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

CIBC World Markets analyst Kevin Chiang lowered his third-quarter and full-year earnings expectations for both Canadian National Railway Co. (CNR-T) and Canadian Pacific Railway Ltd. (CP-T) on Tuesday, seeing volume trends tracking below his projections due to supply chain disruptions and a weaker Canadian grain outlook.

In a research report released before the bell, he now thinks both companies may miss their 2021 volume targets.

“Supply chain disruptions and the B.C. wildfires have weighed on volumes this quarter,” Mr. Chiang said. “The silver lining is that for a number of commodities (i.e., autos, potash, intermodal), the weaker volume trends in Q3 are being driven by supply issues and not a drop-off in demand, in our opinion. So as these supply chain issues ease, we still see a healthy volume environment. Where we do see more challenging end-market conditions is Canadian grain. Agriculture and Agri-Food Canada’s August outlook for principal crops significantly reduced its production forecast for the 2021/22 crop year. Total Canadian field crop production is forecast to decrease significantly by 27 per cent year-over-year (to 71.844 million tons) as the drought in Western Canada worsened considerably throughout July. For comparison, Agriculture and Agri-Food Canada’s July outlook for principal crops had forecast that 2021/22 production would be down just 4 per cent year-over-year (to 95.28 million tons).”

For CN, Mr. Chiang’s 2021 and 2022 earnings per share forecast slid to to $5.80 (from $5.90) and $6.43 (from $6.57), respectively. His CP estimates dropped to to $3.96 (from $4.08) and $4.30 (from $4.44), respectively.

In their battle for Kansas City Southern (KSU-N), Mr. Chiang thinks CP’s bid could be deemed superior in the wake of the U.S. Surface Transportation Board’s rejection of CN’s proposal to create a voting trust in which it planned to operate KCS.

“With the probabilities tilting towards a CP-KCS transaction, we would expect CN’s focus to turn towards improving its operating leverage and relative OR versus its peers,” he said.

The analyst maintained an “outperformer” rating and $106 target. The average on the Street is $104.60.

Concurrently, he raised his CN target to $170 from $158, reiterating an “outperformer” recommendation. The average is $149.90.

“For CN, our estimates do not assume any restructuring efforts in the event its pursuit of KCS proves to be unsuccessful. Given the recent STB decision, however, this looks to be the most likely outcome and we expect the company to focus its attention towards driving margin expansion especially given TCI’s recent activism. To reflect this optionality, we have increased our price target multiple,” he said.


With a bullish view on the outlook for the outdoor leisure sector, BMO Nesbitt Burns analyst Gerrick Johnson upgraded BRP Inc. (DOO-T) to “outperform” from a “market perform” recommendation.

“Over the past year, we had been concerned about DOO’s loss of market share in the key off-road vehicle market, particularly given that the market had been over-indexing to new, first-time buyers with strong lifetime values,” he said. “We were pleased to see the company return to market share gains in 2Q, which bodes well for the acquisition of high-quality lifetime customers.

“No company in the powersports industry has a better track record of innovation than DOO. Most recently, the company announced it is bringing to market the first and only side-by-side vehicle producing over 200 HP (Maverick X3). We anticipate this innovation, as well as two new engine options in the Defender utility business, will help the company grow further share in this rapidly growing ORV market.”

Mr. Johnson’s target for BRP shares is now $154, jumping from $100 and exceeding the $136 average.

“Our upgrade is based on a positive outlook on the powersports market DOO participates in, continued strong innovation, which has helped accelerate the performance gaps between itself and competitors, reclamation of market share gains in the key off-road vehicle market after several quarters of decline, and positive initial dealer response to the new Sea-Doo Switch Pontoon boat,” he added. “Management’s outlook for double-digit sales and earnings growth in FY2023 indicates that our prior outlook was too low. Giving us confidence in this outlook is the fact that in its eight-year history as a public company, management has never missed its annual EPS guidance.”


In a research report on the Canadian telecommunications sector in which he revised his preferences for the remainder of 2021, Canaccord Genuity analyst Aravinda Galappatthige lowered his rating for Shaw Communications Inc. (SJR.B-T) to “hold” from a “buy.” He now sees the stock properly pricing in the probability that regulatory approval will be granted to Rogers Communications Inc. (RCI.B-T) in its pursuit of the company.

“While we continue to see the probability of the Rogers-Shaw transaction receiving regulatory approval, albeit with remedies, in the 80-85-per-cent level, with Shaw’s share price now above $37, the expected value calculations suggest the stock is now efficiently valued,” he said. “Considering the midpoint of the approval probability range, we estimate the expected share price of SJR.B at $37.79, which is just slightly above (1 per cent) Shaw’s last closing price (which reflects an 8-per-cent discount to the deal price compared to more than 16 per cent immediately post announcement). We have thus downgraded the stock ... We should mention that we are also nudged along ahead of a federal election, which theoretically introduces modest policy-related risk.”

He maintained a $40.50 target for Shaw shares, exceeding the $38.36 average on the Street.

Mr. Galappatthige said he now prefers BCE Inc. (BCE-T) and Telus Corp. (T-T) “due to strong wireless results, outlook, as well as an evident general defensive bias in the market.”

Keeping “buy” recommendations for both stocks, he raised his BCE to $69 from $66, exceeding the $63.78 average. His Telus target increased by $1 to $32, versus an average of $30.19.

“We consider the solid wireless returns of late with underlying (ex roaming/overage) service revenue growth returning to a robust 3 per cent for both companies,” he said. “Alongside this, we have also seen strong loading in wireline suggesting positive financial trends in the segment going forward. We also highlight the point that both TELUS and BCE are reaching the latter innings of their fibre-related capex spend, suggesting meaningful uplift post 2022.”

Conversely, Mr. Galappatthige said “more patience” is required for Rogers Communications Inc. (RCI.B-T, “buy”), as he cut his target to $71 from $75, which sits below the $72 average.

“Our analysis (contained within this note) indicates that Rogers’ wireless returns, in addition to its incremental exposure to the pandemic and related restrictive conditions, are lagging notably even on an ex roaming and overage basis,” he said. “This is predominantly ARPU [average revenue per user] related and thus a function of pricing and mix, and seemingly a variance that opened up more distinctly over the past three quarters. While Q3/21 would provide us with more insights, this causes us to push it down a notch in the pecking order, also due to the generally slower return to normalcy on key areas like travel, live sports etc. We still believe RCI.b qualifies as a buy on account of its natural leverage to increased travel, immigration levels etc, as well as attractive relative valuations. RCI.b trades at a 1.3-times discount to BCE and 2.4 times to TELUS on EV/EBITDA FY+2 (2022e). This compares with 0.7 times and 0.9 times, respectively, prepandemic (i.e., beginning of 2020).”

He also reduced his target for Cogeco Communications Inc. (CCA-T, “buy”) to $130 from $132. The average is $131.20.

“Overall, we believe CCA is well positioned to transition to a multi-tenet growth story, as the M&A-led upside in the US is seemingly supplemented with footprint expansions and potential entry into Canadian wireless,” he said.


Barclays analyst John Aiken expects Canadian banks to continue to “ride the credit tailwind to close out FY21.”

“Although margins will likely remain under pressure, we believe this could be absorbed by solid lending volumes with the increasing economic activity spurring stronger top-line growth,” he said.

In a research note previewing the fourth quarter for the sector, Mr. Aiken said investors continue to wait for core growth after a third-quarter earnings season that displayed familiar themes.

“The Canadian banks managed to garner better than expected results on the back of reserve releases,” he said. “Moving forward, bottom-line growth will increasingly need to be supported by underlying operational growth as credit tailwinds ease. Economic activity provides some optimism but cost controls remain paramount in the immediate term.”

“Buoyed by allowance releases in Stage 1 & 2, total PCLs declined materially for a fifth straight quarter. CMRev continues to moderate: Capital markets revenues continued to slow in Q3. While our analysis suggests Q4 is a historically weak quarter for CMRev, we believe the environment remains constructive. Margin pressures resurface: Margin pressures intensified as yield curves and liquidity worked against the banks. While mortgage growth remained solid, improved economic sentiment could translate into commercial loan growth.”

The analyst made a pair of rating changes in the note, raising Bank of Montreal (BMO-T) to “equal weight” from “underweight” with a $132 target. The average on the Street is $143.87.

“BMO has the best overall exposure to return of capital scenario as it is likely to generate the greatest lift to its dividend yield, while still having ‘excess capital’ representing almost 10 per cent of its current market capitalization,” said Mr. Aiken. “Further, with its over-indexed exposure to commercial lending, particularly in the U.S., BMO is well positioned to benefit from the eventual economic expansion as businesses reinvest in their operations and plan for growth. Finally, BMO has done a commendable job managing its expenses and we anticipate that it should continue to benefit from ongoing operating leverage.”

He also upgraded Toronto-Dominion Bank (TD-T) to “overweight” from “equal weight” with a target of $89, which falls below the $92.02 consensus.

“The market’s disappointment in TD’s earnings has pushed TD’s valuation multiple below the group average but we see several catalysts that could lead to relative multiple expansion,” the analyst said. “TD has the highest regulatory capital ratio and level of ‘excess capital,’ representing almost 11 per cent of its market capitalization, and should benefit when the restrictions are lifted. In addition, we believe that there were some positive signs in TD’s third quarter that could translate to future growth, including anticipated NIM expansion after its U.S. NIM stabilized, and lending volumes with its exposure to the U.S. as well as domestic cards.”

Concurrently, Mr. Aiken reduced his target for Bank of Nova Scotia (BNS-T) to $83 from $86, keeping an “equal weight” rating. The average is $86.48.


Tidewater Renewables Ltd. (LCFS-T) “offers attractive growth through capital projects in the renewable fuels industry, supported by strong industry fundamentals, including increasing regulatory support,” according to CIBC World Markets analyst Robert Catellier.

He was one of a group of equity analysts on the Street initiated coverage of the subsidiary of Tidewater Midstream and Infrastructure Ltd. (TWM-T) after coming off research restriction following its Aug. 18 initial public offering.

Seeing Tidewater Renewables “poised for substantial upside” if the Canadian Clean Fuels Standard is adopted, Mr. Catellier gave it an “outperformer” rating.

“As a pure-play on renewable fuels, the company’s outlook and projects are supported by the megatrend of decarbonizing the economy to achieve net-zero 2050 targets,” he said. “With Canada having lower penetration rates of renewable fuels, the tailwinds from increased demand could be quite strong. Renewable diesel is one way to help meet greenhouse gas reduction goals without making major changes to vehicle fleets.”

“The company’s shares provide investors with exposure to the Low Carbon Fuel Standard (“LCFS”) credit market and renewable fuels: Despite some short-term noise related to U.S. supply and demand, we are bullish on the outlook for BC LCFS credit pricing based on encouraging long-term supply and demand fundamentals. Tidewater Renewable shares represent one of the few ways for investors to gain this exposure, and the approaching onset of the Canadian Fuel Standard could provide meaningful upside for investors. LCFS exposure can serve as a hedge to environmental compliance risk elsewhere in investors’ portfolios.”

The analyst said he expects renewable diesel production to “dominate Tidewater Renewables’ story in the near term,” however he also emphasized its assets and growth projects in renewable natural gas and hydrogen industry. He thinks the provide exposure to “critical elements in decarbonizing the economy.”

Touting its enticing valuation, he set a target of $26 per share.

“The shares are trading at a valuation of 3.5 times our 2023 EBITDA estimate, an attractive valuation even in light of the project development risk,” said Mr. Catellier. “Even on 2022 estimates, which doesn’t include a contribution from the capital projects, the shares are trading at 10.5 times EBITDA. The company is fully funded for its initial project and should be in a net cash position in 2024, in solid financial shape to pursue additional projects.”

Elsewhere, seeing an “enticing valuation with significant upside,” Scotia Capital analyst Justin Strong initiated coverage with a “sector outperform” rating and $20. target.

“We believe TWR is well-positioned to pursue its strategy and create shareholder value. Our thesis and recommendation are based on TWR’s (1) enticing valuation with significant upside above our target price, (2) strong growth outlook, (3) early-mover advantage in growing market with regulatory tailwinds, (4) opportunity to invest in other renewable fuels at attractive multiples, and (5) experienced management team,” he said.

Meanwhile, RBC Dominion Securities initiated coverage with an “outperform” rating and $20 target.


Innergex Renewable Energy Inc.’s (INE-T) US$310-million joint acquisition of the 60MW Curtis Palmer hydro portfolio in New York with Hydro-Québec “could provide support for equity market valuation,” according to iA Capital Markets analyst Naji Baydoun.

Resuming coverage following the Aug. 17 announcement of acquisition under a strategic alliance formed in 2020, Mr. Baydoun said he sees the potential for double-digit free cash flow per share accretion and a “significant” reduction in its payout ratio, emphasizing it should alleviate investor concerns about the sustainability of Innergex’s dividend and “provide additional comfort that the Company can deliver both cash flow and income growth to shareholders.

“The acquisition will strategically expand INE’s hydro footprint and increase the hydro-based cash flows within the Company’s portfolio, which could provide support for equity market valuation,” he said. “Furthermore, the transaction is the first joint acquisition by INE and HQ, and represents a ‘proof of concept’ for the potential that the partnership can deliver in terms of further enhancing INE’s ability to source and execute on new growth opportunities.”

Maintaining a “buy” recommendation, Mr. Baydoun increased his target by $1 to $25. The current average on the Street is $24.33.

“We continue to like INE’s (1) high-quality, low-risk asset portfolio (more than 3GW net in operation,14-year weighted average contract term), (2) healthy FCF/share growth (6-8 per cent per year, CAGR2021-25), (3) healthy dividend (3-per-cent yield, albeit with a greater than 80-per-cent payout over our forecast period), (4) potential upside from organic development (7GW of prospects) and M&A, and (5) the support of the HQ strategic alliance,” the analyst said. “We believe that the 4-5-per-cent intra-day share price decline following INE’s Q2/21 results is unwarranted given the unchanged long-term outlook. We are increasing our price target to incorporate the Curtis Palmer acquisition.”

Elsewhere, Scotia Capital’s Justin Strong raised his target to $26.50 from $23.50 with a “sector perform” rating, while BMO’s Ben Pham increased his target by $1 to $24 with an “outperform” recommendation.

“We view the transaction as being 13-per-cent and 22-per-cent accretive on a FCF per share basis, in 2022 and 2023, respectively,” Mr. Strong said. “As a result, our estimate for FCF payout in 2022 decreases by 13 per cent to 97 per cent. The equity raise was priced at $19.40 per share and announced on August 18. Since that time the shares have appreciated 7.5 per cent. We see the shares as having more room to run in the short term. As such, and in line with our modeled accretion from the first full year of contribution from the assets (2022), we have increased our target price.”


London, Ont.-based Indiva Ltd. (NDVA-X) is “absolutely dominating” the cannabis-infused edibles market through its “marquee” license agreements with a group of popular U.S. brands, according to Raymond James analyst Rahul Sarugaser.

“Presently, NDVA claims 50-per-cent edibles market share, or 2.5 per cent of the total market, landing this sub-$50-million market cap company in the top-10 LPs by sales,” he said.

“This, folks, is an M&A target if we’ve ever seen one. Some context: In April, Canopy Growth (CGC-NASDAQ, not covered), acquired Supreme Cannabis (FIRE-TSX, not covered) — a company with smaller market share than NDVA, albeit operating in a different category — for $435-million. Again, NDVA’s market cap is $50-million. The asymmetry we see here is stunning.”

Mr. Sarugaser initiated coverage of Indiva with a “strong buy” recommendation and $1.75 target, seeing “compounding market forces” driving its growth. The average target on the Street is 63 cents.

“Benefiting from our conversations with NDVA management, our visits to NDVA’s manufacturing facilities in London, and our study of NDVA’s sales and operating results quarter after quarter, we conclude that NDVA is a top-shelf operator that consistently produces high-quality, fast-selling products that Canadian consumers seem to love,” he said.


After a 15-per-cent jump in spot uranium prices over the last two weeks prompted him to increase his 2021 and 2022 forecasts, Raymond James analyst Brian MacArthur raised his target prices for several stocks in his coverage universe.

“Price moves in the spot market like this are not unexpected given the nature of the spot market,” he said. “As importantly, we still believe the longer term uranium price outlook is favourable given uncovered utility demand post-2023 and reduced supply given the uranium price is not, in our view, high enough to incentivize the restart of significant curtailed production and/or new production. We acknowledge that at higher prices there is curtailed production that can return to the market, but we believe this requires long term contracts, and we also note these restarts take time and capital. Furthermore, given supply curtailments we note producers are also now potential buyers in the spot market to cover some contracts thereby creating additional demand.

“In addition, the recent creation of the Sprott Physical Uranium Trust, an entity designed to provide investors with direct exposure to the uranium price, effectively may create more demand for uranium. Sprott is also planning to pursue a listing in the U.S. which could increase the profile of the Sprott Physical Uranium Trust with US and international investors, potentially resulting in an increase both in trading liquidity and in access to capital. Finally, we would highlight nuclear has near zero greenhouse gas emissions in the energy generation phase and therefore could be a major contributor to climate mitigation objectives while providing reliable base load electricity. Many governments are now recognizing this potential which could provide additional investor support for uranium.”

Mr. MacArthur made these changes:

* Cameco Corp. (CCO-T, “outperform”) to $29 from $25. The average on the Street is $25.34.

“We believe Cameco provides investors with lower-risk exposure to the uranium market given its diversification of uranium sources,” he said. “These sources are supported by a portfolio of long-term contracts that provide some downside protection in periods of depressed spot uranium prices, while maintaining optionality to higher uranium prices. In addition, the company has multiple operations curtailed that can be brought back should uranium prices increase. Although the 2021 tax court decision applies only to the 2003, 2005, and 2006 tax years, we view it as a positive for CCO given we believe it will be relevant in determining the outcome for other years and reduces risk related to the CRA dispute.”

* Denison Mines Corp. (DML-T, “outperform”) to $2.10 from $1.80. Average: $2.17.

“DML holds a controlling interest in the Wheeler River project, including the Phoenix deposit, which is one of the highest-grade deposits in the world. DML also offers a diversified revenue stream from tolling and DES, while exploration and development activities at Wheeler progress. We believe Denison offers investors good exposure to uranium through a number of assets,” he said.

* NexGen Energy Ltd. (NXE-T, “outperform” to $7.50 from $6.25. Average: $6.84.

“NexGen offers exposure to one of the world’s largest undeveloped uranium deposits (Arrow) located in Saskatchewan. NexGen is well financed in the near-term to continue to develop Arrow. Given the high quality of the Arrow deposit we maintain our Outperform rating,” he said.


In other analyst actions:

* After a U.S. federal judge denied a request from several U.S. Native American tribes for a preliminary injunction to halt preliminary digging for the Thacker Pass lithium mine in Nevada, iA Capital Markets analyst Puneet Singh raised his target for Lithium Americas Corp. (LAC-T) to $32 from $29 with a “speculative buy” rating. The average on the Street is $27.67.

“With LAC’s shares outperforming over the past month ahead of this decision, we wouldn’t be surprised if the shares pull back in the next few weeks, offering investor sa better entry point,” he said. “After years of consultations etc., Thacker Pass’ RoD should hold as this is a large project that is of domestic importance to the US. To exercise conservatism, in our model we’ve maintained our delay (iA: 2026 start) to Thacker Pass’ start on the off chance it gets caught up in the courts. However, we’ve increased our target price ... by reverting to a 1.0-times NAV multiple (from 0.9 times). Our valuation incorporates our long-term Li2CO3 price of $13,000 per ton, NPV8% valuation for Cauchari-Olaroz, and NPV10% valuation for Thacker Pass.”

* Stifel analyst Ian Gillies increased his target for shares of Aecon Group Inc. (ARE-T) to $26 from $24 with a “buy” rating. The average is $23.69.

“Opportunities continue to abound for Aecon and this is evident as we release our 2023 estimates .... Our 2020-2023E adj. EBITDA and EPS CAGRs are 8 per cent and 15 per cent, respectively,” he said. “The stock also portrays excellent value in 2023 at 4.3 times EV/adj. EBITDA and 11.3 times P/E. We have increased our target price to $26.00 from $24.00, using a target multiple of 7.0 times 2023 estimated EV/adj. EBITDA. We have made changes to our target price methodology, primarily related to treatment of debt instruments, which we outline in the body of the document. The stock remains well positioned to deliver robust returns over the next 12-months and is our Top Pick.”

* With its acquisition of Citizen Stash Cannabis Corp. (CSC-X), Raymond James analyst Rahul Sarugaser cut his target for The Valens Co. (VLNS-T) to $3 from $3.50 with a “market perform” rating. The average is $4.36.

“While VLNS stepping into higher margin lines of business is positive in our view, we expect the transition will require much dilution, and — based on conversations we’ve had with some of VLNS’ contract manufacturing customers — will jeopardize its core processing/white labelling business,” he said.

* National Bank Financial analyst Endri Leno hiked his Medical Facilities Corp. (DR-T) target to $12 from $9.75 with an “outperform” rating. The average is $10.40.

“Historically and on average, DR has mostly traded in line or above peers due to its elevated yield and low leverage. As these two factors persist, while those that resulted in the current valuation discount have generally been addressed, in our view, DR should trade closer to its peers,” he said.

Follow David Leeder on Twitter: @daveleederOpens in a new window

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