Inside the Market’s roundup of some of today’s key analyst actions
RBC Dominion Securities’ Paul Quinn thinks the focus of the approaching first-quarter earnings season for paper, packaging and forest products companies will almost exclusively be focused on the relationship between rising commodity prices and the ability to manage soaring costs.
In a research report released Thursday, the equity analyst said significant price gains have been offset by increased labour, energy, chemical, and transportation costs that are limiting margin expansion.
“In our view, OSB and lumber producers have been able to most successfully offset inflationary pressures with price, while packaging and tissue producers have been slower to react,” said Mr. Quinn. “The slower-than-expected implementation of price increases could result in negative surprises and guidance revisions.”
To reflect “a combination of lower commodity price expectations, weakening fundamentals, and a less constructive outlook,” Mr. Quinn cut his target for these stocks:
* Canfor Corp. (CFP-T, “outperform”) to $40 from $45. The average on the Street is $43.50.
“We value Canfor based on a 4.5 times blended valuation multiple using our Trend EBITDA estimate of $900-million (85-per-cent weighting) and our 2022 EBITDA estimate of $1.6 billion (15-per-cent weighting),” he said. “We believe the company should trade below the low end of the typical range for Canadian Paper and Forest Products companies (range 5.0 times to 7.0 times), due to the company’s heavier exposure to B.C. and an uncertain capital allocation strategy.”
* Canfor Pulp Products Inc. (CFX-T, “sector perform”) to $6 from $7. Average: $6.70.
“Our $6 price target is based on a blended 3.25 times EV/EBITDA multiple on our trend EBITDA of $175-million (weighted 85 per cent) and our 2022 EBITDA estimate (weighted 15 per cent) of $79-million,” he said. “We believe that Canfor Pulp shares should trade below the typical range for Canadian Paper and Forest Products companies (5.0 times to 7.0 times) given the tight fiber supply situation in B.C., partially offset by momentum in pulp pricing.”
* Conifex Timber Inc. (CFF-T, “outperform”) to $2.50 from $3. Average: $2.92.
“Our $2.50 price target is based on a blended 4.25 times EV/EBITDA multiple on our trend EBITDA (weighted 85 per cent) of $25-million and our 2022 EBITDA estimate (15-per-cent weighting) of $56-million,” he said. “We believe that CFF should trade near the low end of the typical range for Canadian Forest Product companies (range 5.0 times to 7.0 times) given their exposure to British Columbia’s unfavourable operating conditions.”
* Interfor Corp. (IFP-T, “outperform”) to $45 from $50. Average: $50.33.
“.We value Interfor on a 5.5 times EV/EBITDA multiple on our trend EBITDA estimate of $450-million (85 per cent) and our 2022 EBITDA estimate of $1.2 billion (15-per-cent weighting),” he said. “We believe the shares should trade at a multiple near the middle of the typical Canadian Paper & Forest Products company trading range (5.0 times to 7.0 times).”
He raised his target for Vancouver-based Mercer International Inc. (MERC-Q) to US$18 from US$16 with an “outperform” rating. The average is US$16.30.
“In Canada, our favorite names are Interfor, Western Forest Products, Canfor, and Cascades. In the United States, our favorite names are Louisiana-Pacific, West Fraser, James Hardie, and Weyerhaeuser,” said Mr. Quinn.
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Scotia Capital analyst Mark Neville recommends investors take an “overweight” position for North American waste companies, expecting them to “deliver another year of solid performance” in 2022.
“They possess several attractive attributes, especially to navigate today’s market/macro environment: (i.) the companies can price above inflation, albeit with a lag, (ii.) supply-chain risks are minimal, (iii.) 100 per cent of sales are derived in North America, (iv.) the businesses are incredibly durable, as evidenced by the organic volume performance through the pandemic, and (v.) the companies generate a lot of cash, which is used for value-accretive initiatives – i.e., M&A, investments in sustainability (e.g., RNG projects, recycling/automated MRFs, etc.), progressive dividends, and share repurchases,” he said in a research report released Thursday.
Though he thinks Toronto-based Waste Connections Inc. (WCN-N, WCN-T) “checks all the boxes,” he lowered his rating for its shares to “sector perform” from “sector outperform” based on valuation concerns.
“We have WCN trading at a 3.1-per-cent/3.4-per-cent FCF yield on our 2022/2023 estimates (would be 3.4 per cent on our 2022, excluding $100-million of incremental spend on sustainable initiatives), with the U.S. 10-year at 2.6 per cent,” said Mr. Neville. “Historically, WCN has traded at a 180 basis points spread to the U.S. 10-year. In fact, this is WCN’s tightest spread to the U.S.10-year in approximately 10 years. Its also near the low end (i.e., the highest multiple) of where WCN has traded on an absolute basis over that time.”
He maintained a US$135 target for Waste Connection shares. The average is US$146.69.
“WCN is guiding to 12-per-cent/14-per-cent growth in adj. EBITDA/adj. FCF in 2022E, which includes completed M&A,” Mr. Neville added. “While robust, we believe this could prove conservative: (i.) pricing could trend higher if further increases are required to offset inflation – the company has guided to 6.5-per-cent pricing growth but indicated this could potentially approach 7.0 per cent; of note, management estimated its internal cost inflation at approximately 6%; (ii.) volume growth assumptions (1.05 per cent, ex. roll-off of lower quality acquired revenues) lags that of both WM (2 per cent) and GFL (1.25 per cent); (iii.) margin guidance (flat y/y, but includes 20bp of M&A dilution) would likely prove conservative if volumes came in better than expected; and (iv.) incremental M&A (company acquired $100 million of annual revenues year-to-date in 2022, as at February 17) and/or share repurchases (company repurchased $425 million of stock YTD in 2022, as at February 17) would be additive.”
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Canaccord Genuity analyst John Bereznicki sees Superior Plus Corp. (SPB-T) “well positioned” to execute on its consolidation strategy following its recent $288-million equity raise.
With its shares currently at a 23-per-cent implied total return to his target price after falling almost 11 per cent since the mid-February release of its 2022 earnings guidance, he raised his recommendation to “buy” from “hold” on Thursday.
The equity raised coincided with Superior Plus’ US$145-million acquisition of the retail propane distribution and refined fuels assets of Quarles Petroleum Inc.
“Quarles is an established retail and commercial propane distributor that should significantly increase Superior’s share of the Virginia market,” the analyst said. “Superior expects Quarles to contribute normalized run-rate EBITDA of approximately US$19-million once it fully realizes operating synergies within 24 months of closing in Q2/22 (for an implied net purchase price of 7.6 times EBITDA). Pro forma Superior’s recent closing of Kamps along with its equity raise and pending closing of Quarles, Superior expects its net debt to fall within its 3.5 times to 4.0 times EBITDA target range (consistent with our 3.8 times estimate). We are adjusting our estimates to reflect Superior’s Quarles acquisition, equity financing and cold January and February weather in the Northeastern U.S. and Eastern Canada.”
Mr. Bereznicki cut his target for Superior Plus shares by $1 to $13.50. The average is $13.73.
Meanwhile, RBC Dominion Securities’ Nelson Ng upgraded the stock to “outperform” from “sector perform” with a $15 target (unchanged).
“.SPB’s leverage ratio is now back within the company’s long-term target, providing some dry powder to execute on accretive acquisitions. SPB’s top two shareholders subscribed for 35 per cent of the equity offering, which we view as a vote of confidence for the company’s growth strategy and management team,” said Mr. Ng.
Elsewhere, iA Capital Markets’ Matthew Weekes lowered his target to $13 from $14 with a “hold” rating, while Scotia’s Ben Issacson cut his target to $14 from $16 with a “sector perform” rating.
“The financing improves SPB’s financial flexibility, with the proceeds expected to keep Superior within its target leverage range, although we estimate the Company will be near the high end with the acquisitions of Quarles and Kampsin 2022,” said Mr. Weekes.
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IA Capital Markets analyst Chelsea Stellick thinks DRI Healthcare Trust Inc. (DHT.UN-T) is “a rare kind of pure-play streaming company, providing an ESG-friendly, tax-advantaged income stream uncorrelated to commodity cycle.”
In a research report released Thursday, she initiated coverage of Toronto-based DRI, which focuses on acquiring global pharmaceutical royalties, with a “buy” recommendation, calling it a “healthcare name you can trust” and touting its “potentially significant upside.”
“Investors seeking diversified exposure to healthcare with a well-covered income stream at minimal risk should consider DRI Healthcare Trust,” said Ms. Stellick. “We expect strong growth in the pharmaceutical sector over the next decade and highlight DRI’s ESG advantage over royalties in the environmentally damaging mining or energy sectors. Moreover, investors avoid commodity exposure with DRI because the Trust is non-cyclical and uncorrelated to commodities. Investors should look to DRI if they want stable, reliable income (approximately 5-per-cent yield) with tempered risk.”
Ms. Stellick sees the possibility for “substantial” share price appreciation if DRI even approaches its objective to acquire $500-million of accretive royalties in the next four years.
“DRI focuses on acquiring royalties on medical products with significant life-saving potential. DRI is sheltered from the development risk of any single pipeline product due to its diversified portfolio and low cost of capital, which enables the Trust to be opportunistic in capturing products on a single asset basis,” she said. “DRI’s portfolio covers products in a wide breadth of indications at attractive risk-adjusted returns, including an oncology asset and a dermatology asset since its IPO.
“Due to DRI’s ability to access a lower cost of capital than royalty vendors who are typically subject to more development risk (biotech/pharma) or financing constraints (individuals/academic institutions), it is able to acquire royalties at a purchase price favourable to both DRI and the vendor. These acquisitions are supported by royalty income, cash raised at the IPO, and existing credit facilities that charge at LIBOR 2.0-2.5 per cent. This sustainable competitive advantage is compounded by DRI’s structure as a trust that is not subject to corporate tax, thus the Trust holds a compelling niche within the healthcare industry that makes it an optimal vehicle for acquiring and holding royalty assets.”
Mr. Stellick set a US$14 target for its units, which falls below the $15.58 consensus on the Street.
“DRI offers a rare combination of high yield and significant growth potential, with a unique combination of healthcare tailwinds at modest risk given its diversified portfolio of royalties on pharmaceutical products that generate consistent cash flow,” she concluded.
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Stifel analyst Martin Landry thinks shares of BRP Inc. (DOO-T) have the possibility of more than doubling in price over the long term if valuation multiples return to historical averages.
“Investors appear concerned about the company’s ability to grow EPS in coming years given potential economic turbulence and given the hockey stick EPS performance of the recent years,” he said. “Our long-term FY26 scenario analysis suggests that the company could grow its EPS at a CAGR [compound annual growth rate] of 7-10 per cent annually from FY23 levels.”
Mr. Landry said a meeting with the management of the Quebec-based recreational vehicle manufacturer on Wedsneday reinforced his bullish view, touting upcoming capacity increases at it Mexican facilities and several potential revenue drivers. They include: “(1) The introduction of the See-Doo Switch has been a highly successful product launch and will start contributing to revenues this year. Management expects that the Switch could generate upwards of $600 million in annual sales within 3 to 4 years of its launch, (2) BRP’s Ghost project expected to be unveiled this spring, which should bring BRP near its 2025 target of $1b in revenues in the marine segment, (3) The entry into the motorcycle segment which could results in upwards of $500 million annual revenues.”
Mr. Landry sees BRP “better positioned” to face an economic downturn in the past, noting inventory levels at dealerships are “extremely low,” which could “act as a cushion to absorb a sell-through slowdown.” He also pointed to their products at low price points and a broader range of offerings than in the past.
He maintained a “buy” rating and $150 target for BRP shares. The average is $136.
“We believe that shares of BRP offer an appealing risk/reward profile to investors for the following reasons; (1) Deeply discounted valuation, DOO trades 8x our FY24 EPS estimate, 6 multiple points lower than its historical average, (2) near term catalyst with the 2025 plan update in June, which should improve visibility and reassure investors, (3) healthy balance sheet providing flexibility to return capital to shareholders and (4) industry scanner data suggesting continued momentum with unit volumes at U.S. dealerships up 13 per cent year-over-year in February, the strongest growth rate of the last 7 months,” he said. “We believe that the upcoming 2025 plan update could surprise to the upside as current expectations appear low, hence we would be buyers leading up to the investor day in mid-June.”
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Raymond James analyst Jeremy McCrea said Rubellite Energy Inc. (RBY-T) possesses the “two of the most important characteristics for a successful operator: a strong experienced management team and high quality inventory.”
He initiated coverage of Calgary-based energy producer, which is focused on its pure-play Clearwater asset in Eastern Alberta, with an “outperform” recommendation.
Rubellite was formed from the spin-out of Perpetual Energy Inc. in September of 2021
“The Clearwater asset has reflected some of the best well economics in the basin given its low risk, low cost and quick payouts,” said Mr. McCrea. “Rubellite is pursuing an organic growth approach through exploration and emerging land acquisitions while prioritizing superior corporate returns, free funds flow generation, and a conservative (no debt) capital structure. As the company is still new, we expect to see the valuation improve as institutional investors become more familiar with the name.”
He set a $6 target, exceeding the $4.75 average on the Street.
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In other analyst actions:
* Deutsche Bank’s Brian Bedell lowered his Brookfield Asset Management Inc. (BAM-N, BAM.A-T) target to US$62 from US$65 with a “hold” rating. The average is US$72.10.
* Mr. Bedell raised his TMX Group Ltd. (X-T) target to $152 from $145 with a “buy” rating. The average is $147.86.
* BoA Securities’ Lisa Lewandowski cut her Canopy Growth Corp. (WEED-T) target to $8.50 from $10, below the $10.33 average, with an “underperform” rating.
* Truist Securities’ Beth Reed raised her Lululemon Athletica Inc. (LULU-Q) target to US$390 from US$386, keeping a “hold” rating. The average is US$427.71.
* Barclays’ Brian Johnson cut his Magna International Inc. (MGA-N, MG-T) target to US$68 from US$72 with an “equal weight” rating. The average is US$90.17.
“Despite the selloff, we believe investors are still underestimating risks to the sector - and in particular to suppliers - from inflation and production pressures - as well as the impact of interest rate hikes on portfolio allocations,” he said.
* CIBC World Markets’ Jacob Bout raised his target for Methanex Corp. (MEOH-Q, MX-T) to US$56 from US$50, keeping a “neutral” rating, while BMO’s Joel Jackson increased his target to US$65 from US$60 with an “outperform” rating. The average on the Street is US$54.33.
“2022 consensus (EBITDA $1.1-billion) seems low as even assuming moderating methanol as a base case, 2022E EBITDA may still reach $1.4-1.5-billion with FCF (ex G3) $8 per share. At a base case mid-cycle $350 per ton realized price for 2024E (vs. spot $450 per ton), we see valuation support from a US$95-100/sh 11-per-cent NAV and investors better appreciating the $10per-share-plus FCF trajectory (at mid-cycle methanol) in 2024 post G3,” said Mr. Jackson.
* National Bank Financial’s Shane Nagle resumed coverage of Osisko Gold Royalties Ltd. (OR-T) with an “outperform” recommendation and $20 target. The average is $23.04.
* Echelon Capital’s Michael Mueller initiated coverage of Standard Lithium Ltd. (SLI-X) with a “speculative buy” rating and $13.15 target. The average is $11.31.
* After meetings with management, ATB Capital Markets’ Kenric Tyghe cut his Terrascend Corp. (TER-CN) target to $11 from $14 with an “outperform” rating. The average is $12.29.
“We are lowering our prior revenue estimates which, on essentially unchanged margin assumptions, translates into material revisions to our 2022 and 2023 adjusted EBITDA,” he said. “The changes in our revenue estimates largely reflect (i) our miscue on the timing (and ramp) of New Jersey, (ii) a more marked than we initially appreciated impact of various supply chain and regulatory related delays (through which they have now cycled) in Michigan, and (iii) a measured view on the pace and cadence of the share recovery in Pennsylvania. While our conviction on how well TerrAscend is positioned in New Jersey and the visibility on the path to further share recovery in Pennsylvania was reinforced through the course of the discussions, we were simply too aggressive out of the gate for 2022.”
* CIBC’s Anita Soni raised her Yamana Gold Inc. (AUY-N, YRI-T) target to US$7.50 from US$6.75, exceeding the US$6.87 average with an “outperformer” rating.