Inside the Market’s roundup of some of today’s key analyst actions
Market fundamentals are “looking supportive” for Capital Power Corp. (CPX-T), according to ATB Capital Markes analyst Nate Heywood.
“While Alberta power pool prices and generation at core facilities were strong in Q2/22, we have seen a significant increase to Alberta power pool prices and the associated spark spread for natural gas generators,” he said. “While we remain cognizant of power pricing hedges from large power generators such as CPX, we expect favourable natural gas hedge positions could be partially offsetting. Overall, we would expect the higher Alberta pool pricing and widening spark spreads to be favourable for generators such as CPX with significant natural gas generation capacity. Given this positive outlook, we have revised our Q3/22 estimates higher for the Alberta Commercial segment, which is comprised of significant merchant natural gas generation capacity.”
In a research report released Tuesday, he raised his full-year earnings expectations following Capital Power’s $350-million hybrid note offering and “supportive” Alberta power pricing thus far in the quarter.
“In the near term, we expect Capital Power to continue investing heavily in growth initiatives, with a significant focus on the Genesee 1 & 2 repowering accompanied by recent efforts on carbon capture and renewable projects in both Canada and the U.S.,” said Mr. Heywood. “Additionally, management has demonstrated its appetite for natural gas generation M&A with the recent Midland Cogen acquisition, an example of acquiring mid-life assets with attractive contracting profiles. The Company continues to improve its contracted cash flows through PPAs, which we expect to be a consideration on any potential development and M&A activity.
“The Company boasts an attractive dividend yield of 4.5 per cent, supported by a modest 2022 estimated payout ratio of 35 per cent. With a 2023 estimated EV/EBITDA of 8.2 times, we note that Capital Power is trading at a discount to the peer average of 11 times, although we attribute the discount to its exposure to thermal generation – a business line that may continue to see future investment.”
Maintaining a “sector perform” rating for Capital Power shares, Mr. Heywood raised his target to $51 from $49. The current average is $51.35.
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Citing the benefits of input cost tailwinds as old corrugated container (OCC) pricing moved “significantly” lower over the last two months, RBC Dominion Securities analyst Paul Quinn sees “a clear pathway to stronger profitability” for Cascades Inc. (CAS-T) despite recent softness in containerboard demand
That prompted him to raise his recommendation to “outperform” from “sector perform” on Tuesday.
“Old corrugated container costs have decreased substantially in August and September on a trend of lower industry demand,” he said. “After bouncing around the US$120–130/ton range in 2022 through July, OCC prices fell from US $126/ton in July to US$109/ton in August and US$77/ton as of September (a 39-per-cent decrease in two months), which should provide relief to Cascades’ containerboard input costs. While the company noted with its Q222 results that it expected a trend of favourable OCC prices in Q322, the magnitude of the move has surprised us. As such, we have revised our OCC price assumptions from US$140/ton to US$130/ton for Q322, from US$128/ton to US$90/ton for Q422, and from an average of US$125/ton to an average of US$94/ton in 2023.”
“Suppliers have begun cutting premiums to move volumes, as more OCC is available than can be sold to local buyers or exported. Softness in demand has led to ‘market-related and maintenance downtime in September at major paper and board mills in the USA, China, and Southeast Asia,’ according to RISI, which noted that its contacts are expecting downtime in September that could represent 3–6 per cent of US containerboard production. Cascades disclosed in August that it would take five weeks of downtime at machine two at Niagara Falls to address its corrugated medium inventories, although we do not expect any further downtime at present.”
Mr. Quinn increased his target for Cascades shares by $1 to $12, above the $11.64 average.
“While a slowing economy could impact containerboard demand, we believe the company could be well positioned,” he said. Industry box shipments were down 2.3 per cent year-over-year in Q222, and while we estimate slightly lower (down 1 per cent) containerboard shipments for Cascades quarter-over-quarter, we expect a rebalancing in inventory paired with back-to-school and holiday spending to revive demand in the latter half of Q322. Meanwhile, resilient food, beverage, produce, and e-commerce segments (which account for 72 per cent of containerboard demand for Cascades) should continue to stabilize the company’s packaging revenues. Additionally, Bear Island should be a lowcost mill (i.e., favourably positioned along the industry cost curve) upon the completion of its conversion to recycled containerboard production (expected in December 2022).”
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Calling it a “a defensive value play, with a twist,” RBC Dominion Securities analyst Maxim Matushansky, initiated coverage of Calian Group Ltd. (CGY-T) with an “outperform” rating.
“Calian has transformed itself into a business that is more diversified by geography and end market, less concentrated on government revenue, and more technology-driven, which we believe isn’t fully reflected in the valuation. We see further upside from continued organic growth, increasing profitability, multiple uplift, and M&A in each of its four segments,” he said.
Touting its “repeatable” M&A strategy, capacity for further acquisitions, growing end markets and “profitable, defensive business model with room for further margin upside,” Mr. Matushansky set a $75 target. The average is $82.13.
“Calian is trading at 8.9 times CY23E EV/ EBITDA as compared to the peer group averages of 7.5-10 times,” he said. “We value Calian at 11.5 times CY23E EV/EBITDA given its lower variability that comes as a result of a diversified revenue base, 20+ year track record of profitability, and capacity/likelihood of further upside from M&A. We believe potential catalysts for multiple uplift are increased investor awareness of Calian’s defensive business model, a longer track record of increasing organic growth, and increasing margins.”
The analyst also initiated coverage of these companies:
* Copperleaf Technologies Inc. (CPLF-T) with an “outperform” rating and $10 target. Average: $10.86.
“We see shares as attractive given Copperleaf’s unique and differentiated offering, the long-term growth potential in a primarily greenfield market, and strong execution to date,” he said. “We believe shares are compelling in light of the multi-year growth trajectory (32-per-cent FY21–23E subscription revenue growth CAGR) and multiple expansion as Copperleaf re-rates closer to peers.”
* D2L Inc. (DTOL-T) with an “outperform” rating and $9 target. Average: $10.81.
“Our positive investment thesis reflects our view of D2L’s long-term structural growth (14-per-cent FY21-FY24E revenue CAGR) and multiple expansion (from 0.8 times to 1.5 times CY23E EV/Sales). We view D2L’s valuation as having an undeservedly large discount to peers and see an opportunity for a re-rating from continued execution of its growth strategy, COVID normalization concerns dissipating, and realizing operating leverage,” he said.
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A group of equity analysts on the Street raised their target prices for shares of Topaz Energy Corp. (TPZ-T) following Monday’s announcement of its $265.3-million acquisition of a newly created 5-per-cent gross overriding royalty on current and future oil production from Deltastream Energy Corp.’s holdings.
“The acquisition significantly expands TPZ’s exposure to Clearwater, which is considered among the most economically competitive, fastest-growing oil plays in western Canada, and the Company anticipates strong production growth from the asset to2024,” said iA Capital Markets’ Matthew Weekes.
The assets generated almost 19,000 barrels of oil per day in July, which Mr. Weekes said represents 80.0-per-cent growth over Topaz’s existing heavy oil production and 5.5-per-cent growth over total Q2/22 production.
See also: Calgary’s Tamarack Valley signs deal to buy Deltastream Energy for $1.425-billion
“TPZ anticipates that the undeveloped acreage will continue to attract development capital driven by strong economics, well-established area infrastructure, and upside for enhanced recovery techniques, enabling growth to 24,000-25,000 bbls/d (1,200-1,250 net to TPZ) by 2024,” he said.
He now projects Topaz will generate $80-million in excess free cash flow after dividends in the second half of 2022 and $160-million in 2023, “leaving flexibility for additional M&A opportunities.”
The company also announced a 7-per-cent increase to its quarterly dividend (to 30 cents per share), which provides a current yield of 6 per cent.
Maintaining a “buy” rating for Topaz shares, Mr. Weekes bumped his target to $26 from $25.50. The average on the Street is $29.73.
“We view the acquisition as providing mild accretive based on our go-forward heavy oil pricing assumptions and we are raising our target price,” he said.
Others making target changes include:
* Desjardins Securities’ Chris MacCulloch to $30.50 from $29.50 with a “buy” rating.
“The transaction came on the heels of Tamarack Valley’s acquisition of Deltastream and provides TPZ with a significantly expanded position in the fastest-growing oil play in western Canada,” he said.
* CIBC World Markets’ Jamie Kubik to $29 from $28 with an “outperformer” rating.
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CIBC World Markets’ Scott Fromson cut his forecast for Park Lawn Corp. (PLC-T), expecting the impact of the COVID-19 pandemic to “fade” and weigh on near-term results.
“The elevated U.S. mortality rate, due to pull-forward from COVID-19, has reversed,” he said. “Over time, the mortality rate will revert to around pre-pandemic levels, though it will likely be spread out over an extended period. This could mean an effective normalization of the mortality rate over just the next several years.”
“The moderating mortality rate will dampen funeral home call volumes, likely into 2023; this will put pressure on margins, as a significant portion of the cost structure is fixed and difficult to reduce ahead of recovery. Call volumes will return and cemetery sales production will increase as life normalizes, pandemic fatigue becomes less of a factor and PLC replenishes its sales pipeline. Group sales, which are lumpy by nature, will also return. Management is undertaking measures to remediate sales volume softening.”
Ahead of the company’s Nashville investor day on Sept. 29, Mr. Fromson said its second-quarter results likely marked the beginning of a mean reversion that will take several quarters to play out.”
“While the current environment isn’t a perfect storm, we view it as a squall that will likely weigh on results and the share price through to 2023,” he said.
The analyst trimmed his target for Park Lawn shares to $36 from $40, keeping an “outperform” rating. The average is $41.44.
“Our long-term bullish investment thesis is unchanged: the deathcare industry is recession-resistant; barriers to entry are significant; the demographics of an aging North American population support long-term growth; and PLC has the management expertise and balance sheet to execute on acquisition opportunities,” he noted.
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Scotia Capital analyst Ovais Habib said he sees the expansion scenarios for K92 Mining Inc.’s (KNT-T) Kainantu Gold Mine as “mixed.”
On Monday after the bell, the Vancouver-based company announced the results of its Integrated Development Plan for the project in Papua New Guinea. It involves a pair of scenarios: Kainantu Stage 3 Expansion Definitive Feasibility Study Case and Kainantu Stage 4 Expansion Preliminary Economic Assessment Case.
“While AISC was in line with expectations and expansion capex was lower than expected, there was a slight decrease in forecasted grades which impacted our estimates. We now see the focus of the company shifting towards executing the expansion(s),” said Mr. Habib.
Maintaining a “sector outperform” rating, he trimmed his target to $10 from $10.50. The average is $11.43.
Elsewhere, TD Securities’ Arun Lamba lowered his target to $11.50 from $12 with a “buy” rating.
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In other analyst actions:
* TD Securities’ Vince Valentini lowered Corus Entertainment Inc. (CJR.B-T) to “buy” from “action list buy” with a $5 target, down from $6.50 but exceeding the $4.07 average.
* BMO Nesbitt Burns’ Ryan Thompson raised his Aya Gold & Silver Inc. (AYA-T) target by $1 to $11, maintaining an “outperform” rating. The average is $11.50.
* In response to its $35-million deal for a royalty interest in the global net sales of Zeju from AnaptysBio, Canaccord Genuity’s Tania Armstrong-Whitworth raised her target for DRI Healthcare Trust (DHT.UN-T) to $14.75 from $14.50 with a “buy” rating. The average is $15.43.
* RBC Dominion Securities’ Keith Mackey raised his Shawcor Ltd. (SCL-T) target to $12 from $8 with an “outperform” rating. The average is $12.36.
* Scotia Capital’s Michael Doumet bumped his target for Stelco Holdings Inc. (STLC-T) to $44 from $43 with a “sector perform” rating following its recent repurchase and cancellation of 5.15 million shares. Conversely, Stifel’s Ian Gillies raised his target to $41 from $40 with a “hold” rating. The average is $51.65.
“We expect investors’ interest to remain on potential uses of cash on hand (22E: $1.6-billion),” said Mr. Gillies. “With that said, we remain focused on earnings momentum as believe that will be the sustainable driver for the share price. We are not yet confident earnings momentum is emerging.”