Inside the Market’s roundup of some of today’s key analyst actions
Citi analyst Itay Michaeli lowered his 2022 financial forecast for North American auto parts suppliers, including Magna International Inc. (MGA-N, MG-T), to account for a “softer” vehicle production outlook and incremental inflation and foreign exchange considerations.
In a research note released Tuesday, he acknowledged his projections are now “comfortably” below the consensus on the Street, however he expects other analysts to move lower as quarterly earnings season approaches.
“With a number of near-term uncertainties still lingering, we expect companies to take a more cautious ‘22 macro/LVP view (vs. IHS) and either reduce guidance to the lower end of prior ranges, or modestly below,” he said.
Mr. Michaeli thinks supplier stocks are likely to see declines in the coming weeks, however he predicted “a sharp reset” might end up boosting sentiment post-Q1. He thinks the medium-term setup “does sport a number of appealing attributes (single-digit ‘23 price-to-earnings with a path for double-digit EPS growth in ‘24 on a multi-year production recovery, accelerating bookings and eventual cost recoveries boosting incrementals).”
“If companies maintain more optimistic ‘22 outlooks, supplier stocks might trade up initially, but our sense is that those moves might fade since the degree of reassurance companies can provide might only go so far,” he said. “Beyond the near-term, we do think some suppliers could eventually benefit from potential re-shoring of auto production capacity, though we would not expect that to show up in Q1 bookings. As for stocks, we prefer a barbell approach favoring best-in-class EV/Car of the Future exposure (Aptiv) and deep-value names with upside optionality (Magna). We are more cautious on names like Lear and Autoliv given risk we see to prior guidance.”
The analyst said he now prefers the stock of automakers to parts suppliers, citing a “more constructive” view on “price/mix sustainability.”
“While risks are elevated in this environment, we believe a number of factors combine for a different risk/reward setup vs. prior downturn analyses: (a) Low U.S. dealer inventory limiting the “double whammy” effect of steep production cuts + higher incentives, (b) encouraging March segment-mix; (c) structural auto demand gains that we believe occurred through the pandemic (i.e. de-urbanization identified in our density surveys); (d) potential additional multi-year pickup truck demand tailwinds (NA capex); (e) EV/AV/connectivity trends that meaningfully expand TAMs,” he said. “We prefer GM given stronger Q1 production and more ideal regional exposures (no material Europe exposure). We remain somewhat more cautious on Ford on 2022 guidance risk (tough Q1 production mix + EU/China exposure), but believe the setup could improve if Q1/’22 estimates reset lower. We will also look for an update on the timing of the BlueCruise OTA given prior Q1′22 commentary. For Tesla, we are above consensus for Q1, though the recent run in the stock makes the Q1 setup less compelling.”
For Magna, Mr. Michaeli cut his target for its shares to US$81 from US$94, maintaining a “buy” recommendation. The average on the Street is US$90.56.
“We see two paths for further multiple expansion,” he said. “The first is simply delivery of Magna’s FCF growth/conversion plan. The second, in our view, is to reposition the segments/story (including for a possible future spin) towards the increasingly important & unique role that Magna can play in AV/EV mobility scaling. This ‘two-entity’ thesis is a way to perceive Magna in the context of Car of the Future investing.”
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After a record 2021 for mining royalty companies, Canaccord Genuity analyst Carey MacRury sees “continued growth ahead.”
“We forecast relatively strong growth across each of the royalty companies with growth led by Nomad Royalty (228 per cent), Elemental Royalties (96 per cent) and Osisko Gold Royalties (47 per cent),” he said. “We believe GEO growth will ultimately exceed our forecasts as projects advance through permitting and construction, and as we do not assume growth in our forecasts from new royalty or stream acquisitions. We note this growth contrasts with most of the senior gold producers, which have largely flat production profiles. The royalty companies have approximately $6.1-billion in available liquidity to deploy to new opportunities.”
Mr. MacRury emphasized royalty companies offer investors precious metals exposure without the risk of cost inflation, which he calls a “key theme” for producers.
“While most producers expect modest inflationary pressures, we believe cost inflation fears are weighing on investors’ minds given the rampant inflation seen in the last cycle,” he said. “Against this backdrop, the royalties as a group outperformed in 2021, down 4 per cent on average vs. the miners down 13 per cent and gold 4 per cent. Franco-Nevada was the best performer in 2021, up 11 per cent. So far in 2022, the royalty sector is up 16 per cent outpacing the 6-per-cent increase in the gold price but slightly lagging the miners, up 17 per cent on average. The best performers YTD (in US$ terms) have been Royal Gold (up 39 per cent) and Sandstorm (37 per cent).”
Despite that bullish view, Mr. MacRury lowered his rating for a pair of stocks to “hold” from “buy” based on valuation:
- Franco-Nevada Corp. (FNV-T) with a $210 target, up from $205, which is the current consensus.
“Franco is trading at 2.77 times NAV at the high end of its historical range (2-year average of 2.5 times),” he said.
- Royal Gold Inc. (RGLD-Q) with a US$145 target, up from US$135 and above the US$138.13 average.
He also made target changes for his top picks in the group:
* Nomad Royalty Co. Ltd. (NSR-T, “buy”) to $15.50 from $16. Average: $15.73.
“NSR has assembled a portfolio of royalties and streams that we believe will drive strong growth,” he said. “We forecast GEOs roughly tripling by 2025 from 16koz in 2021 and to sustain around 47-53koz through 2036 without factoring in any future deals. We view Nomad’s shares as attractively priced, trading at 0.78 times NAV and 15.1 times 2023 estimated EBITDA vs. peers at 1.5 times and 15.2 times, and we believe there is potential to rerate with upcoming catalysts including Blyvoor ramping to steady state and Greenstone construction milestones. We note that the recently announced Platreef stream, offered as part of a co-financing package with Orion Mine Finance (private), and Greenstone stream agreement, struck with a subsidiary of Orion, demonstrates the benefits of NSR’s close relationship with Orion, which now holds a 64-per-cent interest in NSR.”
* Osisko Gold Royalties Ltd. (OR-T, “buy”) to $25 from $24. Average: $23.25.
“Osisko Gold Royalties is one of our top picks in the precious metals streaming and royalty space due to its strong growth profile, several potential upcoming catalysts, and attractive valuation,” he said.
Mr. MacRury’s other changes were:
- Maverix Metals Inc. (MMX-T, “buy”) to $8.50 from $8. Average: $8.36.
- Sandstorm Gold Ltd. (SSL-T, “buy”) to $11.50 from $10.50. Average: $12.02.
- Wheaton Precious Metals Corp. (WPM-T, “buy”) to $76 from $67. Average: $69.58.
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Citing the impact of the Omicron variant and rising program budgets, Canaccord Genuity analyst Aravinda Galappatthige expects Corus Entertainment Inc. (CJR.B-T) to take a “step back” from the “steady” improvement seen recently when it reports second-quarter results on Friday.
He’s projecting revenue to be flat year-over-year and adjusted EBITDA to slid by 15 per cent.
“We suspect that the omicron wave of COVID-19 likely moderated ad revenue growth during the quarter, and potentially content production (and delivery),” he said. “This, coupled with sustained high programming cost inflation, is expected to drive down TV margins from 35 per cent last year to 30 per cent in Q2 this year.”
Accordingly, Mr. Galappatthige made “modest” reductions to his forecast and also emphasized “macro level headwinds including an uptick in inflation and sustained supply chain issues (which in turn impacts advertising).”
Keeping a “buy” recommendation for Corus shares, he cut his target to $7 from $8.50. The average is $7.87.
“In light of the notable sell-off in the broader markets as well as Corus’s closest comps, we have reduced our target price by $1.50 per share,” the analyst said. “We now apply 4.5 times EV/EBITDA 2023 (5 times previously) to establish our target. We note that U.S. comps like Discovery and AMC Networks trade in the 6-6.5 times (2023) range. We believe the Corus should continue to trade at a 2-3-times discount to these two peers. We maintain our BUY rating on the stock, however, owing to its solid value credentials, in particular its compelling FCF yield, against the backdrop of easing balance sheet leverage.”
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Touting the “strength of the macro environment,” Raymond James analyst Andrew Bradford upgraded Ensign Energy Services Inc. (ESI-T) to “outperform” from “market perform.”
“Contract drillers have been demonstrably successful at passing through cost inflation over many cycles, and this rule so far seems the case in 2022 as well,” he said. “This, in combination with a rapidly tightening super-spec rig market, is having a meaningful impact on industry dayrates. For our part, we expect leading-edge dayrates in the U.S. are already approximately US$23,000 range and will move to US$26,000 per day by the end of 2022. We expect this will displace older priced contracts throughout 2022 and 2023, pushing average dayrates to US$25,000.
“Higher daymargins and higher rig counts are moving our estimates for ESI higher. We expect 2022 EBTIDA of $337-million and 2023 EBITDA of $440-million. Our note of caution here is that Ensign may not be as willing in invest in upgrades – at least to a competitive extent – which may limit its participation in the Super-Spec upswing.”
Mr. Bradford hiked his target to $5.25 from $2.20. The average is $3.69.
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While the Hydrogen industry continues to take advantage of a series of sector tailwinds, National Bank analyst Rupert Merer thinks Mississauga-based Next Hydrogen Solutions Inc. (NXH-X) is also poised to benefit from commercialization of its systems and delivery to partners in the coming months.
Shares of Next Hydrogen jumped 20.6 per cent on Monday following the premarket release of its fourth-quarter financial release, which exceeded Mr. Merer’s forecast. However, he called the results “immaterial” given the company’s pre-commercial stage.
“In 2022, NXH should see its first revenue from electrolyser sales (NBF estimate $6.9-million), as it plans to demonstrate up to five prototypes this year,” he said. “However, we anticipate losses for a few more years as it increases investment into product and business development as well as production capacity.
“NXH plans to improve the design of its NH-300 unit (1.8 MW), the first of which should be commissioned at Canadian Tire Corp. in H1. NXH targets delivery of three to five prototypes of various sizes in ‘22, including one to Hyundai Motor Co. in Q2′22. With $39-million in cash, NXH should have sufficient liquidity to fund its path to commercialization for this year.”
On the sector, Mr. Merer said: “H2 stocks have had momentum recently, as the fuel is increasingly seen as an essential component of the world’s future energy mix. The E.U. has proposed a H2 Accelerator to develop the necessary infrastructure and storage to support a roll out of the fuel as it targets a reduction in imported energy from Russia. Moreover, the recent commitment in the U.S. to provide up to $8-bilion in funding for H2 hubs is also a catalyst for the sector. NXH has joined a hub in the U.S. N.E. with 40 partners to submit a proposal for funding. Growing interest in H2 has brought increased competition.”
Largely maintaining his financial estimates, Mr. Merer cut his target for Next Hydrogen shares to $4.50, below the $5.83 average on the Street, from $6 with a “sector perform” rating in response to a reset in sector valuations.
“On valuation, despite the hydrogen sector being supported in recent weeks by tailwinds stemming from the energy crisis and rising demand for electrolysers, the inflection point for hydrogen could still be a couple of years away and the recent tailwinds followed a much steeper sector-wide sell-off from late Nov. 2021 through the end of Jan. 2022,” he said.
“With NXH still in a precommercialization phase and that we have yet to see momentum for new orders, we are maintaining our Sector Perform rating.”
Elsewhere, Echelon Partners analyst Michael Mueller cut his target to $6.50 from $10.50 with a “speculative buy” rating.
“While investor interest towards renewables has waned in recent months, particular in cases where visibility to meaningful cash flow is more future dated, we remain confident in Next Hydrogen’s ability to capture a growing market despite recent focus on traditional energy sources,” he said. “Support for renewable energy infrastructure remains in place, and we are encouraged with the steps Next Hydrogen has taken to establish a foothold in the sector itself.
“Additionally, for those that hold a cautious view on the space in general, we would highlight that at Monday’s close of $2.75 per share, Next Hydrogen is trading at levels approaching its net cash value of approximately $1.79 per share. In our view, this provides a firm floor to the share price and see this as an attractive entry point ahead of the Company growing its customer base and sales in 2023 and beyond into an industry that is just in the early innings of adoption and growth.”
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After announcing Monday it is seeking financing alternatives after being unable to reach an agreement with Sprott Resource Lending over the drawdown of the remaining US$60-million from its facility, Raymond James analyst Craig Stanley downgraded Ascot Resources Ltd. (AOT-T) to “market perform” from “outperform.”
He now sees financing concerns for its 100-per-cent owned, fully permitted Premier Gold Project in northwestern British Columbia.
“Ascot has $90-million in cash and underground development remains on track for later this month. But there could be a delay to guidance of first production in 1Q23; we currently model first gold production in 3Q23,” he said.
“Management is focused on securing additional financing. We believe equity is not an option following the $64-million bought deal that closed last month. Ascot already has relationships with debt providers and the press release noted management will be exploring royalty and/or stream options. There are four royalties on various claims at Premier that can be repurchased for $14.7-million. After repurchasing these royalties, a 1-per-cent. NSR and 5-per-cent net profit interest (NPI) royalty will remain and apply to most of the production.”
Mr. Stanley cut his target to $1.15 from $1.65. The average on the Street is $1.60.
Elsewhere, CIBC World Markets’ Allison Carson cut her target to $1.30 from $1.65 with an “outperformer” rating, while Desjardins Securities’ Jonathan Egilo trimmed his target to $1.40 from $1.75 with a “buy” rating.
“We believe today’s prices more than bake in present risks and provide a strong re-rate opportunity if management can execute over the next year,” said Mr. Egilo.
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Desjardins Securities analyst Benoit Poirier thinks investor reaction to Stella Jones Inc.’s (SJ-T) three-year strategic plan through 2024 is “highly unjustified.”
Shares of the Montreal-based producer of industrial pressure-treated wood products are down 1 per cent since the March 9 announcement, versus a 4-per-cent gain for the S&P/TSX composite index.
However, Mr. Poirier called thinks the plan offers “compelling value-creation opportunities” with targets through 2024 of 4-6-per-cent revenue growth, a stable EBITDA margin of 15 per cent and $500-$600-million allocated for capital deployment toward buybacks and dividends.
“We believe SJ could be worth $65 per share by 2024 if management delivers on its 2022–24 targets,” he said. “We derive another $8 per share of value creation if management can execute on its M&A pipeline of US$200-million of revenue, implying a potential return of up to 100 per cent through 2024.
“We believe the underperformance is partly driven by S&P/TSX Capped Materials Index fund flows. SJ is the 29th largest stock in the 52-stock index with an index weight of 0.55 per cent. The index is up 25 per cent since beginning of 2021 while SJ is down 20 per cent over the same period. This can be attributed to the strong performance of commodities (Bloomberg Commodity Index up 59 per cent over the same period). The inverse relationship between SJ’s stock and the S&P/TSX Capped Materials Index has been very strong in the short term as investors, whose performance is benchmarked against the index, have increased their exposure to commodities (ie mining companies) to the detriment of SJ. That said, over the long term, the relationship is much weaker (SJ is up 345 per cent since the beginning of 2011 vs down 7 per cent for the index over the same period).”
Mr. Poirier reiterated his “buy” recommendation and $58 target for Stella-Jones shares. The current average on the Street is $52.31.
“Ultimately, we believe the name is still quite attractive considering the ongoing market uncertainty and SJ’s resilient attributes (90 per cent of railway tie and utility pole demand is driven by maintenance). This is a good opportunity for investors to revisit the story and buy the shares,” he said.
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In other analyst actions:
* Touting its “best in class carbon expertise” and “attractive pipeline of high return projects,” Raymond James analyst David Quezada initiated coverage of Base Carbon Inc. (BCBN-NE) with a “strong buy” rating.
“Our bullish view is a function of: 1) our expectation of significant long term appreciation in carbon credits; 2) Base’s team of seasoned carbon industry veterans and capital allocators; 3) the company’s pipeline of high-return carbon offset investments with a focus on high quality, defensible projects; and 4) a model that leverages Base’s deep relationships with carbon credit project developers and end buyers, that we expect will add significant shareholder value over time,” he said, setting a $2 target for its shares.
* Following Monday’s announcement of a deal to sell its Kumtor gold mine to Kyrgyzstan for just under a billion dollars, Raymond James’ Brian MacArthur raised his Centerra Gold Inc. (CG-T) target by $1 to $14 with a “market perform” rating. The average is $13.15.
* Mr. MacArthur also increased his Champion Iron Ltd. (CIA-T) target to $8.75 from $7.50 with an “outperform” rating. The average is $8.
“We believe Champion offers investors good exposure to premium iron ore through its Bloom Lake asset, which is a long-life, lower-cost asset producing, high-grade iron ore concentrate (66-per-cent iron) located in Quebec, Canada, a lower-risk jurisdiction,” he said. “In addition, we believe Champion has potential for growth through its Bloom Lake Phase 2 expansion project at favourable capital costs, given the previous owners spent significant capital. Given Champion’s exposure to premium iron ore (which we believe should trade at a premium given structural changes in the iron ore industry), high-quality asset, growth potential, and low jurisdictional risk, we rate the shares Outperform.”
* Alliance Global Partners’ Brian Kinstlinger lowered his target for McCloud Technologies Corp. (MCLD-X) by $1 to $5.50 with a “buy” rating. The average is $9.
* Scotia Capital’s Trevor Turnbull reduced his Osisko Gold Royalties Ltd. (OR-T) target to $22.50 from $26 with a “sector outperform” rating. The average is $23.25.
* Echelon Partners’ Ryan Walker initiated coverage of Palladium One Mining Inc. (PDM-X) with a “speculative buy” rating and 65-cent target. The average is 60 cents.
“An investment in PDM affords exposure to a large and growing PGE-Cu-Ni project in a Tier 1 jurisdiction,” he said. “Indeed, a recent maiden resource estimate of the Haukiaho deposit on PDM’s flagship LK project brings total contained Pd-Eqv. resources to 2.3Moz (average 2025 consensus metal price forecasts) contained in both the Kaukua and Haukiaho deposits. We highlight here that PDM shares show good beta (compared with its peers) to all of the metals represented in the company’s resources — not surprisingly led by Pd and Pt.”
* In response to the feasibility study for its Media Luna Project, National Bank’s Don DeMarco trimmed his target for Torex Gold Resources Inc. (TXG-T) to $23.25, below the $24.14 average, from $24 with a “sector perform” rating. Others making changes include: Stifel’s Ian Parkinson to $28 from $25 with a “buy” rating and RBC’s Wayne Lam to $18 from $20 with a “sector perform” rating.
“We view the Media Luna FS as a key de-risking event, with updated capital/operating costs reflecting an achievable plan and current inflation environment,” said Mr. Lam. “The company now forges ahead to construction, which will require focused execution given technical complexity and size of the project.”
* Eight Capital’s Christian Sgro cut his Well Health Technologies Corp. (WELL-T) target to $12 from $13 with a “buy” rating. The average is $10.04.
David Leeder