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Inside the Market’s roundup of some of today’s key analyst actions

Raymond James analyst Steve Hansen thinks Canadian rail traffic likely hit a bottom in late May following three months of "acute" headwinds stemming from both the collapse of energy prices and the impact of the COVID-19 pandemic.

In a research report released before the bell on Tuesday, Mr. Hansen said he has “reasonable confidence” in a rebound in the second half of 2020, pointing to fundamental improvements in several key categories, including potash, forest products, Grain and automotive.

Emphasized a recovery pattern remains “murky,” Mr. Hansen also said headwinds remain “stiff,” but he does think Canadian Pacific Railway Ltd. (CP-T, CP-N) is “faring better” than rival Canadian National Railway Co. (CNR-T, CNI-N).

"While CN and CP have both grappled with acute traffic headwinds over the past three months, CP traffic has fared demonstrably better," he said. "Specifically, we highlight that CN and CP 2Q20 quarter-to-date RTMs [revenue ton miles] (ending week 25) were reported at down 17.4 per cent year-over-year and down 10.6 per cent year-over-year, respectively, with some of the largest variances attributable to CP's outsized performance in key categories such as Grain, Potash, Ferts & Sulphur, Forest Products, and Intermodal.

“We expect this relative performance will be evident in both carriers’ upcoming 2Q20 results — with CN traffic broadly underperforming our prior expectations and CP outperforming.”

Mr. Hansen sees potash tailwinds as serving " an important differentiator favoring CP's consolidated metrics," noting it hauls 80 per cent of Canpotex export volumes.

“We expect this outsized tailwind will become increasingly evident in 3Q20 as we start to lap the easy comps established in last year’s contract stalemate,” the analyst said.

Mr. Hansen upgraded his rating for CP shares to "outperform" from "market perform" with a $375 target, rising from $340. The average on the Street is $353.55.

“While our CP upgrade may raise eyebrows with the shares currently perched at the upper end of their historical trading range , we believe it is worth highlighting: 1) Street 2020/21 estimates are too low, in our view, implying the stock is likely cheaper than it looks (17.8 times our FY21 estimate); 2) it is currently trading at a fairly wide 2.0 times discount to CN (FY+2); and 3) it is trading at an outsized (3.6) times multiple discount to the S&P500 (FY+1) vs. the 5-yr historical avg. of (0.30) times,” he said.

He maintained a “market perform” rating for CN with a $125 target, up from $115 and above the $116.73 average.


Viewing its shares as “notably undervalued” in comparison to comparable peers, Canaccord Genuity analyst Yuri Lynk initiated coverage of AirBoss of America Corp. (BOS-T) with a “buy” rating on Tuesday, seeing it poised to benefit from the COVID-19 pandemic moving forward.

“AirBoss is a leader in rubber compounding and the manufacture of defence and first responder products,” he said. “We believe the latter potentially gives AirBoss interesting portfolio diversification benefits as an effective hedge against a second wave of COVID-19. The company has already secured its largest-ever contract: a $96 million award from the Federal Emergency Management Agency (FEMA) for FlexAir Powered Air Purifying Respirators (PAPRs).

“We believe similarly sized awards are imminent and represent upside potential to our estimates. Furthermore, we believe there is an attractive recurring revenue story emerging here in supplying defence and first responder products with associated consumables that supports our $145 per share ‘Bull Case’ scenario.”

Mr. Lynk thinks the company has been able to benefit from the “privileged position” within the industry of its newly formed AirBoss Defense Group segment during the COVID-19 pandemic, seeing an “explosion” of orders for its PAPRs. He thinks further orders are likely to be a catalyst for AirBoss shares in the near term.

“From a base of 43 US cents in 2019, we forecast adjusted EPS [earnings per share] of 65 US cents in 2020, 70 US cents in 2021, and to 80 US cents in 2022,” he said. “Growth this year is primarily driven by ADG via its $96 million FEMA contract. The COVID-19 pandemic has led to lost business for Rubber Solutions and Engineered Products, especially in Q2/2020. Our 2021 and 2022 forecasts assume the economy reopens and past and current capex investments in the business help to drive more normalized earnings. We expect ADG to also lead growth in 2021 and 2022 and note the hundreds of millions of dollars of outstanding bids mentioned above represent upside to our published estimates.”

Mr. Lynk set a Street-high target price of $27 per share. The current average among analysts covering the stock is $19.90.

“AirBoss’ earnings, return metrics, and, ultimately its stock price, are at an inflection point,” he said. “We believe AirBoss shares are incredibly cheap at 7.3 times EV/EBITDA (2021 estimates) compared to the peers at 10.9 times. When we dig a little deeper, the valuation disparity is even wider. Consider that Avon Rubber PLC (AVONLON), a major competitor to ADG in low-burden gas masks, trades at 16.1 times EV/EBITDA (2021), and HEXPOL AB (HPOL.B-OME), the best comparable for Rubber Solutions, trades at 9.3 times. We concede auto-related comparables get low single-digit valuations, but that portion of AirBoss’ business (Engineered Products) is small.”


Citing “strong balance sheet, historical execution and encouraging new plays and well results,” Raymond James analyst Jeremy McCrea upgraded Whitecap Resources Inc. (WCP-T) to “outperform” from “market perform.”

“Throughout Whitecap’s operating regions, the company consistently shows some of the best well economics among its neighboring peers,” he said. “This can sometimes be forgotten, especially when it relates to emerging plays, with investor conversations focused on broader macro themes recently. That said, as balance sheet concerns give way to profitability, we highlight 5 recent well results that caught our attention. For reference, we have not modeled any ‘risked upside’ for these plays as of today, but believe investors could soon consider the upside here in the not too distant future.”

Mr. McCrea increased his target to $3 from $1.75. The average is currently $2.69.


Industrial Alliance Securities analyst George Topping expects Amex Exploration Inc.‘s (AMX-X) early success to continue, initiating coverage of its stock with a “speculative buy” rating on Tuesday.

Amex owns 100 per cent of the Perron gold project in the Abitibi Greenstone Belt of Quebec. The company is "tightly owned and fully funded," said the analyst, noting billionaire investor Eric Sprott owns a 12-per-cent stake.

"Amex may have discovered the next large gold trend in the Abitibi Greenstone Belt with its Perron project," said Mr. Topping. "To date, the Company has identified three main zones on the property, defining approximately 3 kilometres of strike length so far. However, most of the drilling has been into the Eastern Gold Zone. Investors will hopefully benefit from additional drilling (200,000 metres budgeted) to better understand the Gratien and GCZ zones as well as exploring other regional targets as management tries to fully delineate all 15 kilometres of the two faults that run along its property.

"The drilling has been driving the share price higher, regardless of how the gold price was doing in the past. In the last month, gold market sentiment has started shifting down market capitalization and junior gold explorers are once again starting to come into favour. For now, since the share price is largely driven by drilling, we initiate with a Speculative Buy recommendation, awaiting for a full resource to come into the picture."

Mr. Topping said Amex shares have attracted funds flow on the back of good drilling results. Moving forward, he thinks its price will increase with a bankable feasibility study and the eventual sale of the company to a producer.

He set a target of $3 per share, exceeding the average on the Street of $2.08.


Desjardins Securities analyst Gary Ho sees a “brighter” outlook for several of Alaris Royalty Corp.‘s (AD-T), prompting him to raise his financial expectations for the Calgary-based private equity firm.

On Monday before the bell, Alaris released a corporate update, which Mr. Ho said provides “improved visibility” on distributions.

“We are encouraged by the corporate update, particularly on BCC, PFGP and Federal Resources (38 per cent of distributions combined),” he said. “Gradual reopening of the U.S. economy should improve AD’s outlook (80 per cent of distributions are from U.S.-based companies) and lower its payout ratio (70 per cent in 2021).”

Mr. Ho raised his 2020 and 2021 adjusted EBITDA estimates to $84.6-million and $96-million, respectively, from $81.7-million and $91.3-million. His cash flow per share expectation for 2020 increased to $1.67 from $1.65, while his 2021 forecast shrunk by 3 cents to $1.68.

Maintaining a “buy” rating for its stock and emphasizing its “attractive” 9.0-per-cent dividend yield, he increased his target for Alaris shares to $14.50 from $12.50. The average on the Street is $13.25

“The valuation remains attractive,” he said.


Ahead of the June 29 release of its fourth-quarter results, Desjardins Securities analyst Chris Li raised his financial expectations for Alimentation Couche-Tard Inc. (ATD.B-T), seeing potential upside to the Street’s near-term merchandise and fuel sales expectations based on recent industry and company data.

“7-Eleven’s U.S. merchandise SSSG [same-stores sales growth] improved from a 8.3-per-cent decline (April) to 0 per cent (May) versus a 5-per-cent rise (May) from PDI’s survey of 5,500 mid-/large c-stores,” he said. “The difference could be 7-Eleven’s higher foodservice mix, which has been hit by the pandemic. Both data points are better versus our negative 4.5-per-cent U.S, merchandise SSSG estimate. While the U.S. fuel volume decline of 30 per cent quarter-to-date is in line with our expectation, Norway’s (ATD’s biggest European market) fuel volume decline improved from 20 per cent (April) to 12.5 per cent (May), ahead of our estimate.”

Mr. Li raised his 2020 and 2021 earnings per share projections to US$1.92 and US$1.23, respectively, from US$1.83 and US$1.11.

He kept a “buy” rating and $47 target, which sits 21 cents below the consensus.

“ATD has a clear path to doubling its EBITDA over the next 3–4 years, supported by M&A and organic growth opportunities,” he said.

Elsewhere, Canaccord Genuity analyst Derek Dley raised his 2020 EPS estimate to US$1.95 from US$1.80, expecting record U.S. fuel margins.

Mr. Dley maintained a “buy” rating and $45 target.

“In our view, Couche-Tard offers investors an attractive combination of both organic and acquisitive growth. We note our estimates do not include future acquisitions, hence we are comfortable assigning a higher multiple relative to peers as we believe the company will capitalize on accretive growth opportunities over the coming year, given Couche-Tard’s flexible balance sheet,” he said.


RBC Dominion Securities analyst Shweta Khajuria sees Etsy Inc. (ETSY-Q) as a “structural winner in the COVID crisis” and thinks the craft e-retailer is “taking the right steps to position itself for healthy, sustainable, long-term growth by leaning into the recent surge in demand.”

“We upgraded ETSY shares on Sept. 19 last year,” she said. “That said, a lot has changed this year, primarily due to COVID-19. year-to-date, Etsy shares are up 115 per cent versus Nasdaq, which is up 11 per cent.

“Given what we view as sustainably healthy growth and profitability levels, we believe ETSY’s year-to-date outperformance is justified.”

In response to a recent proprietary survey, Ms. Khajuria thinks newly added customers are likely to stay with the site, pointing to “remarkably consistent” buyer trends, and feels it will be able to acquire buyers at a greater-than-normal rate.

“COVID-19 has accelerated e-commerce adoption and we expect ETSY to be one of the biggest beneficiaries,” she said. “While short-term demand has surged from closures of physical retail stores, consumer buying patterns have likely changed permanently. This accelerated shift offers Etsy an opportunity to take share of what looks like permanently changing buying behaviour.”

Also emphasizing “very positive” web traffic data and a range of potential growth catalysts, including a “materially better” user experience and international market penetration, she hiked her target for Etsy shares to US$117 from US$79, keeping an “outperform” rating. The average on the Street is US$88.53.


Fronsac Real Estate Investment Trust (FRO.UN-X) is displaying “strong” funds from operations per unit growth “through an entrepreneurial mindset,” according to Laurentian Bank Securities analyst Yashwant Sankpal.

He initiated coverage of the Montreal-based REIT, which focuses on triple net and management-free retail properties, with a “buy” rating.

“Fronsac REIT offers exposure to well-located, single-tenant, retail properties located in secondary markets of Quebec,” said Mr. Sankpal. “Because of the long-term, management-free nature of its eases, FRO’s cash flow is quite steady. Most importantly, FRO has been growing its FFO/unit at a CAGR [compound annual growth rate] of 26 per cent since 2011 because of its disciplined acquisitions and tight control over its overhead costs. Consequently, FRO has increased its distribution eight times since 2011 (at a CAGR of 9 per cent).

“We believe FRO has a long runway to continue doing these accretive acquisitions as this real estate sub-sector is huge and fragmented; properties can be accumulated in different regions without adding a lot of overhead costs as they are leased on triple-net, management-free basis. As the REIT grows its size, it should see its valuation multiple improve as investors take notice of its value creation model. Once a sufficient scale is achieved, such a niche portfolio should be an attractive acquisition target for a larger REIT or institutional owner. As a result, we think FRO is a good investment for long-term investors.”

Calling it an “entrepreneurial growth story in early stage” and emphasizing its large insider ownership, “conservative” balance sheet and reasonable valuation, he set a target of 65 cents per unit. The average on the Street is 70 cents.


In other analyst actions:

* Canaccord Genuity analyst Doug Taylor resumed coverage of Exchange Income Corp. (EIF-T) with a “buy” rating and $35 target (unchanged). The average on the Street is $36.83.

“As with many other aerospace-heavy names, trading is likely to continue to be extraordinarily volatile and driven by COVID-19 headlines,” said Mr. Taylor. “In our view, Exchange’s regional aviation focus and its growing mix of manufacturing revenue with a large backlog should help the company traverse the near-term uncertainty and rebound from COVID-19 restrictions. The balance sheet is robust ($800-million of liquidity) and airline-related cash burn is limited. This has enabled the company to preserve its high dividend throughout this period, even if there has been less capital generation to recycle into near-term organic and inorganic growth opportunities. We maintain a BUY rating as we believe the return profile to our medium-term expectations remains compelling; the company trades at 7.1 times our 2021 estimated EBITDA.”

* Credit Suisse analyst Andrew Kuske raised Canadian Utilities Corp. (CU-T) to “outperform” from “neutral” with a target price of $37.50, rising from $36 and above the average on the Street of $36.63.

“Canadian Utilities (CU) and Quanta Services created a new entity called LUMA Energy LLC that won the right to modernize and operate Puerto Rico’s electric transmission and distribution system over a 15-year term,” he said. “LUMA will be equally owned and receive fees for the term of the contract. LUMA will be an operator and not the asset owner, nor will the entity be directly investing capital in the restoration of the Puerto Rico Electric Power Authority (PREPA) asset base. Very simply, the LUMA deal accomplishes a number of strategic objectives for CU in a very capital efficient fashion with economic accretion. Given that reality combined with significant stock underperformance for the year-to-date and a discounted valuation, we upgrade CU.”

* Mr. Kuske also raised Atco Ltd. (ACO-X-T) to “outperform” from “neutral” and increased his target by a loonie to $45. The average is $45.93.

“ATCO Ltd. (ATCO/ACO) is rather unique with a 52-per-cent holding in Canadian Utilities (CU) and a few wholly-owned legacy businesses,” he said. “Yet, almost the entirety of ATCO’s value is underpinned by that CU value and, therefore, the remaining businesses provide option value along with an alternative way of owning the core utility business. In a parallel note, we upgraded Canadian Utilities (CU) to Outperform following the creation of LUMA with the transaction related to the Puerto Rico Electric Power Authority (PREPA) .... That capital efficient investment, an underperformance versus peers along with a heavily discounted valuation were motivators for the CU upgrade. ATCO offers a discounted way of owning CU; we upgrade the stock.”

* Citing its valuation and improving fundamentals, BMO Nesbitt Burns analyst Jonathan Lamers raised Uni-Select Inc. (UNS-T) to “outperform” from “market perform” with a $10 target. The average is $6.13.

“Operating results performed in line with or better than recovering end markets in May, end market indicators suggest demand recovered further in June, and expenses will be adjusted further. Prior risks related to liquidity and potential covenant breaches were substantially reduced following the recent refinancing,” he said.

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