Inside the Market’s roundup of some of today’s key analyst actions
Following the close of its US$900-million hybrid note offering, AltaGas Ltd.’s (ALA-T) leverage position has “materially” improved, according to ATB Capital Markets analyst Nate Heywood.
“The proceeds will be used to repay current indebtedness under the credit facility (approximately $673-million as of Q2/24) and for repaying senior notes,” he said in a research report released Tuesday. “ALA has two notable maturities for an aggregate $800-million due in H1/25 ($300-million in January and $500-million in June).
“The hybrid offering significantly improves the calculated leverage position as ALA’s 4.5 times leverage target excludes hybrid notes. As a result, we are now forecasting a year-end 2024 estimated multiple of 4.3 times (excluding hybrids) compared to 5.0 times previously. For comparability with peers and a 50-per-cent inclusion of hybrid notes in the calculation, we see leverage sitting near 4.8 times at YE2024. Leverage could further be improved with non-core asset sales, and we would note management previously initiated a formal sales process for its interest in the Mountain Valley Pipeline (MVP) asset. We previously estimated an MVP sale could improve leverage by 0.3-0.4 times.”
Resuming coverage following the offering, Mr. Heywood also emphasized the progress made by the Calgary-based energy infrastructure company on its growth pipeline.
“With Q2/24, management highlighted a focus on de-risking the REEF facility and securing commercial support toward 100 per cent of export capacity,” he said. “For REEF, site clearing and geotechnical work has been completed, with work starting on the jetty. The construction is 40 per cent underpinned by fixed price EPC contracts and management is working toward an additional 10 per cent. ALA is also progressing with Pipestone II construction, progressing discussions for a third Pipestone phase and has $1.5-billion in ARP investments it can deploy in Utilities over the coming years. "
While the offering prompted Mr. Heywood to trim his near-term projections for AltaGas, given an increase to its effective interest rate and, as a result, higher-than-previously-modeled interest costs, he reaffirmed his “outperform” recommendation and $36 target for its shares. The average target on the Street is $37.63, according to LSEG data.
“Near-term capital expenditures remain focused on the Utilities segment and near immediate and high risk-adjusted capital returns; however, the improving macro environment and rising global energy security narrative is offering support to midstream opportunities over the coming years,” he concluded. “The Utilities segment provides rate base opportunities and a stable investment profile in portfolio-enhancing initiatives. Midstream efforts are expected to be directed at optimizing global export capabilities, capturing synergies between RIPET and Ferndale, and utilizing latent capacity. ALA recently made positive FID on both REEF and Pipestone II, and has expressed interest in a potential fractionator expansion at North Pine. We see leverage levels falling toward 4.8 times at year-end 2024 based on our calculation with a 50-per-cent inclusion of hybrids; however, management’s calculation excludes hybrids and we have forecast leverage to exit 2024 below its 4.5 times target at 4.3 times. An MVP sale could help improve leverage metrics even further. While we remain supportive of modestly higher leverage than peers given the stable cash flow profile, we expect deleveraging initiatives could be a catalyst for the stock. We view ALA as a name that commands a premium; ALA currently trades at a 2024 estimate EV/EBITDA multiple of 11.1 times compared to peers at 10-11 times.”
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National Bank Financial analyst Dan Payne continues to see Tourmaline Oil Corp. (TOU-T) as a bellwether for the natural gas industry, which he sees as “one of the most dynamic & proactive” groups in the [energy] sector.
In a research report released Tuesday, he said the Calgary-based company is one of the only names experiencing a rising tide of funds flow and sees it well-positioned to benefit from the gas trade.
“Through the value proposition established by its dynamic & proactive approach, the company has created scale and opportunity that is an order of magnitude ahead of that of its peers; representing 15 per cent of domestic natural gas production (vs. largest U.S. peer 5-10 per cent) AND 15 per cent of conventional oil & liquids production, it is dominant in all realms,” he said. “With that, its $22-billion market capitalization is buoyed by solid funds flow in support of a premium valuation (6.1 times 2025 estimated EV/DACF [enterprise value to debt-adjusted cash flow] on strip vs. peers 5.1 times).”
In a research report released Tuesday titled The Value a Reflection of a Dynamic & Proactive Approach, Mr. Payne acknowledged its multiple is “a significant source” of his conversation with investors, discussing “What’s fair, why & how is it, where is it going?”
“Its easy to say that scale elicits a strong relative multiple, or that its booked NPV [net present value] suggests value through our target, while we can also point to the consistency & significance of its return of capital as providing yield support, and certainly given its relative exposures it should be comped closer to U.S. peers than CDN!!! All done, conversation over,” he added.
Calling it “one of Canada’s structurally most important companies,” the analyst reaffirmed his “buy” recommendation and $72.50 target for Tourmaline shares. The current average is $77.25.
“Was it too early for the street to chase the gas trade in the spring? Definitely,” said Mr. Payne and his colleagues in a Tuesday report titled Something is Percolating; Structural Trends in Support of the Gas Trade. “Could we put a brutal 2024 behind us and look forward to better structural support going forward? Probably. As with all things in gas markets, that’s as definitive as you can make them (i.e. things were definitely bad, and at best, possibly get better), but there is absolutely reason to be optimistic looking in to 2025 and beyond (as distilled in our prior publication; multiple sources of impending improvement for supply/demand). Uneveness in the market should continue to be expected as structural support entrenches itself (whether over quarters or years), and even the most optimistic gas producer will tell you that tactical positioning will remain important (risk the outcome of supply & demand trends accordingly). We continue to advocate for businesses that are defensible & opportunistic at relative lows ($2/mcf) with high-impact to be realized as prices rebound (i.e. $4/mcf), whether through insulation of market diversification, liquids, costs or a discounted valuation, and which we reflect in best positioning of; Large Caps (TOU & ARX) before pivoting towards higher-impact names like (AAV, PEY, SDE & BIR) plus the free-option gas exposure of TPZ.”
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TD Cowen analyst Brian Morrison thinks emerging catalysts should improve the valuation of Spin Master Corp. (TOY-T), naming the Toronto-based toy company to the firm’s “Canada Best Ideas” list on Tuesday.
He predicts Spin Master’s collaborative business model is “positioned to achieve attractive year-over-year revenue/EBITDA growth and strong FCF [free cash flow] in H2/24 that accelerates in 2025.”
“We view its current valuation as punitive, and reflective of a challenged consumer environment but more so in our view, missteps out of the gate with its Melissa & Doug (’M&D’) acquisition,” he said. “With M&D showing clear signs of improvement, the industry appearing to stabilize, and an exciting line-up of releases/licenses, we believe Q3/24 results should return to growth and improve investor confidence upon it achieving its annual financial guidance.”
“The next catalyst should be improved visibility on its 2024 financial guidance, inclusive of M&D, that should emerge with its Q3/24 results improving investor confidence in its guidance. We note the current consensus allocation between Q3/24 and Q4/24 likely needs to be updated pre-results to be more reflective of management guidance.”
Mr. Morrison has a “buy” rating and $46 target for Spin Master shares. The current average is $42.
“Our $46 price target is derived by applying a 7.25 times target multiple to our 2025 estimated EBITDA,” he said. “This multiple reflects an 2.5 times discount to its peers that we view as appropriate until investors gain comfort in the financial outlook for M&D/2024 guidance.”
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Analysts at Canaccord Genuity believe uranium equities have “decoupled from the underlying commodity price with little regard to the bullish commentary emanating following the [World Nuclear Symposium] earlier this month.”
“The supply shortfall has not magically evaporated, the global build-out of traditional nuclear has not slowed, but rather accelerated, and the pace of SMR development has, if anything, increased,” they said in a research report released Tuesday. “With our underlying thesis still very much intact (we retain our US$90/lb long-term price forecast) we see a compelling opportunity.”
Calling it “an unconscious uncoupling,” the analysts added: “Uranium equities have defied an improving term price, experiencing an 8 per cent decline year-to-date vs. an 18-per-cent increase in the reported term price. The recent pull-back in uranium equities, amidst a steady climb in the term price, has been highly uncharacteristic and has created the largest divergence (last 10-years) between the Global X ETF (equity proxy) and the long-term price. We believe this decoupling has signalled a breakdown between equities and the underlying price, with the equities appearing oversold, in our view. Average implied prices across our coverage now stand at $61/lb, while the mean P/NAV is 0.65 times. This equates to a 25-per-cent discount to both spot and term, with a number of our names pricing in similar valuation ranges to 12-months ago when spot and term were $65.50 and $61/lb, respectively.”
In a report titled Power required for energy hungry world, the firm predicted prices will continue to improve as supply levels struggle to meet rising demand.
“Our discussions with industry participants at WNA suggest that producers are now quoting largely market-related contracts with $75-$80 floors and $120+ ceilings, with escalators,” the analysts said. “As such, we view the base-escalated price ($80/ lb), as a backwards looking indicator, with most discussions happening at higher price points. This, in our view, has helped put a floor under spot, as it would not make sense for spot to trade at a material discount to term, given the opportunity this presents to traders, utilities, and producers to restock below current LT prices. We are now in a seller’s market, where producers are demanding higher prices. However, there are many utilities who are slow to accept and transact at higher price levels. Effectively, the market is in standoff. Our view is that utilities will eventually have to accept the ‘new normal’ and when this occurs, both term and spot will re-price higher.”
Analyst Katie Lachapelle made a series of target price changes to stocks in her coverage universe. They include:
- Cameco Corp. (CCO-T, “buy”) to $78 from $75. The average on the Street is $75.03.
- Encore Energy Corp. (EU-X, “buy”) to $8.50 from $8. Average: $7.47.
- Fission Uranium Corp. (FCU-T, “speculative buy”) to $1.65 from $1.75. Average: $2.11.
- Global Atomic Corp. (GLO-T, “speculative buy”) to $2.75 from $3. Average: $3.54.
- Uranium Royalty Corp. (URC-T, “speculative buy”) to $6.50 from $6.75. Average: $7.10.
“Our preferred equity exposures are DML, NXE, and EU in North America; PDN, LOT, DYL, and BOE in Australia; and KAP in the UK,” they said.
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Ventum Capital Markets analyst Devin Schilling views Diversified Royalty Corp. (DIV-T) as “a compelling investment opportunity that offers a balanced mix of income potential and growth.”
“DIV’s diversified royalty streams provide a defensive revenue base while its high dividend yield of 8.6 per cent makes it attractive in a declining interest rate environment,” he said. “With a proven track record of growth (both organic and via acquisitions) and a scalable business model, DIV is well-positioned to deliver long-term shareholder value. With a 47-per-cent forecasted total return, we view the Company’s shares as undervalued and anticipate that the easing interest rate cycle will boost valuation in the near term.”
Resuming coverage of the Vancouver-based company, Mr. Schilling set a “buy” rating and $4 target. The current average is $3.85.
“We view DIV as a top name to own in a declining interest rate environment as high-yield stocks tend to perform well as investors pursue yield,” he added. “As interest rates fall, bonds and other fixed-income investments yield less, making high-yield stocks more attractive to income-seeking investors. This dynamic could increase demand for DIV shares and provide a nice tailwind for the foreseeable future. We see the potential for a dividend increase in 2025 given the modest and declining payout ratio (88.6 per cent last quarter) and the growth prospects from the underlying portfolio.”
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In other analyst actions:
* Ahead of investor tour next week in Europe, Stifel’s Justin Keywood cut his ATS Corp. (ATS-T) target to $58 from $60 with a “buy” rating. The average is $57.50.
“We anticipate deep insight into autoinjector assembly lines for GLP-1 as the highest growth area, along with nuclear medicine and radio pharmaceutical technologies and processing/packaging for food products,” he said. “We also roll out new F2026 forecasts and adjust F2025 estimates as a transition year, from material EV headwinds, anticipated to comprise 22 per cent of sales vs. 31 per cent year-over-year. Our F2026 estimates assumes EV declines moderate, as OEM ordering inertia, heading into the U.S. election, could subside. We expect continued strength in Life Sciences, including from record FQ1 backlog. M&A continues to be part of our thesis and could materially change forecasts.”
* CIBC’s Anita Soni raised her B2Gold Corp. (BTG-N, BTO-T) target to US$3.60 from US$3.30. The average on the Street is US$4.09.
* BMO’s Joel Jackson raised his Chemtrade Logistics Income Fund (CHE.UN-T) target to $12 from $11 with an “outperform” rating. The average on the Street is $12.75.
“Raising our target price ... as CHE, which continues to look attractively valued, despite recent share price outperformance, also continues to flirt with index inclusion (though strong share buyback execution pushes the goal line out),” he said. “This as we update our model for: i) actions around the 2025 convertibles now being fully taken out; ii) CHE seemingly repurchasing shares under its NCIB at a 71k/day pace; and iii) a possible small blip to Q3 earnings from rail strike issues.”
* Stifel’s Cole McGill bumped his Foran Mining Corp. (FOM-T) target to $5 from $4.75 with a “buy” rating. The average is $5.29.
“Following the most recent financing, we continue to note the compelling dual track thesis through successfully derisking McIlvenna Bay and drilling district targets,” he said. “The most recent financing ($495-million in increased liquidity for $851-million total liquidity as of 2Q24) alongside FID with the G Mining approved US$604-million budget materially derisk McIlvenna Bay, the first track of our thesis. Alongside construction milestones to first production intimated 1H26, exploration drives the second track. FOM ground is 13 times less drilled than the eastern arm of the Flin Flon Greenstone Belt (which has yielded 18+ deposits more than 1MMt) and the recent 17,800 line-km geophysical survey, alongside 8,000m regional program have the ability to organically add value. Simply put, this year we have seen the copper price rally, the risk profile of McIlvenna Bay decrease, while FOM equity is effectively flat. In a market where Canadian assets of scale are being bid, something has got to give.”
* Acumen Capital’s Jim Byrne raised his Hammond Power Solutions Inc. (HPS.A-T) target to $160 from $156 with a “buy” rating (unchanged) in response to a definitive agreement to acquire the assets relating to the operations of Micron Industries Corp. in a deal worth US$16-million. The average is $165.
“The fundamental drivers for electrification and demand from multiple sectors is set to drive growth for Hammond for several years to come,” he said. “The company has delivered solid revenue growth and margin expansion in the past few years and the outlook for the next several years remains strong.”