threats.”
“Canada may finally select its next fighter jet in 2022 and both CAE and HRX stand to benefit regardless of which jet wins the competition,” he said.
With that view, Mr. Doerksen made a pair of target price increases on Thursday. They are:
* CAE Inc. (CAE-T, “outperform”) to $45 from $44. The average on the Street is $40.30.
“A pullback in global airline capacity due to Omicron will likely negatively impact pilot training demand in the short term, but we remain confident the company’s Civil results can be nearly fully recovered in CAE’s F2024 (ended March),” he said. “With the cost reductions the company is implementing and the addition of the higher margin L3Harris Military Training division, we believe CAE will be a more profitable company post the pandemic
* Héroux Devtek Inc. (HRX-T, “outperform”) to $26 from $23. Average: $24.08.
“HRX currently generates more than 70 per cent of its revenue and the majority of the company’s backlog is defence-related providing good revenue visibility,” he said. “The company has new defence contracts that are ramping up over the next year supporting defence revenue growth (CH-53K helicopter, Saab Gripen fighter, new Lockheed-Martin development program). Furthermore, we believe HRX will win additional aftermarket contracts to build on its existing work manufacturing the complete landing gear for the F-18 and F-15 fighter jets.
“Commercial end markets have seen the bottom. In addition to the higher production rates at Airbus and Boeing, we expect over the next few years, HRX will benefit from a new actuation systems contract for Boeing widebodies as well as the ramp up of the Falcon 6X business jet program.”
Mr. Doerksen maintained a $2.50 target, exceeding the $2.32 average, and “outperform” rating for Bombardier Inc. (BBD.B-T).
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Badger Infrastructure Solutions Ltd. (BDGI-T) is “primed for the next chapter of growth,” according to Scotia Capital analyst Michael Doumet.
However, he initiated coverage of Calgary-based company with a “sector perform” rating on Thursday, saying he will “remain on the sidelines until we get further evidence of enhanced utilization and margin improvement, both of which have acted as positive catalysts in the past.”
“Badger is a vertically integrated hydrovac manufacturer/operator with a multi-year runway for double-digit organic growth,” said Mr. Doumet. “While its recent margin performance has disappointed, we think a turn in the operating and financial profile (management implemented several initiatives) can, once again, bring to light the significant long-term earnings growth potential. Increased visibility of such an inflection would act as a positive catalyst for the shares, in our view.”
Calling it “an organic-first growth story” that “generates sufficient free cash flow (FCF) to self-fund double-digit growth,” Mr. Doumet expects Badger’s focus to term to the U.S. hydrovac market, which he thinks is 10 years behind Canada in terms of adoption.
“Badger aims to double its U.S. revenues and grow consolidated adjusted EBITDA by an average of 15 per cent per year over the next three to five years (from a 2020 base),” he said.
“Why is the hydrovac market expected to grow by so much? Hydrovac trucks provide safe excavation, trenching, and daylighting (the uncovering and exposing of underground utilities, cables, and pipelines) around critical infrastructure in congested underground conditions and reduce the probability of inadvertently striking power, communication, water, and sewer lines, which is costly, disruptive, and dangerous. According to the Common Ground Alliance, line strikes cause an estimated $30 billion of damage to critical underground infrastructure in the United States each year – and the United States has lagged in hydrovac adoption.”
Moving forward, Mr. Doumet thinks Badger’s transformation from “operations-led to organization-led” will be a key element of its success, noting: “Badger has implemented a more cohesive pricing, sales, and marketing strategy aimed at locking in efficiencies – it implemented an ERP and upgraded its organizational structure with scalable systems. But with the demand weakness (and variability) brought on by the pandemic, we have yet to see the full intended benefits. While margin pressures may persist in the near term (i.e., wage inflation), we believe Badger’s more co-ordinated operating model will enable it to achieve more profitable growth, longer term. With that in mind, our 2023 EBITDA margin forecast of 26 per cent (roughly in line with the 2015-2018 average) has upside toward its target margins of 28 per cent to 29 per cent.”
He set a target of $36 per share. The current average is $38.21.
“Recent margin compression has weighed on BDGI’s shares. In terms of assessing potential trough value, we note that Badger’s EV per truck has never fallen below $0.8 million. Each time it reached those levels (in March 2013, September 2015, and March 2020), the shares appreciated more than 100 per cent, on average, in the NTM [next 12-months],” the analyst said. “Currently, the shares reflect an EV per truck of $0.9 million. While we would be inclined to view the stock as outright ‘cheap,’ the significant investment required to renew its fleet through 2024 gives us pause (40 per cent of its fleet may need to be renewed through 2024).”
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Following the recent close of its acquisition of Dana Hospitality, National Bank Financial analyst Zachary Evershed sees Dexterra Group Inc. (DXT-T) “primed” for more M&A activity and sees its goal of reaching $1-billion in annual sales “within reach as catalysts abound.”
“Dana’s primary end markets of education, entertainment and healthcare will expand DXT’s scale and add a footprint in new verticals, paving the way for future contract wins typically reserved for larger entities,” he said.
“Balance sheet primed for more Pro forma the acquisition, we calculate Net Debt/EBITDA of approximately 1.0 times and estimate DXT can fund an additional $200-million in incremental revenue added annually through M&A while maintaining leverage below management’s comfort of 2 times. As we see leverage falling to 0.2 times by the end of 2023, we would be unsurprised by another transaction over the next 12 months and a future pace of 1-2 per year.”
In a research note released Thursday, Mr. Evershed introduced his 2023 financial estimates for the Calgary-based company, seeing contributions from Dana helping it reach its sales objectives.
“We see support from WAFES as well with the reopening of the Crossroads lodge later this year, which we estimate will contribute a baseline $30-million of revenue per annum at attractive margins for the duration of the LNG Canada project,” he said. “Furthermore, we remain constructive on affordable housing initiatives, for which we believe DXT will flex its market leading position.”
Keeping an “outperform” rating for Dexterra shares, he raised his target to $14 from $12.50. The current average is $11.54.
“DXT is well-positioned to accelerate out of the pandemic, both organically with exposure to recovering end markets and via M&A given its healthy balance sheet,” said Mr. Evershed.
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In other analyst actions:
* Touting the potential of its Goldboro flagship asset in Nova Scotia, Raymond James analyst Craig Stanley initiated coverage of Toronto-based Anaconda Mining Inc. (ANX-T) with a “strong buy” recommendation and $1.30 target. The current average on the Street is $1.80.
* Following at discussion with CEO and co-founder Greg Smith on Wednesday at an investor conference, CIBC World Markets analyst, CIBC World Markets analyst Todd Coupland trimmed his Thinkific Labs Inc. (THNC-T) target to $15 from $18 with an “outperformer” rating. The average is $17.42.
“While we have updated our downside scenario to reflect what revenue could look like with lower growth and a lower valuation, at the current price, valuation is attractive at only 5.7 times EV/sales on our 2022 forecast,” he said. “The risk reward is positive. Thinkific’s priority for 2022 is growth with a credible path to return to 2019 revenue growth of 60 per cent. This is largely within the company’s control by converting its funnel to paying customers, ARPU expansion and Thinkific Payments adoption.”
* Following the release of its 2022 guidance, Scotia Capital analyst Trevor Turnbull cut his Torex Gold Resources Inc. (TXG-T) target to $23 from $26 with a “sector outperform” rating. The average is $24.78.
“We continue to believe Torex is exceedingly inexpensive at current levels,” he said. “The company’s shares trade at 0.59 times our valuation versus the peer group at 0.99 times. We believe Torex is fully funded for the Media Luna development and that free cash flow yields will be 26 per cent in 2024.”
* CIBC World Markets analyst Bryce Adams raised his First Quantum Minerals Ltd. (FM-T) target to $40 from $37 with an “outperformer” rating, while JP Morgan’s Patrick Jones cut his target to $36 from $37 with an “overweight” recommendation. The current average is $35.96.
* CIBC’s Anita Soni lowered her B2Gold Corp. (BTG-N, BTO-T) target to US$5.50, below the US$6.20 average, from US$5.75 with an “outperformer” rating.
* In response to its deal to acquire M&M Food Market, Canaccord Genuity analyst Derek Dley lowered his target for Parkland Corp. (PKI-T) to $47 from $48,reiterating a “buy” recommendation. The average is $50.
“In our view, the acquisition demonstrates Parkland’s commitment to its retail diversification strategy as part of its goal to achieve $2-billion in adjusted EBITDA by 2025,” he said. “Specifically, it strengthens Parkland’s food offering, adding fresh from frozen (i.e. finishing meal preparation in-store) and frozen (i.e. meal preparation finished at home) to complement its existing fresh food offering in-store through Triple O’s. The acquisition of M&M provides roughly 20 per cent of Parkland’s Diversification EBITDA growth target pre-synergies, and 25 per cent of the target post-synergies.”
“We believe Parkland represents an attractive near- and long-term investment, given its ample consolidation opportunities, history of generating material synergies from acquisitions, and attractive asset base which we think is unique in the North American market.”
* With the close of its $115.0-million bought deal financing and expecting its robust acquisition activity to continue through 2022, particularly in the middle market, Canaccord’s Tania Gonsalves cut her Dentalcorp Holdings Ltd. (DNTL-T) target to $19.50 from $20 with a “buy” rating. The average is $20.42.
* In the wake of its fourth-quarter preliminary revenue exceeding his expectation, Canaccord’s Carey MacRury raised his Altius Minerals Corp. (ALS-T) target by $1 to $21, matching the consensus, with a “buy” rating.
“Our BUY rating is based on Altius’ low-risk royalty exposure to base metal and bulk commodities, high-quality royalty portfolio with long-life assets, and proven management team,” he said.
* TD Securities analyst Brian Morrison lowered his target for Linamar Corp. (LNR-T) to $98 from $100, keeping a “buy” rating. The average is $97.80.
* Deutsche Bank analyst Bhavin Shah reduced his target for shares of Shopify Inc. (SHOP-N, SHOP-T) to US$1,400 from US$1,650 with a “hold” rating. The current average is US$1,616.16.
* Stifel analyst Vincent Anderson raised his Nutrien Ltd. (NTR-N, NTR-T) target to US$85, topping the US$82.21 average, from US$78. He kept a “buy” rating.