Tuesday’s analyst upgrades and downgrades

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

Citi analyst Tyler Radke predicts further volatility in shares of Shopify Inc. (SHOP-N, SHOP-T) for the remainder of the year, pointing to a “challenging” macro environment for ecommerce companies that is likely to “drive a continued growth deceleration in 3Q22, and limit upside, similar to the cadence year-to-date.”

“We expect revenue growth to be muted in 2H given high inflation, slowing consumer spending, and a strong dollar,” he said. “Despite new capabilities launched during the quarter (Shopify Capital in Australia, Shopify Markets Pro, Shopify Tax, Shopify Collabs) and management guiding higher GMV growth vs. the retail industry in 2H22, alternative data suggests a 3-per-cent quarter-over-quarter deceleration in Shopify’s total merchant base for 3Q22 vs. 2 per cent in 2Q22. Alternative data also suggested limited traction of Buy with Prime among Shopify’s merchants with just 0.1 per cent total merchants and 0.05 per cent of Plus merchants using this service, which should alleviate some competitive concerns.”

In a research note released late Monday, Mr. Radke said he remains “cautious” on Ottawa-based Shopify’s gross merchandise volume, believing macro uncertainty will hinder growth and “defer growth re-acceleration to mid-2023 at the soonest.”

Shopify has a growing problem with customer retention, Globe data study shows

“We anticipate further margin compression as Shopify invests heavily in Fulfillment and International expansion,” he added. “On the bright side, we expect some modest take rate expansion from Shopify Plus, Pay and POS. Despite the stock trading at approximately 5 times 2023 revenue, we see continued slowing growth and margin dilution keeping a lid on shares.”

The analyst lowered his revenue estimates for both the third quarter and the full 2023 fiscal year. He also reduced his non-GAAP operating income loss estimates based on on lower Merchant Solutions gross margins and higher expense forecasts.

“Although OpEx growth year-over-year is guided to decelerate in 3Q22 and again in 4Q22, operating losses are expected to increase in 2H22 from Deliverr (employees, integration costs) in addition to increased costs (est. $50-million in 2H22) associated with Flex Comp— Shopify’s new compensation structure,” he said.

Maintaining a “neutral/high risk” recommendation for Shopify shares, Mr. Radke cut his target by US$1 to US$35. The current average on the Street is US$40.23.

“We rate Shopify shares as Neutral/High Risk (2H) because while we appreciate the magnitude of the TAM, an acceleration of secular tailwinds coming into focus, a strong management team, and record of execution, we believe much of this is priced in at the current multiple — which earns a significant premium to the implied multiple of its growth/margin framework and implies a 10-year revenue CAGR [compound annual growth rate] that appears potentially too high,” he said.

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Despite seeing lingering headwinds from “stubbornly high” fuel prices and the weaker Canadian dollar, National Bank Financial’s Cameron Doerksen expects Air Canada (AC-T) to continue to enjoy a recovery in earnings and cash flow in the coming quarters as the “robust rebound” in air travel persists.

Previewing the company’s third-quarter earnings release, scheduled for Friday, the equity analyst said pricing trends remain positive and demand “still looks strong.” He thinks airlines “are having success in passing on higher costs through airfare increases.”

See also: Further market turbulence appears inevitable as Canadian earnings season commences

“Based on CATSA passenger screening data at Canada’s largest airports, the 7-day rolling average of passenger traffic in Canada is still down 15.5 per cent compared to the same period in 2019, showing demand still has significant room to recover to pre-pandemic levels,” said Mr. Doerksen. “However, the recent further easing of pandemic restrictions in several important markets in Asia (Japan, notably) and the recent removal of all remaining restrictions in Canada (including vaccination requirements, masking on planes, and the mandatory use of the ArriveCan app) should help sustain demand momentum. Indeed, when we account for the pre-pandemic 20-year CAGR [compound annual growth rate] of Canadian airline passenger growth (3.5 per cent per year), we estimate that passenger demand could still be running 20 per cent behind trendline growth had the pandemic not occurred. The consumer’s willingness to pay high airfares could result in some demand destruction in the coming quarters, but we note that major U.S. airlines that have reported Q3 results are so far reporting that demand trends remain strong into Q4 despite high airfares.”

Mr. Doerksen adjusted his financial estimates to account for a higher jet fuel costs, which are up 75 per cent in the third quarter versus the same period in 2019, and elevated costs related to a weaker Canadian dollar.

For the third quarter, he’s projecting adjusted earnings per share of 30 cents, up from 12 cents previously. However, his full-year estimate fell by 11 cents to a loss of $4.55 and his 2023 forecast is now a profit of 39 cents, down from $1.11.

Maintaining an “outperform” rating for Air Canada shares, Mr. Doerksen trimmed his target by $1 to $29. The current average on the Street is $26.20.

“Leverage is still high for Air Canada (we forecast 7.2 times net debt/EBITDA at year end 2022), but the company expects to generate $3.5 billion in cumulative free cash flow during the 2022-24 period, which will drive significant de-leveraging by the end of 2024 (AC is targeting 2024 year-end leverage of 1.0 times – we are more conservative at 1.7 tines),” he said. “We see de-leveraging as a significant positive for the valuation of Air Canada’s equity.”

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The move by PrairieSky Royalty Ltd. (PSK-T) to double its quarterly dividend should “provide a signal to the market of [its] confidence in its high-margin business model and the outlook for drilling and leasing activity,” according to iA Capital Markets analyst Matthew Weekes.

The Calgary-based company announced the move to hike its payout to 24 cents a share from 12 cents previously after the bell on Monday alongside the release of its third-quarter results.

“The decision reflects strong organic production growth over the past year, strong leasing and drilling tailwinds, and an accelerated pace of debt reduction following the Heritage acquisition compared to initial expectations,” he said. “The revised annual 96 cents per share payment will yield 4.7 per cent on the current price and we estimate is sustainable at low commodity prices, with a payout ratio of 50 per cent in 2023 based on our commodity assumptions, leaving room for incremental dividend increases on an annual basis, continued near-term debt reduction, and flexibility for royalty acquisitions or share buybacks.”

For the quarter, PrairieSky reported funds from operations per share of 52 cents, up 73 per cent year-over-year and beating the analyst’s estimate by 2 cents. That came with royalty production of 24,986 barrels of oil equivalent per day, in line with Mr. Weekes’s projection of 24,950 boe/d and well above the output of the previous year (19,871 boe/d).

“PSK’s Q3/22 results were solid, with both production and FFO/share essentially in line with our forecasts, as higher gas production and average realized pricing versus our forecasts offset lower oil production which faced a seasonal quarter-over-quarter drop coming out of breakup,” said Mr. Weekes. “Production growth was strong year-over-year, driven by both acquisition volumes and 20-per-cent organic growth in oil production, and third-party operators were active, spudding 50 per cent more wells on PSK’s lands compared to the prior year.”

Raising his production, EBITDA and FFO projections for the remainder of 2022 and 2023, Mr. Weekes bumped his target for PrairieSky shares to $24 from $23, maintaining a “buy” rating. The average on the Street is $24.54.

Others making target adjustments include:

* ATB Capital Markets’ Patrick O’Rourke to $23 from $22 with a “sector perform” rating.

“[The dividend increase] comes one quarter ahead of our prior thinking with respect to management and the board addressing the dividend policy which we had expected concurrently with the Q4/22 results release – this acceleration will likely be viewed as a win for return of capital focused investors,” said Mr. O’Rourke.

* Raymond James’ Jeremy McCrea to $28 from $27 with an “outperform” rating.

“With PSK’s competitive royalty framework (vs. the Crown at current prices), we suspect production should continue to grow faster than prior years. Although PrairieSky may not have the torque to commodity prices unlike its traditional E&P peers, investors might find comfort in the safety of the company, especially as a true inflation hedge given no spending/operating requirements. Overall, the 3Q results should have a positive share price reaction,” said Mr. McCrea.

* CIBC’s Jamie Kubik to $27 from $26 with an “outperformer” rating.

“We take this as a good update out of PrairieSky with production and cash flow exceeding expectations, although liquid volumes came in weaker than Street estimates,” said Mr. Kubik. “We expect the oil miss is transitory however, given the level of oil-focused spud activity in Q3/22. We were expecting to see a dividend increase in 2023 given PSK’s low payout ratio, but the dividend bump arrives a quarter earlier than we were expecting and signals confidence in underlying activity levels. Our new estimates see PSK with a 2023 payout ratio of 51 per cent on strip, which remains modest and defensible under weaker commodity pricing. Our estimates point to PSK exiting 2023 with minimal debt, leaving room for potential M&A or future dividend increases. We continue to see PrairieSky as offering attractive and unhedged exposure to rising activity across the WCSB while remaining insulated from rising costs. We increase our production assumptions, which drive an increase to our cash flow estimates and prompt our price target increase.”

* RBC’s Luke Davis to $25 from $24 with an “outperform” rating.

* Canaccord Genuity’s Mike Mueller to $22.50 from $21.75 with a “buy” rating.

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While acknowledging TSX-listed mortgage stocks may be showing an “attractive entry point” given their weakness thus far in 2022, National Bank Financial analyst Jaeme Gloyn reaffirmed his cautious stance on the sector, believing patience is the “appropriate strategy” heading into third-quarter earnings season and for the remainder of the year.

“Our initial caution to begin the year centred on rising regulatory and policy uncertainty,” he said. “OSFI has yet to announce material regulatory changes since our July 2022 note, however, the message from the regulator is clear - mortgage borrowers are increasingly leveraged and OSFI is committed to taking action to manage the rising risk of higher credit losses.

“The rapid rise in interest rates on both sides of the balance sheet further increases the risk to mortgage origination volumes, loan growth and profitability. We reflect lower originations in our estimates. We also look at the potential payment shock HCG mortgage holders may face in the coming quarters ... we estimate an increase of up to $1,190 per month, or 43 per cent.”

In a research note released Tuesday, Mr. Gloyn also emphasized risks in the housing market remain elevated, noting the average price of a low-rise home in the Greater Toronto Area was down 7 per cent year-over-year in the first week of October despite inventory “rapidly” increasing.

“Valuation remains above trough levels, though the gap is closing ... Mortgage Finance stocks trade closer to crisis average valuation multiples than trough multiples,” he said. “This suggests to us that downside risk, perceived or actual, remains. Overall, we believe Mortgage Land’s relative underperformance will persist in the near term, at least until uncertainty surrounding these risks diminish. As a result, we lower our Price Targets cross the board. Our estimate changes largely reflect a slower pace of residential mortgage origination/loan growth.”

Mr. Gloyn said EQB Inc. (EQB-T) remains his top pick for the sector, lowering his target to $68 from $73 with an “outperform” rating. The average on the Street is $78.94.

“EQB remains our preferred name within the sector given stronger diversification relative to Mortgage Finance peers: i) asset mix (e.g., commercial, equipment and decumulation loans), ii) funding mix (e.g., more cost-effective EQ Bank and covered bond channels), and strategy (e.g., digital bank buildout, fintech / open banking relationships, Concentra acquisition, AIRB). While these fundamental strengths do NOT provide EQB with immunity, the company is more favourably positioned to manage through the current risks in our view,” the analyst said.

His other target changes were:

* Home Capital Group Inc. (HCG-T, “sector perform”) to $30 from $31. Average: $41.29.

“The lower target multiple compared to EQB reflects HCG’s greater exposure to residential mortgages and residential real estate investors. While we believe the company’s remaining excess capital (~$121 million, pro-forma SIB) will continue to drive an improved ROE [return on equity] profile, a more elevated risk backdrop (decelerating earnings momentum due to NIM [net interest margin] pressures and increasing risk of higher PCLs [provisions for credit losses] as the broader employment picture may deteriorate in a slowing economic backdrop) could constrain the company’s ROE potential near term,” he said.

* First National Financial Corp. (FN-T, “sector perform”) to $34 from $35. Average: $37.

“We remain positive about FN’s industry-leading and diversified origination platform, diversified funding model, limited credit risk, defensive recurring revenue model and capacity to consistently raise the dividend. These fundamentals help explain FN’s premium trading multiple of approximately 11.4 times on 2023 consensus EPS vs. the Big Six Bank average of 8.8 times. However, FN historically trades at a discount to Big Six Banks, particularly during periods of elevated risks to the outlook. Moreover, FN’s near-term earnings power is more sensitive to sudden shifts in origination volumes. As origination volume growth faces risks related to rapidly rising interest rates and a still unfavourable regulatory backdrop, we reiterate our Sector Perform rating,” he said.

* Timbercreek Financial Corp. (TF-T, “sector perform”) to $8.25 from $8.75. Average: $9.20.

“Overall, we believe the portfolio quality remains robust (i.e., a high percentage of multiunit residential properties, first mortgages, cash-flowing properties, low LTV loans) and will benefit from stable commercial real estate trends in its key segments and geographies (multi-unit residential),” he said.

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Ahead of third-quarter earnings season for pipeline, utility and energy infrastructure companies, National Bank Financial analyst Patrick Kenny adjusted his target prices for stocks in his coverage universe.

His changes were:

Midstream

• Gibson Energy Inc. (GEI-T, “sector perform”) to $23 from $25. Average: $25.50.
• Keyera Corp. (KEY-T, “outperform”) to $35 from $38. Average: $35.08.
• Pembina Pipeline Corp. (PPL-T, “sector perform”) to $45 from $48. Average: $50.81.
• Superior Plus Corp. (SPB-T, “outperform”) to $12 from $13. Average: $13.21.

Pipelines

• Enbridge Inc. (ENB-T, “outperform”) to $53 from $61. Average: $59.05.
• TC Energy Corp. (TRP-T, “sector perform”) to $56 from $65. Average: $67.

Power

• Capital Power Corp. (CPX-T, “outperform”) to $48 from $52. Average: $51.62.
• TransAlta Corp. (TA-T, “sector perform”) to $13 from $15. Average: $16.04.

Utilities

• Atco Ltd. (ACO-X-T, “sector perform”) to $40 from $49. Average: $50.64.
• Brookfield Infrastructure Partners LP (BIP-N/BIP.UN-T, “outperform”) to US$38 from US$46. Average: US$45.79.
• Canadian Utilities Ltd. (CU-T, “sector perform”) to $33 from $40. Average: $38.69.
• Emera Inc. (EMA-T, “sector perform”) to $51 from $60. Average: $59.83.
• Hydro One Ltd. (H-T, “sector perform”) to $31 from $36. Average: $36.25.

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In his earnings preview, Credit Suisse analyst Andrew Kuske made a series of rating changes and target adjustments to his coverage universe, which includes forest products, renewable power, infrastructure and utilities.

He upgraded these stocks:

* AltaGas Ltd. (ALA-T) to “outperform” from “neutral” with a $30 target from $32.50. Average: $32.73.

* Canadian Utilities Ltd. (CU-T) to “neutral” from “underperform” with a $38.50 target from $41.50. Average: $38.69.

* TransAlta Renewables Inc. (RNW-T) to “outperform” from “neutral” with a $17 target from $19.50. Average: $17.46.

Mr. Kuske downgraded Boralex Inc. (BLX-T) to “neutral” from “outperform” with a $43 target from $55. Average: $49.

His target changes included:

• Atco Ltd. (ACO.X-T, “neutral”) to $48 from $49.50. Average: $50.64.
• Algonquin Power & Utilities Corp. (AQN-N/AQN-T, “outperform”) to US$13 from US$15. Average: US$15.25.
• Capital Power Corp. (CPX-T, “outperform”) to $53 from $57.50. Average: $51.62.
• Emera Inc. (EMA-T, “neutral”) to $55 from $53.50. Average: $59.83.
• Enbridge Inc. (ENB-T, “neutral”) to $54 from $58. Average: $59.05.
• Fortis Inc. (FTS-T, “neutral”) to $56.50 from $62. Average: $57.75.
• Gibson Energy Inc. (GEI-T, “neutral”) to $22.50 from $24. Average: $25.50.
• Hydro One Ltd. (H-T, “neutral”) to $34 from $36. Average: $36.25.
• Innergex Renewable Energy Inc. (INE-T, “outperform”) to $21.50 from $27.50. Average: $21.08.
• Keyera Corp. (KEY-T, “outperform”) to $35.50 from $38. Average: $35.08.
• Northland Power Inc. (NPI-T, “outperform”) to $48 from $53. Average: $49.07.
• Pembina Pipeline Corp. (PPL-T, “outperform) to $52 from $55. Average: $50.81.
• TC Energy Corp. (TRP-T, “neutral”) to $63 from $70. Average: $67.
• TransAlta Corp. (TA-T, “outperform”) to $15 from $17.50. Average: $16.04.

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After Monday morning’s release of weaker-than-anticipated preliminary third-quarter results, a reduction to its full-year guidance and a plan to idle production for two weeks sent its shares plummeting 18.6 per cent, Scotia Capital analyst Mark Neville downgraded NFI Group Inc. (NFI-T) to “sector perform” from “sector outperform, citing elevated equity risk.

“2022 guidance was cut due to component supply issues,” he said. “Revised guidance would put NFI offside on its adj. EBITDA leverage ratio covenant (liquidity looks fine) when covenant tests resume on Jan. 1, which significantly increases the risk profile of the equity in the near-term. Management indicated it was working with its banks and governments on a relief plan. While the company’s banking syndicate has proven to be very supportive of NFI through the pandemic/supply chain issues, the company has also de-risked the syndicate along the way (via equity and convertible debentures) and there can be no assurance that further de-risking will not be required, which could potentially result in significant dilution. As such, in our view, the current investment thesis is more dependent on covenant relief than the business fundamentals, which still appear strong (outside of supply chain issues). While we continue to believe the upside potential in NFI shares remains significant, we feel compelled to downgrade NFI to Sector Perform as we have no visibility into relief negotiations.”

Mr. Neville’s target for NFI shares fell by $1 to $13 and below the $13.90 average.

Other analysts making adjustments include:

* ATB Capital Markets’ Chris Murray to $18 from $21 with a “speculative buy” rating.

“While demand conditions remain strong and bode well for the medium-term outlook, the announcement was a clear setback,” he said. “We will be looking for additional details on current market conditions with Q3/22 results, which are now planned for November 15.”

* National Bank’s Cameron Doerksen to $13 from $17 with a “sector perform” rating

“We expect the stock to remain under pressure until there is more tangible evidence that the supply chain is normalizing, and the company receives covenant relief,” said Mr. Doerksen.

* CIBC’s Kevin Chiang to $10 from $14 with a “neutral” rating.

“NFI’s Q3 pre-release was disappointing as this is the third time it has lowered its outlook for 2022 and the fifth time it has adjusted its outlook lower since 2021. It highlights the continued pressure the company is facing as it navigates through its supply chain issues. The main issue is that the company does not have good visibility on when these bottlenecks will ease, which in turn makes it difficult to forecast near-term earnings trends. With NFI now forecasting an EBITDA loss in 2022, it will trip its Total Leverage Ratio covenant on January 1, 2023, which means the company will again have to seek covenant relief having just received relief this past summer. This lack of earnings visibility keeps us on the sidelines,” said Mr. Chiang.

* TD Securities’ Daryl Young to $11.50 from $14.50 with a “hold” rating.

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Seeing “significant” growth ahead and touting its “strong” balance sheet and internally funded growth, Canaccord Genuity analyst Roman Rossi initiated coverage of Aura Minerals Inc. (ORA-T) with a “buy” rating on Tuesday.

The British Virgin Islands-based company is a Latin American mid-tier producer, owning three operating mines and five projects across Brazil, Mexico, Honduras and Colombia.

“The company currently has three operating mines (San Andres, Aranzazu and EPP) and three key projects that should translate into increased production in the next three years. Almas, Matupa and Borborema are expected to be commissioned in 2023, 2024 and 2025, respectively,” the analyst said. “Altogether, we believe that Aura could reach 475kGEO production by 2025, which could translate into US$484-million in EBITDA based on our US$1,892 gold price forecast.”

Mr. Rossi sees “attractive” exploration upside across its diversified portfolio, which he thinks reduces regulatory and political risks.

“Aura has been increasing its exploratory budget over the last few years (from US$8-million in 2018 to US$25-million in 2022), bringing an increase in LOM,” he said. “We believe the campaign at EPP and Aranzazu could be critical to extend the reserves and resources further. In our view, updates on exploration results and new development projects could serve as significant catalysts.”

Mr. Rossi set a target for Aura shares of $15.50. The current average on the Street is $18.25.

“We believe that the company has a very well delineated path to break the 400kGEO threshold by 2025, thanks to its short- and mid-term projects,” he concluded.

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In other analyst actions:

* Believing its balance sheet “at risk of a potential funding gap,” RBC Dominion Securities analyst Wayne Lam downgraded Equinox Gold Corp. (EQX-T) to “underperform” from “sector perform” and cut his target to $5.50 from $8, seeing “elevated costs across the portfolio.” The average target on the Street is $5.

* Scotia Capital’s Ovais Habib lowered Calibre Mining Corp. (CXB-T) to “sector perform” from “sector outperform” and dropped his target to $1.50 from $2.25 and below the $2.09 average.

“We are downgrading our rating on shares of Calibre Mining following the announcement of a US Presidential Executive Order that includes the authority to ban U.S. companies from doing business in Nicaragua’s gold industry, along with the U.S. Treasury Department’s imposed sanctions on Nicaragua’s mining authority and another top government official,” said Mr. Habib. “In our view, the intent of these actions appears to be targeted towards gold (a major export for Nicaragua) as an important source of foreign currency revenue. To be clear however, while these actions are aimed at a small group of individuals with ties to the United States, we see this having an out-sized impact for Calibre given that 88 per cent of Calibre’s Asset NAV and 82 per cent of 2022 production is in Nicaragua as investors adopt a wait-and-see approach. To reflect this change in investor sentiment we have applied lower multiples (outlined below) which reduces our price target

* In a research note previewing quarterly results for diversified industrial companies in his coverage universe, Desjardins Securities’ Gary Ho raised his Boyd Group Services Inc. (BYD-T, “buy”) target to $230 from $222, citing the strength of the U.S. dollar. Based on lower estimates and peer multiples, he reduced his targets for CareRX Corp. (CRRX-T, “buy”) to $5.50 from $6, Dentalcorp Holdings Ltd. (DNTL-T, “buy”) to $15.50 from $17 and Superior Plus Corp. (SPB-T, “buy”) to $12.50 from $13.50. The averages on the Street are: $213.08, $6.88, $16.77 and $13.21, respectively.

* JP Morgan’s Matthew Boss lowered his target for Lululemon Athletica Inc. (LULU-Q) to US$413 from US$464 with an “overweight” rating. The average is US$378.58.

* Desjardins Securities’ Chris Li dropped his Parkland Corp. (PKI-T) target to $36, down from $44 and below the $42 average. He kept a “buy” rating.

“We have lowered our estimates following last week’s 3Q EBITDA update reflecting commodities volatility,” said Mr. Li. “While we believe PKI’s valuation is inexpensive, with the stock trading at near-trough 6.5 times forward EBITDA with little value attributed to its retail business, catalysts and patience are needed. Continued deleveraging (to less than 3.0 t,es in early 2023), improved macro visibility and a clear path to EBITDA of $2-billion by 2025 should improve sentiment and valuation.”