Inside the Market’s roundup of some of today’s key analyst actions
The investor pessimism swirling around Air Canada (AC-T) and its peers feels “overdone,” according to National Bank Financial analyst Cameron Doerksen.
“We appreciate that the market is concerned about the sustainability of air travel demand and pricing as well as the ongoing contract talks with Air Canada’s pilot union,” he said. “However, we believe that the current share price reflects an overly dire scenario for Air Canada.
“On our updated 2024 forecast, which assumes a 3.0-per-cent decline in passenger unit revenues and non-fuel unit costs towards the high end of Air Canada’s guidance range, Air Canada shares are trading at just 2.9 times EV/EBITDA and 7.0 times P/E. This is below the historical average forward multiples (excluding the pandemic years) of 4.3 times EV/EBITDA and 9.0 times P/E. If we assumed that AC’s shares should trade at its historical average forward EV/EBITDA multiple in a trough earnings scenario, the current share price implies that 2024 EBITDA would come in at $2.5-billion, a 38-per-cent decline from the $4.0-billion Air Canada generated in 2023. We note that Q1/24 EBITDA was higher year-over-year.”
In a research report released Wednesday previewing its second-quarter financial results, Mr. Doerksen emphasized the airline’s current valuation now sits “at levels last seen during the depths of the pandemic.”
“During the pandemic, which effectively shut down air travel and forced airlines into survival mode, Air Canada saw its market cap fall from over $13-billion in January 2020 to just over $3-billion in March of that year (a decline of over 75 per cent),” he noted. “AC’s market cap rebounded late in 2020 and again in mid-2021 (briefly hovering over $10-billion, although this was partially due to two separate share issuances in Q4/20 and Q2/21) but has largely declined since then despite a dramatic financial turnaround and de-leveraging through 2023 (market cap currently sits at approximately $6.4-billion).
“In addition, compared to the U.S. peer group, Air Canada’s share price performance has largely underperformed since the beginning of 2023, only outperforming American Airlines (noting that this is mostly due to a large decline in AAL’s stock price in May after a profit warning). Delta shares have increased 42 per cent since the start of 2023 and United is up 28 per cent while AC’s stock has declined over 7 per cent over the same period.”
Mr. Doerksen thinks the primary headwind to investor sentiment for Air Canada shares in the near-term remains the uncertainty around negotiations with its pilot union, and he expects that to continue until a deal is reach. Following the disruptions caused by the strike by WestJet’s mechanics union, he predicts the federal government may get involved given Air Canada’s market position and the potential impact of the disruption to the country’s travel industry.
Believing its financial position “remains strong,” the analyst emphasized the demand for air travel “is not collapsing.”
“Based on CATSA passenger screening data at Canada’s largest airports, the most recent 7-day rolling average of passenger traffic in Canada was up 4.8 per cent year-over-year and so far this year, has largely been higher than last year. Airfares in Canada have stabilized the last three months with the most recent numbers from Statistics Canada showing prices up 4.5 per cent year-over-year in May and 15.6 per cent ahead of May 2019. We expect some yield erosion for AC in the coming quarters due mainly to tough comps, especially on Atlantic routes, but domestic prices look relatively health.”
“Overall Canadian industry domestic capacity in Q3/24, as measured by seats, is projected to be up 0.9 per cent year-over-year but down 7.1 per cent versus Q3/19. The U.S. trans-border market will see industry capacity up 13.7 per cent year-over-year in Q3 while international capacity to and from Canada is set to increase 8.7 per cent year-over-year. Air Canada should see particular strength this summer on Pacific routes where traffic was up 36 per cent in Q1 and yields flat despite a 38-per-cent increase in capacity.”
With updates to his 2024 forecast, which assumes a 3-per-cent decline in passenger unit revenues and non-fuel unit costs towards the high end of its guidance range, Mr. Doerksen trimmed his target for Air Canada shares to $28 from $30, keeping an “outperform” rating. The average target on the Street is $26.72, according to LSEG data.
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Calling it “a repositioned company” as it transitions from a predominantly oil and gas company to a more industrials-oriented business, RBC Dominion Securities analyst Arthur Nagorny upgraded Mattr Corp. (MATR-T) to “outperform” from “sector perform” on Wednesday.
“As Mattr works through the bulk of its growth capex program throughout the remainder of 2024, we believe top-line growth will begin to accelerate in H2 and beyond, which we believe will be more appropriately reflected in the company’s valuation over time,” he said.
“We believe management has done a good job of repositioning Mattr from a predominantly oil & gas focused company to a more industrials-oriented business over the last few years. The company has sold off most of its oil & gas subsidiaries since late 2020, with the sale of a substantial majority of Pipeline Performance Group (“PPG”) in November 2023 marking the completion of the company’s strategic review. Today, three of Mattr’s four remaining core businesses are exposed to industrial end-markets, which we believe are substantially less volatile than the company’s historical Pipeline & Pipe Services segment businesses (58 per cent of revenue in 2019). Despite this repositioning, Mattr’s valuation (5.6 times EV/ NTM consensus EBITDA) is only modestly above its 3-year average (5.1 times) and meaningfully below peers (9.0 times/9.0 times across Connection/Composite Technologies peers) even though the company has a stronger growth outlook (we forecast 2025 EBITDA/EPS growth of 22 per cent/35 per cent year-over-year, vs. 11 per cent/15 per cent for Connection Technologies peers and 15 per cent/7 per cent for Composite Technologies peers). As Mattr executes on its growth targets, we see potential for the valuation discount vs. peers to close over time.”
Mr. Nagorny raised his target for shares of the Toronto-based company, formerly known as Shawcor Ltd., to $20 from $18. The average target on the Street is $22.78.
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National Bank Financial analyst Dan Payne sees Topaz Energy Corp.’s (TPZ-T) $100-million infrastructure deal with Whitecap Resources Inc. (WCP-T) as a “very much an on-strategy acquisition for the company, with a number of strategic tailwinds, and the accretion of which should serve to maintain the positive momentum of shareholder value and its associated equity performance.”
Before the bell on Tuesday, Calgary-based Topaz announced the cash agreement, which centres on a 50-per-cent non-operated working interest in Whitecap’s newly commissioned natural gas and condensate facility in the Musreau area of the Alberta Montney.
“Implied transaction metrics of the transaction are forecast at around 7.0-7.5 times; these are accretive metrics, expanding its cash flow per share and FCF per share by approximately 4-5 per cent, respectively. Its infrastructure take-or-pay revenue expands by 20 per cent to a 26-per-cent proportional weighting (from 22 per cent), and which now covers nearly half of its dividend payout (from 1/3rd),” he said. “The acquisition is expected to be funded through its existing free cash and balance sheet, with leverage metrics expanding to about 1.1 times D/EBITDA at year-end (from prior 0.8 times).”
Mr. Payne thinks the acquired assets diversifies Topaz’s “regional exposure in to the high-impact Montney liquids fairway (from its preexisting TOU assets in the area that are predominantly Deep Basin oriented assets), while maintains the quality-bias of its assets (long-duration, new & high-utilization assets assigned to a quality counterparty).”
“Perhaps more importantly, the acquisition proves its proactivity in the A&D market, expanding its non-TOU infrastructure assets in an opportunistic fashion in association with one of its pre-existing (and similarly proactive) counterparties – that positive alignment of interests throughout being a significant strategic advantage,” he added.
Reiterating his “outperform” recommendation for Topaz shares, Mr. Payne raised his target by $1 to $28.50. The average target on the Street is $28.25.
“Recall, its dividend payout remains at the low-end of its target range (with upside to its cash yield to come as execution persists over the long-term), and peer comps (9.4-per-cent aggregate FCF yield vs. prevailing 10.1 per cent) suggest a near-term re-rate towards $26 is prospective,” he said.
Other analysts making target adjustments include:
* RBC’s Robert Kwan to $28 from $27 with an “outperform” rating.
“Topaz’s acquisition of interest in Whitecap’s Musreau facility is in line with strategy, and adds an additional plank of infrastructure (and incremental 13-14-per-cent yield) to the portfolio. We remain constructive on the story,” said Mr. Kwan.
* CIBC’s Jamie Kubik to $27 from $26 with an “outperformer” rating.
* Canaccord Genuity’s Mike Mueller to $29 from $28.50 with a “buy” rating.
* Jefferies’ Anthony Linton to $27 from $25 with a “buy” rating.
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In response to the heap leach pad failure at its Eagle gold mine in central Yukon last week, Ventum Capital Markets analyst Alex Terentiew moved his recommendation for Victoria Gold Corp. (VGCX-T) to “under review” from “buy” previously, calling the incident, which has caused its shares to drop by almost 85 per cent, “significantly negative.”
First Nation concerned Victoria Gold, Yukon government playing down impact of Eagle mine rockslide
“Considering the limited details provided regarding the remedial costs and timeline, the impact on the mine and environment, and the Company’s eventual ability to restart operations (essentially, the future is unknown), we have changed our rating to Under Review and removed our estimate of potential future value,” he said. “Overall, we expect the Company’s share price to be under pressure and volatile as the situation at its Eagle mine unfolds.”
With a “a substantial amount” of information on the incident and the Whitehorse-based company’s next steps unknown, Mr. Terentiew thinks future cash flow forecasts are “very uncertain.”
“Following the HLP failure, we expect several months of technical and environmental assessments will be needed before a technically viable plan can be formulated to bring the mine back into production,” he added. “In addition, we expect VGCX will have to re-apply for several permits to get Eagle back into production, and with regulators on heightened alert, re-permitting could take time. We note that the Eagle mine is an important economic driver in the Yukon, and we believe the government is likely to be cooperative in the restarting process.
“Long-term value remains, but with great uncertainty in the near term. Our estimates prior to the incident used a gold price of US$2000/oz and yielded a NAV of $1,124 for the Eagle Mine. If gold prices remain strong, we see an opportunity for value creation beyond the looming debt and remediation liabilities.”
Mr. Terentiew removed a target for Victoria Gold shares. His previous target was $14, exceeding the $11.19 average on the Street.
“A larger and financially stronger miner could come in and consolidate the mines and projects in the region, but until the permitting status and pathway to reopening the mine are clarified, we expect potential acquirers to stay on the sidelines,” he concluded.
“With $233-million in debt outstanding as of March 31, 2024, we think VGCX may struggle to service its debt and also fund remedial efforts at the mine.”
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Seeing its turnaround “in full stride,” RBC Dominion Securities analyst Greg Pardy thinks Suncor Energy Inc. (SU-T) is “well positioned to demonstrate ongoing operating and financial momentum, while addressing its longer term development opportunities.”
In a research note following meetings with its executive vice-president of oilsands Peter Zebedee and vice president of investor relations Troy Little, he reaffirmed the Calgary-based company as his favourite integrated energy producer in Canada and its place on the firm’s “Global Energy Best Ideas” list.
“Our recent meeting ... explored the company’s extensive oil sands portfolio, stepwise improvements in its operating performance and longer-term bitumen supply options,” said Mr. Pardy. “We have believed for some time that Suncor has been rigorously working its development plans behind the scenes. This meeting reinforced our confidence in that regard.”
“What stood out most to us from the discussion with Peter and Troy was the bitumen supply opportunities that Suncor possesses, including integration initiatives. Peter also emphasized that the rate at which its Millennium/North Steepbank mines run will be optimized well into the next decade as other barrels are added to the mix.”
Touting its organic growth opportunities and long-term production profile, the analyst kept an “outperform” recommendation and $65 target for Suncor shares. The average is $59.79.
“At current levels and under futures pricing, Suncor is trading at a 2024 estimated debt-adjusted cash flow multiple of 5.0 times (vs. our global major peer group avg. of 6.1 times) and a free cash flow yield of 11 per cent (vs. our peer group avg. of 9 per cent),” said Mr. Pardy. “We believe the company should trade at an average multiple vis-à-vis our peer group given its physical integration, attractive downstream assets, free cash flow generation, solid balance sheet and rising shareholder returns, somewhat counterbalanced by the need to address its Base Mine depletion down the road.”
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In other analyst actions:
* Following its acquisition Port Huron, Mich.-based Xtreme PowerlIne Construction for US$73-million, Canaccord Genuity’s Yuri Lynk lowered his Street-high Aecon Group Ltd. (ARE-T) target to $25 from $26, keeping a “buy” rating. Other changes include: Raymond James’ Frederic Bastien to $16 from $17 with a “market perform” rating and Stifel’s Ian Gillies to $16.50 from $16.25 with a “hold” recommendation. The average is $18.64.
“This is the first acquisition for the company’s utilities roll-up strategy, and we believe it has a strong strategic rationale with a reasonable valuation (5.0 times EV/EBITDA),” said Mr. Gillies. “We find the Utilities’ roll-up strategy attractive, and this deal depicts the ability to acquire at attractive multiples (which had been in question). However, it does not outweigh our concerns over the four fixed-price legacy contracts. We have modestly increased our target price to $16.50 from $16.25, but retain our HOLD rating (despite nearly 25-per-cent upside due to higher-than-average risk).”
* CIBC’s Krista Friesen cut her target for Badger Infrastructure Solutions Ltd. (BDGI-T) to $52 from $55 with an “outperformer” rating. The average is $54.38.
* Acumen Capital’s Nick Corcoran raised his Cargojet Inc. (CJT-T) target to $175 from $165 with a “buy” rating. The average is $156.91.
“Flight data for Q2/24 shows strong momentum driven, in part, by (1) incremental scheduled charter flying for Great Vision HK Express (Great Vision), and (2) ACMI flying for DHL,” he said.
* Stifel’s Stephen Soock trimmed his i-80 Gold Corp. (IAU-T) target to $3.90 from $4.10 with a “buy” rating. The average is $4.15.
“Our recent tour through all i-80s sites in northern Nevada highlighted the amount of infrastructure in place for the company to leverage toward production,” he said. “These assets provide a floor for the company valuation which we believe the stock is near. We saw active work on all the pieces that will come together to make i-80 a 250koz/yr Nevada-only producer. The recent $115-million equity financing will allow the company to accelerate work to support the studies needed to show a clear path forward to bring the autoclave online and get to this level of significant production, generating $200-million per year in site-level free cash flow. "
* CIBC’s Kevin Chiang reduced his Mullen Group Ltd. (MTL-T) target to $15.50 from $16 with an “outperformer” rating. The average is $17.45.
“We have tweaked our EBITDA estimates lower for AND and MTL,” he said. “The silver lining is that the revisions are modest and the general commentary from the trucking names we cover is that the freight environment has not deteriorated further—it simply continues to bounce along the bottom. We also foresee all three companies benefiting from strong liquidity positions, enabling the pursuit of inorganic growth opportunities. We expect MTL and TFII to maintain their 2024 guidance (AND does not provide guidance). Although the cyclical recovery continues to be pushed out, TFII remains one of our preferred names. First, it benefits from a number of company-specific earnings growth levers (improvement in U.S. LTL, lapping restructuring charges incurred last year, rollover benefit from M&A in 2023, tuck-in acquisitions completed this year). Second, as evidenced by updates provided by a number of U.S. LTL players, the LTL operating environment remains rational. Third, TFII has indicated it is evaluating the potential benefits of separating into two distinct public companies—one comprising the TL segment and another comprising the LTL, P&C, and Logistics segments. We believe this move would unlock significant value in TFII’s share price.”
* Mr. Chiang increased his target for Waste Connections Inc. (WCN-N, WCN-T) to US$191 from US$181 with an “outperformer” rating. The average is US$188.35.
“Waste fundamentals remain strong. Our Q2/24 EBITDA estimates for the waste names we cover are in line with consensus expectations but we recognize there is upside potential here given M&A activity, commodity prices, and the strong pricing environment,” he said. “We see GFL, RSG and WCN as positioned to raise their full-year guidance when they report results (WM raised its 2024 outlook with Q1/24 results). Fundamentally, we remain positive on the waste sector. We expect EBITDA margins to be up 104 bps year-over-year, on average, in the quarter, ranging from 51 bps to 139 bps driven by the industry’s pricing-led organic growth algorithm. We expect volumes-related commentary to remain muted. Tactically, our preferred name heading into Q2/24 results is WCN. While GFL is our other Outperformer-rated waste name and it continues to trade at a discount to its peers, the run-up in its share price since May 31, 2024 (up 26 per cent) creates a higher bar when it reports its Q2 results.”
* Jefferies’ Anthony Linton raised his Pembina Pipeline Corp. (PPL-T) target to $56 from $55 with a “buy” rating, while CIBC’s Robert Catellier bumped his target to $59 from $58 with an “outperformer” rating. The average is $55.17.
“Pembina Gas Infrastructure Inc. (PGI) has agreed to acquire a 50-per-cent working interest in the 15-07 Kaybob Complex from Whitecap Resources Inc. for $420-million ($252-million net to PPL) and to fund Whitecap’s Lator area development. The two parties have also entered into a variety of long-term take-or-pay agreements that will add value across Pembina’s integrated value chain. We see the agreement as on-strategy, as it should enhance utilization of key gas plants, increase exposure to key producing areas in the Montney and Duvernay, and support the company’s ethane supply commitments for DOW Inc.’s ethylene cracker,” said Mr. Catellier.