Inside the Market’s roundup of some of today’s key analyst actions
National Bank Financial analyst Vishal Shreedhar sees a “challenging but manageable backdrop” for Loblaw Companies Ltd. (L-T).
“We highlight that over the last few quarters, food inflation has accelerated; Statistics Canada data suggests food store CPI averaging 9.7 per cent (April/May data only) over L’s Q2/22,” he said. “Moderate levels of inflation have historically benefited grocers; however, pervasive and heightened inflation could eventually pressure gross margins. For now, we believe that L has benefitted from an ongoing shift to discount (driving market share gains), margin enhancement through drug store (including strong expected OTC trends) and execution against its Retail Excellence strategy.”
In a research report released Wednesday previewing the July 27 release of the Canadian retail giant’s second-quarter results, Mr. Shreedhar said he’s now projecting earnings per share to grow almost 18 per cent year-over-year to $1.60 (from $1.35), which is penny higher than the consensus estimate on the Street.
He said the gain reflects “positive” food retail same-store sales growth (estimated at 3.0 per cent versus a decline of 0.1 per cent a year ago), “continued momentum” at Shoppers Drug Mart Corp., a decline in COVID-19 costs, the benefits from its ongoing improvement programs and share repurchases.
“We continue to maintain a favourable view on Loblaw and recommend it as a top pick in our staples coverage, supported by several key themes: (1) Anticipated continued execution and benefits from management’s improvement initiatives; (2) Solid earnings growth (we forecast 14 per cent year-over-year in 2022); (3) Market share gains aided by heightened growth in discount and favourable drug store performance (Loblaw over-indexes in both); (4) The ability to pass on elevated food inflation; and (5) Potential structural benefits, including longer-term stronger grocery demand,” said Mr. Shreedhar.
Reiterating an “outperform” rating for Loblaw shares, he raised his target to $125 from $122. The average on the Street is $123.50, according to Refinitiv data.
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Expressing concern over its shift to prioritizing adult-use sales, Raymond James analyst Rahul Sarugaser lowered his recommendation for Aleafia Health Inc. (AH-T) to “underperform” from “market perform.”
“We have trouble seeing how AH will muster the competitive capacity to gain relevant (more than 5-per-cent) market share — and away from capitalizing on the potential of its union contracts’ sticky, high-margin medical cannabis revenue — AH’s key differentiating trait within the Canadian cannabis sector, in our view —combined with the (highly-likely) significant dilution from its much-needed revised convertible debt, we adjust our thesis on AH,” he said.
After it revised its $39.4-million in convertible debt into three tranches, Mr. Sarugaser, who sees the company become EBITDA positive in fiscal 2024, feels Aleafia will not be in the position to repay on schedule.
“We calculate the issuance of 143.9 million additional shares by way of conversion, for an FD share count of 545.3 million, representing 36-per-cent dilution,” he said.
The analyst cut his target for the Toronto-based company’s shares to 10 cents from 30 cents. The average is 23 cents.
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“Positive on pulp,” Credit Suisse analyst Andrew Kuske raised his rating for Vancouver-based Mercer International Inc. (MERC-Q) to “outperform” from “neutral.”
“We believe Mercer International Inc. (MERC) faces many positives that range from commodity prices (pulp, lumber and power), generally favourable FX rates (EUR/USD and USD/CAD) along with a rather attractive valuation. In this context, even with more moderate (in our view) future embedded forecasts around commodity prices and FX, among other factors, we upgrade MERC,” he said.
“On a near-term basis, there are clearly some concerns on the impact of a fire at the Stendal Pulp Mill and, as with many others in the market, the impact of a potential economic recession. Pulp exposed stocks typically possess a significant amount of operating leverage that is subject to a considerable amount of commodity price volatility. These factors combined with limited trading liquidity can often exaggerate the stock’s performance. To us, the recent downward movement in MERC’s stock provides an interesting opportunity for potential performance.”
After raising his 2022 earnings per share estimate to US$3.92 from US$3.55, Mr. Kuske bumped his target for Mercer shares to US$19 from US$18.50. The current average on the Street is US$18.40.
“MERC is favourably positioned as a large NSBK producer; however, pulp pricing movements require nimble trading - especially from more elevated levels,” he added.
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Seeing Primaris Real Estate Investment Trust (PMZ.UN-T) with “a dominant position in secondary markets that have few alternatives for tenants,” iA Capital Markets analyst Gaurav Mathur initiated coverage with a “buy” rating, expecting it to benefit from a rebound in the investment market and possessing the “strongest” balance sheet in the Canadian retail REIT sector.
“We believe that investors use the same paintbrush across the retail asset landscape when it comes to enclosed malls, irrespective of location, population density and footprint,” he said in a research report. “Primaris is the only Canadian REIT focused on enclosed shopping centres and is the third-largest nationwide owner and manager of this type of asset. The nuance here is that most of its assets are the only shopping centres in those markets, thus being primary properties for an entire community that is residing in a secondary market.”
“Over the COVID-19 pandemic, many institutional investors decided to reduce their exposure to retail CRE, especially shopping centres, which have weighed heavily on their portfolios. Based on our conversations with retail CRE brokers, there is a ready pipeline of assets available to buyers and a bottom has been formed in the Canadian enclosed mall sector. We note that transactions resumed in 2021 and 2022, and we see a substantial opportunity for Primaris to both grow through acquisition and actively recycle capital to enhance value and become a consolidator of enclosed shopping malls.”
Mr. Mathur thinks Toronto-based Primaris, which has a portfolio totaling 11.3 million square feet valued at approximately $3.3-billion, “clearly stands out in the sector,” noting its low debt-to-gross book value of 29 per cent, versus an average of 44 per cent for its Canadian retail REIT peers.
“We note that the Canadian REIT sector is devoid of pure-play mall REITs,” he added. “While the U.S. does have some names, there are key differences in property fundamentals on both sides of the border. In our view, the mall REITs, which have fared well in the U.S., have primary assets in their respective geographic locations that focus on high population density areas, much like Primaris REIT. We further believe that the REIT will witness cap rate compression closer to its U.S. pure-play mall REITs as it executes on its strategy.”
Mr. Mathur set a target of $15 per unit. The average target on the Street is $17.25.
Primaris, formerly known as Borealis Retail REIT, began trading on the TSX on Jan. 4 after a spinoff by H&R Real Estate Investment Trust (HR.UN-T).
“The market is providing an attractive entry point to a name with: (1) strong earnings and NAV growth profile through a collection of primary assets in secondary markets, (2) acquisition advantage by being the only major buyer of assets, (3) the strongest balance sheet in the sector, and (4) an attractive dividend profile (6.5-per-cent yield),” he said.
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Carbon Streaming Corp.’s (NETZ-NE) diversified project portfolio creates a “stable” platform and supports its valuation, according to National Bank Financial analyst Lola Aganga.
In a research report released Wednesday, she initiated coverage of the Toronto-based company, which invests in carbon offset projects to earn credits to sell on voluntary markets, with an “outperform” recommendation.
“Accounting for some conservatism in our near-term outlook, we model three- (2023 - 2026) and five-year (2023 – 2028) credits sales growth of 8.7 per cent and 9.6 per cent (CAGR) compared to broader streaming and royalty peers at 7.2 per cent and 5.1 per cent, respectively.
“CSC’s portfolio stands apart as it includes several high-quality REDD+ projects. Within the current portfolio, 12 projects are expected to make initial deliveries in the next year, with CSC guiding towards issuance of 5– 5.6 million credits in calendar 2022 (NBF Estimates: 100,000 credits in 2022 with growth to 6.3 and 7.8 million credits by 2023 and 2024, respectively).”
Ms. Aganga thinks Carbon Streaming has shown a “solid” track record of acquisitions over the last 12 months, estimating transactions have brought internal rates of return averaging 15-20 per cent.
“With net cash of US$100-million and US$40-million of annual FCF over the next three years, we believe CSC is well-positioned to deliver on its growth mandate through additional acquisitions,” she added.
She set a Street-low target of $7.50 per share. The current average is $13.09.
“Supporting our Outperform rating, NETZ is currently trading at a significant discount to the overall peer group of junior to intermediate streaming companies on a P/NAV basis and at EV/ EBITDA multiples comparable to cleantech IPPs, even after excluding Rimba Raya in our fiscal 2023E estimates,” said Ms. Aganga. “We view this discount, particularly on P/NAV, as unwarranted given 1) the high-quality and diversified offset portfolio, 2) production growth from the ramp-up of Cerrado Biome, Cookstoves and Sustainable Communities projects, as well as longer-term optionality from Rimba Raya and the Bonobo Peace Forest, and 3) the potential for accretive acquisitions supported by a strong track record over the past 12 months.”
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Arch Biopartners Inc. (ARCH-X) possesses “blockbuster potential to establish a new standard of care” for preventing and treating organ damage with its lead drug candidate Metablok, according to iA Capital Markets analyst Chelsea Stellick.
Seeing it “diversified across assets and indications,” she initiated coverage of the Toronto-based mid-stage, pre-revenue biotechnology company with a “speculative buy” recommendation on Wednesday.
“Arch holds a suite of proprietary Dipeptidase I (DPEP1) inhibitors and a strong portfolio of patents to ensure that DPEP1 as a novel, anti-inflammatory target remains entirely exclusive,” said Ms. Stellick. “Because so many diseases or injuries cause inflammation in the lungs, liver, or kidneys, there are many possible permutations for Arch’s path to its first product approval. Acute kidney injury (AKI) is the Company’s lead indication, which affects over 6 million people annually in the U.S.. The optionality of holding a suite of drug candidates applicable to multiple indications will allow Arch to pursue the optimal combination of clinical trials to identify the best niches for DPEP1 inhibition given market size, capital, time, and regulatory considerations. For added diversification via possible future partnerships, developments or monetization opportunities, Arch also holds a small portfolio of unrelated early stage assets.”
The analyst thinks Arch has the ability to tap into a “massive” potential market size, noting the inflammation market was been pegged at more than $100-billion last year.
“We believe Arch can capture a substantial subset of this market upon approval given the unique mechanism of action, preliminary evidence of efficacy, and proven safety of the LSALT peptide (Metablok),” she said. “Given that no competitors are working on DPEP1, we believe Arch is in a strong position to create a new segment of targeted anti-inflammatory medications beginning with development in the large unmet need of AKI.”
“One of Arch’s unique strengths is its ability to operate out of academic settings with low-cost access to world-class infrastructure for research. During our site visit to the laboratory in Calgary, AB, we noted how Arch’s cash burn rate remains modest despite the rapid development of Metablok from preclinical to Phase 3 in two years. Namely, vertical integration allows Arch to benefit from and support further academic research that provides supporting material for grant applications, which Arch has been very successful at securing. Similarly, the Phase 2 COVID-19 and Phase 3 COVID-19 Metablok trials were both funded by grants that minimized the need for capital while Arch proves its value with clinical data.”
Ms. Stellick, currently the lone equity analyst covering the company, set a target of $6 for Arch shares, a potential gain of 93.6 per cent on Tuesday’s close.
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With a “deteriorating price environment,” National Bank Financial’s Shane Nagle and Rabi Nizami updated their price assumptions for base metals through 2023 on Wednesday.
“While we had previously anticipated some price volatility throughout 2022 given China’s zero-COVID policies, Russia’s ongoing invasion of Ukraine, global supply chain issues, rising inflationary pressures and pending supply growth within the copper market, recent global recessionary fears have made the market relatively near-sighted and unable to price in favorable long-term fundamentals,” the analysts said.
While they thinks long-term fundamentals “remain positive,” the pair said the most “notable” decrease was their copper price forecast for 2022 and 2023, which fell to US$3.60 per pound from US$4.70. Their nickel estimate slid to US$9.75 from US$14 with hard coking coal dropping to US$300 per ton from US$375.
“Beyond an anticipated market surplus in copper throughout 2023/2024, we anticipate a growing structural deficit to take hold beginning in 2025,” they said “This deficit is partially driven by stable long-term demand due to broader ‘Green Energy’ initiatives, increased spending on electrification and EV adoption. More material price support will stem from lack of supply growth as there remain limited substantial projects contemplated for development beyond those coming online over the next few years and the current market environment is expected to further stifle production growth given depressed copper prices and inflationary environment.”
The changes to his price deck prompted a decline in the target prices for several companies in their coverage universe. However, the analysts did say three company’s stand to see “better relative performance from strong balance sheets in [a] risk-off environment.”
“We highlight balance sheet sensitivity across our coverage universe for producers capable of deferring capital projects and harvesting cash flow to preserve the cash throughout a potential period of depressed prices through to the end of 2024,” he said. “TECK/B and FM are capable of preserving a strong balance sheet and supporting shareholder returns without sacrificing near-term growth objectives while LUN remains in a strong financial position assuming the deferral of Josemaria development.”
Their target adjustments for those companies are:
- First Quantum Minerals Ltd. (FM-T, “outperform”) to $35 from $46. The average on the Street is $42.75.
- Lundin Mining Corp. (LUN-T, “sector perform”) to $9.50 from $14. Average: $13.45.
- Teck Resources Ltd. (TECK.B-T, “outperform”) to $55 from $65. Average: $62.51.
Their other changes are:
- Adventus Mining Corp. (ADZN-T, “outperform”) to $1 from $1.10. Average: $1.51.
- Capstone Copper Corp. (CS-T, “sector perform”) to $4.50 from $7.25. Average: $8.25.
- Copper Mountain Mining Corp. (CMMC-T, “outperform”) to $2.75 from $4.50. Average: $4.89.
- Ero Copper Corp. (ERO-T, “sector perform”) to $16.50 from $21.50. Average: $24.77.
- Filo Mining Corp. (FIL-T, “outperform”) to $30 from $35. Average: $27.14.
- Foran Mining Corp. (FOM-X, “outperform”) to $3.30 from $3.50. Average: $3.47.
- Hudbay Minerals Inc. (HBM-T, “outperform”) to $8.50 from $11.50. Average: $12.56.
- Sherritt International Corp. (S-T, “sector perform”) to 75 cents from $1. Average: $1.19.
- Solaris Resources Inc. (SLS-T, “outperform”) to $16 from $22. Average: $21.73.
- Taseko Mines Ltd. (TKO-T, “sector perform”) to $1.85 from $3. Average: $3.16.
- Trevali Mining Corp. (TV-T, “sector perform”) to 65 cents from $1.50. Average: $1.21.
- Trilogy Metals Corp. (TMQ-T, “sector perform”) to $1.35 from $1.75. Average: $2.32.
“CMMC is expected to provide updated Copper Mountain reserve/resource update and revised LOM plan,” they said. “TECK/B continues to look at monetizing non-core interests in oil sands to deliver value and drive shareholder returns. LUN may look to preserve capital and defer Josemaria development resting on the strongest balance sheet in the sector currently. First Quantum is expected to finalize an agreement on tax & royalty framework at Cobre-Panama which will provide some nearterm certainty in operating assumptions.”
“The current market may be the last chance for industry majors to acquire high-quality, long-term development assets in a depressed commodity price environment. Both FIL and SLS continue to showcase world-class resource growth while development remains far enough in the future that current inflationary pressures shouldn’t impact valuations.”
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In other analyst actions:
* Raymond James’ Savanthi Syth cut her Air Canada (AC-T) target to $23 from $30, maintaining an “outperform” rating. The average is $28.87.
“We are updating our earnings forecast for Air Canada reflecting a revised macro outlook similar to recent earnings revisions for our U.S. airline coverage,” she said.. “While we acknowledge that it will be difficult for shares to outperform until street estimates reset lower, we believe the risk-reward is compelling at current levels, particularly given Air Canada’s strong liquidity position (46 per cent of 2019 revenue at the end of March).”
* With its deal to be acquired by Hecla Mining Co. (HL-N), Canaccord Genuity’s Kevin MacKenzie cut his target for Alexco Resource Corp. (AXU-T) shares to 61 cents from $1.25 with a “hold” rating. The current average is $1.07.
“Given the ongoing ramp-up challenges faced by Alexco at Keno Hill, [Tuesday’s] announcement comes as no surprise,” he said. “In our June 22 note Missing the mark, we highlighted Alexco as a ‘potentially attractive acquisition target for an experienced and capitalized silver producer, this given the project’s (1) permitted/established infrastructure, (2) high-grade profile, and (3) illustrated district scale upside”. We qualified this statement by noting that “any potential M&A would likely be centered on renegotiating the project’s silver stream (25-per-cent Ag payable), which is held by Wheaton Precious Metals’.
“While Alexco may have left long-term value on the table with regard to the acquisition valuation, we suspect that there were limited attractive alternatives given Alexco’s financing overhang and the asset’s development/operational risk.”
* In response to its acquisition of the remaining 25.97-per-cent equity ownership of Petrogas Energy Corp. from Idemitsu Canada Corp. for $285-million, Raymond James analyst David Quezada raised his AltaGas Ltd. (ALA-T) target by $1 to $35.50, exceeding the $34.67 average, with an “outperform” rating.
“We believe this transaction is consistent with the company’s export-driven midstream strategy and comes at an attractive valuation while providing strong earnings accretion,” he said.
* A group of analysts reduced their targets for Argonaut Gold Inc. (AR-T) after the close of its $195-million equity financing. Those making changes include: RBC’s Wayne Lam to $1.25 from $2.75 with an “outperform” rating, Scotia’s Ovais Habib to $1.25 from $3 with a “sector outperform” rating, Desjardins Securities’ John Sclodnick to $1.25 from $2.50 with a “buy” rating and Canaccord Genuity’s Michael Fairbairn to 65 cents from$1.50 with a “hold” rating. The average is $1.93.
“We view the announced capex update at Magino and associated financing as a tough but necessary measure to recapitalize the company in getting construction to the finish line. In our view, current share price and depressed valuation reflect the market’s low level of confidence given successive budget overruns, which may be sustained until the project has greater visibility to completion in early-2023. We lower our price target to $1.25 (from $2.75) reflecting significant equity dilution and further capex increase at Magino,” said Mr. Lam.
* RBC Dominion Securities’ Irene Nattel cut her Aritzia Inc. (ATZ-T) target to $52 from $60, which is the current average on the Street. She maintained a “sector perform” recommendation.
“Forecasting solid FQ1 performance with easy prior year comp, but trimming our outlook for F24 and raising our valuation discount rate to reflect uncertainty over the visibility and sustainability of discretionary consumer spending, particularly as we move through late C22/23,” she said. “Notwithstanding compelling implied upside, we maintain our Sector Perform rating on a relative basis, with other similarly compelling SMID-cap names in our coverage benefiting from a more defensive posture.”
* Raymond James’ Brian MacArthur trimmed his target for Champion Iron Ltd. (CIA-T) to $8.25 from $8.75 with an “outperform” rating. The average is $8.50.
“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 Fe) located in Quebec, Canada, a lower-risk jurisdiction. 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,” he said.