Inside the Market’s roundup of some of today’s key analyst actions
TD Cowen analyst Aaron MacNeil moved Enerflex Ltd. (EFX-T) to top of his “pecking order” of Clean Technology and Energy Services stocks in his coverage universe on Wednesday, citing “its contracted/recurring cash flows and defensive attributes, with a high likelihood for increased shareholder returns in the near-term.”
On Tuesday after the bell, the Calgary-based company announced its net debt balance was approximately $700-million, reflecting a gross debt repayment of approximately $100-million during the third quarter through “cash provided by operating activities, including a reduction in net working capital, and cash balances.” It also revealed a partial redemption for $62.5-million of its 9-per-cent senior notes due in 2027.
“In the press release, management states that ‘we see a visible path for Enerflex to increase shareholder returns and look forward to providing further updates to stakeholders in coming months’,” said Mr. MacNeil. “Since Enerflex is comfortably in its leverage target range, we believe that a dividend increase could occur as early as Q3/24 results on Nov. 14, 2024. Enerflex has an annual dividend commitment of $9.4-million, 2025E simple payout ratio of 3.9 per cent and dividend yield of 1.2 per cent.
“In this context, Enerflex has the capacity to provide a competitive yield without a significant increase in its cash commitments, and we expect that it will err on the side of conservatism out of the gate, leaving room for future increases. Our forecast implies that Enerflex has ample room to pursue a wide range of initiatives including a combination of further debt repayment, a more meaningful dividend, buybacks and organic growth.”
After modest adjustments to his forecast, Mr. MacNeil reiterated a “buy” recommendation and $11 target for the company’s shares. The average on the Street is $11.35.
“Enerflex has shown strong operational execution year-to-date and we believe that it will achieve its leverage target of 1.5-2.0 times with Q3/24 results, paving the way for a potential dividend increase with the upcoming quarter,” he said. “In light of significant commodity price volatility and resulting poor industry visibility, we expect that Enerflex’s contracted and/ or recurring cash flows will result in go-forward financial performance that outperforms industry fundamentals in what we believe is becoming an increasingly challenged industry environment. Currently, Enerflex trades in-line with the Energy Services peer group on a 2025 free-cash-flow yield basis (20 per cent), but has the potential to attract a more meaningful premium in our view.”
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Ahead of third-quarter earnings season for North American mining companies, Citi equity analyst Alexander Hacking reiterated the firm’s position as “mid-term copper bulls.”
“Current forecasts are for prices to average $9k/t for the remainder of 2024 with U.S. election uncertainty and weak manufacturing sentiment limiting near-term upside,” he said. “A modest cyclical growth rebound then drives prices to $11k/t by mid-2025 (averaging $10,250/t) and to $12k/t by 2026. We see a 2024 market surplus but a H2 deficit.
“Decarbonization demand growth continues to offset a cyclical demand contraction; copper prices and physical balances remain leveraged to an eventual rebound of the latter. Copper spec positioning and pricing are most correlated with global manufacturing sentiment (eg, PMIs), which we believe are unlikely to recover meaningfully until early 2025 – ie, lagging initial Fed cuts (priced for September), with more certainty on U.S./China policy, and following further tightening of copper physical.”
In a research report released late Tuesday, Mr. Hacking made modest forecast adjustments to companies in his coverage universe, including lowered his 2024 and 2025 EBITDA projections for First Quantum Minerals Ltd. (FM-T) by 20 per cent and 22 per cent, respectively, Ivanhoe Mines Ltd. (IVN-T) by 4 per cent and 5 per cent and Teck Resources Ltd. (TECK.B-T) by 7 per cent and 4 per cent “based on the latest price forecasts from Citi’s global commodity team as well as updated assumptions and production and costs.”
For Teck, Mr. Hacking raised his target to $74 from $64 after changing his valuation methodology, keeping a “neutral” rating. The average on the Street is $73.82.
“Copper equities continue to price in anywhere from $10,500-$13,000 per ton,” he said. “FCX and SCCO are relatively more expensive, while TECK and IVN are relatively cheaper. However, we note that this is mostly project upside with IVN incorporating 75 per cent on Western Forelands project and TECK incorporating 50-75 per cent on QB3, Zafranal and San Nicolas. FM remains a special situation with the Panama mine closed down.”
“We rate Teck at Neutral. Positive factors include exposure to copper, several interesting growth options, and a strong balance sheet. Negative factors include historical challenges on execution and a dual-class share structure. On balance, we see equal upside and downside at current levels.”
For First Quantum, his target remains $26 with a “buy” rating. The average is $20.41.
“We see more upside than downside from the current situation in Panama,” he said. “The stock currently discounts Panama close to zero value, in our view, with very little consideration for potential upside. Downside risks would include a protracted stalemate at Panama or lower copper prices.”
Mr. Hacking kept a $24 target and “buy” rating for Ivanhoe. The average is $24.96.
“We believe IVN offers investors the best growth profile in our global coverage,” he said.
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Scotia Capital analyst Orest Wowkodaw thinks Capstone Copper Corp.’s (CS-T) disclosure of an improved life-of-mine operating plan, including a de-bottlenecking expansion, for its flagship Mantoverde Development Project in Chile is a positive for its shares, pointing to “the solid ramp-up progress, the attractive expansion economics, and [a] 7-per-cent higher NAVPS [net asset value per share projection].
“The recently constructed $870-million Mantoverde open-pit sulphide mine achieved commercial production (30 days of consecutive operation at an average of 75 per cent of design throughput) on September 21,” he said. “To date, grades have reconciled well to the mine plan, while concentrate grade and recoveries are at or above targeted levels at this point of the ramp. CS reaffirmed its 2024 consolidated Cu production guidance of 190-220kt at C1 costs of $2.30-$2.50/lb, but noted that output was trending towards the low end of the range while costs were trending slightly above the range (we now forecast 191kt at $2.70/lb).”
After the bell on Tuesday, Capstone also announced CEO John Mackenzie will transition to a non-executive Chair role and by replaced by current President/COO Cashel Meagher.
Maintaining his “sector outperform” recommendation for Capstone shares, Mr. Wowkodaw raised his target to $13 from $12. The average is $13.46.
“We rate CS shares Sector Outperform based on peer-leading Cu growth and leverage, several catalysts, an attractive valuation, and increasing takeover optionality,” he said.
Elsewhere, TD Cowen’s Craig Hutchison bumped his target for its shares to $13 from $12 with a “buy” rating.
“With growth initiatives in progress, Capstone aims to increase copper production by 50 per cent in 2025 versus 2023 levels,” said Mr. Hutchison. This growth comes amid a global environment in which an increasing number of large copper projects are experiencing operational and political challenges. Additionally, the company is evaluating a range of brownfield and greenfield projects across its portfolio as it assesses long-term growth options. Furthermore, we remain bullish on the outlook for copper, and Capstone represents one of the few ways to gain leveraged exposure to the commodity.”
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Raymond James analyst Daryl Swetlishoff views Doman Building Materials Group Ltd.’s (DBM-T) US$255-million acquisition of South Carolina-based Tucker Lumber LLC as “transformative,” calling the assets “complementary to Doman’s existing footprint (zero overlap), with its operations located across 10 previously unserved southern/east coast states (Carolinas, Florida, Georgia, Virginia, West Virginia, Delaware, Maryland, New York, Pennsylvania) — many with high-growth attributes.”
“We regard the deal as highly attractive — supporting 40-per-cent treated lumber capacity expansion and estimated 25-30-per-cent 2025 EBITDA and EPS accretion,” he added. “Additionally, the acquisition complements Doman’s existing U.S. operations by adding scale, volume, and additional reach into adjacent U.S. South/East Coast geographies.
“Completed at just 5.5 times 2025 EV/EBITDA and US$319/mfbm [thousand board feet] on a capacity basis, we highlight the deal is immediately accretive given DBM shares traded at a healthy 1.5 times premium pre-announcement. Albeit heading into a seasonally slower period, we expect M&A-driven earnings momentum in coming quarters to send DBM shares higher while evidence of margin expansion, which we highlight remains a key focus for the company, will also present itself after DBM executed on two deals year-to-date.”
Mr. Swetlishoff estimates the deal, which was announced before the bell on Tuesday, will increase the Vancouver-based company’s U.S. revenue by 40 per cent, and he’s forecasting U.S. market exposure to hit 70 per cent on a run rate basis, which implies “a more than tenfold increase over the past decade.”
“Reflecting the asset’s attractive geographic footprint and product portfolio, we note a series of modest cost and operational synergies provide additional upside, in our view, including: 1) immediate purchasing scale in lumber treatment chemicals; 2) the ability to leverage DBM’s direct manufacturer relationships; 3) the opportunity to bolster treatment plant utilization rates and eliminate third-party outsourcing,” he said. “Despite this, we contend the deal is more about the prospective growth opportunity, with synergies estimated in the single digits on an EBITDA basis. While Doman will prioritize integrating the asset over the near term, we also envision additional tuck-ins to augment this new footprint over time.”
Also pointing to “improving macro tailwinds on the back of a North American easing cycle” and an expectation of bottoming building materials markets, Mr. Swetlishoff increased his target price to $11.50 from $9.75, “backstopping a 55-per-cent total return inherent in the shares. The average on the Street is $9.42.
“We reiterate our Strong-Buy rating and highlight Doman as a top building materials pick featured on the Raymond James’ 2024 Best Picks’ list,” he concluded.
Elsewhere, other analysts making target adjustments include:
* Stifel’s Ian Gillies to $9.25 from $9 with a “buy” rating.
“Strategically, the deal helps turn Doman in a coast-to-coast distributor of pressure treated lumber products,” he said. “Financially, we estimate the deal is 7.5-per-cent accretive to EPS and 4.1-per-cent accretive to FCF/sh.”
“Doman offers torque as a derivative to the U.S. home builder trade. We continue to think a catch-up trade for DBM is likely given it has underperformed the XHB (S&P Homebuilders Index) by 36 per cent year-to-date. The company has just increased its exposure to U.S. homebuilding through the Tucker acquisition, plus its elevated B/S leverage, will give it significant equity torque if a meaningful earnings recovery occurs in either 2025 or 2026. Every 5-per-cent increase in our 2025 estimated EBITDA at the current EV/EBITDA of 6.6 times would add $0.86/sh to the equity price.
* CIBC’s Hamir Patel to $9 from $8.50 with an “outperformer” rating.
“We see DBM as well positioned to benefit from healthy medium- to long-term demand for treated lumber across North America due to elevated home equity levels and an ageing housing stock,” said Mr. Patel.
* Canaccord Genuity’s Yuri Zoreda to $11 from $9 with a “buy” rating.
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RBC Dominion Securities analyst Andrew Wong expects third-quarter earnings season for North American fertilizer companies will highlight the impact of “mixed” pricing and “soft” agricultural fundamentals.
“We continue to rank our nutrient preference as nitrogen, potash, and phosphate, and see potential earnings upside to nitrogen-based producers,” he said in a research note. “We prefer CF Industries (OP, $95 PT), Nutrien (OP, $60 PT), and LSB Industries (OP, $10 PT), and are neutral on Mosaic (SP, $30 PT).
“Nitrogen performed better than expected, with strong prices supported by elevated marginal costs (EU/international nat gas stayed high) and supply issues (unexpected outages, ongoing Chinese export restrictions) while North American nat gas input costs were lower than anticipated. Phosphate prices remained elevated with tight near-term supply (Chinese export restrictions, Saudi Arabia supply issues), but very challenged affordability has hurt demand and prompted a shift to lower-tier products (more TSP/SSP/NPK vs. DAP/MAP). Potash remained generally stable, with suppliers (including Belarus/Russia) reluctant to lower prices and demand supported by favourable affordability.”
For Saskatoon-based Nutrien Ltd. (NTR-N, NTR-T), Mr. Wong reaffirmed his “outperform” recommendation and US$60 target. The average on the Street is US$59.04.
“We see Q3 slightly below consensus as strong potash volumes and better nitrogen performance only partially offset weaker Retail results (soft ag, Brazil challenges),” he said. “We see shares and fundamentals as likely bottomed and presenting attractive upside/ downside while the company still generates solid cash flows (8-per-cent FCF yield) for buybacks at depressed valuations, and would be buyers on weakness.
“Focus items: Retail recovery path to $1.9-2.1-billion 2026 EBITDA target, impacts from softer ag/Brazil challenges. Progress on cost reduction ($200-million target) and cash conversion. Update on capital allocation, potential for near-term buybacks. Potash sustainability of strong demand growth, price elasticity, and market ability to absorb new supply.”
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A pair of firms initiated coverage of South Bow Corp. (SOBO-T), a spinoff of TC Energy Corp.’s (TRP-T) crude oil pipelines business, ahead of its market debut on Wednesday.
BMO Nesbitt Burns analyst Ben Pham sees an attractive yield but “modest” growth, leading him to give it a “market perform” rating. He set a $31 target.
“As the only publicly-traded pure-play oil energy infrastructure company created through a spin-off from TRP, SOBO is one of the most exposed in our coverage to rising WCSB crude oil production outlook,” said Mr. Pham. “We also like SOBO’s cash flow stability, experienced management team, and the attractive dividend yield of 9 per cent. That said, balance sheet leverage is high, cash flows are less diversified, and anticipated growth is below-peers. Our Market Perform rating balances those considerations.”
He added: “The high level of contracts and competitive position of the Keystone pipeline supports a healthy valuation, but the less diversified cash flows, lower growth and higher leverage will likely weigh on valuation relative to peers”
Elsewhere, CIBC’s Robert Catellier initiated coverage with a “neutral” rating and $31 target.
“Shares of South Bow provide investors with exposure to a focused pure-play liquids infrastructure company,” he said. “In our view, risks associated with high leverage and concentrated exposure to the Keystone pipeline system are roughly offset by the above-average dividend yield, despite the high payout ratio. The company’s highly contracted nature and modest near-term growth catalysts create a relatively flat comparable EBITDA profile through 2025.”
With the change in its organization, both analysts lowered their TC Energy Corp. (TRP-T) targets. Mr. Catellier cut his target to $57 from $62 with a “neutral” recommendation, while Mr. Pham’s fell to $55 from $65 with a “market perform” rating. The average is $60.40.
“Following the spin, TRP is positioned as a higher-growth company (to 7-per-cent EBITDA CAGR from 6 per cent) and natural gas pipeline exposure moves to 90 per cent from 80 per cent (with the balance power). Given recent share price outperformance driven by improved sentiment on natural gas pipelines and relative return, we maintain Market Perform rating,” said Mr. Pham.
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In other analyst actions:
* TD Cowen’s Graham Ryding raised his AGF Management Ltd. (AGF.B-T) target by $1 to $11, keeping a “buy” rating. The average is $11.63.
“AGF reported a solid quarter last week,” he said. “Expenses were higher than expected, and management fees were a bit light, but private capital revenue was strong and offset. We are encouraged with the improving flows and the balance sheet remains solid. Our target price increases ... due to higher AUM and estimates, and rolling forward 4QF valuation.”
* Ahead of its Oct. 10 earnings release, RBC’s Irene Nattel increased her Aritzia Inc. (ATZ-T) target to $56 from $47 with a “sector perform” rating. The average is $51.63.
“Forecasts predicated on early Q2 momentum continuing in the second part of the period, including uptake of fall collection heading into back to school, new store contribution and moderating cost pressures,” she said. Updating our target multiples to the mid-point of the long-term range to reflect favourable F25E/26E setup on GM-percentage, spending initiatives and FCF inflection.”
Ms. Nattel added: “While our F25E remains toward high end of guidance with year-over-year revenue gains weighted to H2 on timing of boutique openings, our preliminary F27 revenue forecast $3.2-billion is more cautious than the aspirational goal of $3.5-$3.8-billion, which ATZ reiterated in conjunction with Q1 results in July. Importantly, we don’t have a fundamental disagreement with ATZ’s medium-term outlook underpinned by step-up in store openings in existing and new geographies, simultaneously driving eCommerce growth. But we would like to see confirmation of a turnaround in consumer sentiment and discretionary spending, particularly as we cycle the 2025/2026 mortgage renewal period in Canada.”
* TD Cowen’s Vince Valentini cut his BCE Inc. (BCE-T) target to $50 from $51 with a “hold” rating. The average is $50.26.
“As indicated by the CEO at a conference in September, BCE is facing revenue growth challenges in Q3,” he said. “We lowered our estimates and we now expect FY24 revenue guidance of 0-4 per cent to be slightly missed.”
“We continue to embed less than 1-per-cent dividend growth per annum in our model, but the payout ratio on TD definition FCF is expected to remain above 100% through 2026 ... With over $4-billion in net proceeds expected from the MLSE sale, we see very little risk of a dividend cut in the next few years, and thus the 8.5-per-cent dividend yield alone should mitigate downside risk for BCE shares as interest rates likely continue to decline.”
* JP Morgan’s Jeremy Tonet cut his Gibson Energy Inc. (GEI-T) target to $26 from $27 with a “buy” rating. The average is $25.09.
* Canaccord Genuity’s Katie Lachapelle cut her Li-Ft Power Ltd. (LIFT-X) target to $8 from $10 with a “speculative buy” rating. The average is $9.70.
* Cormark Securities’ Gavin Fairweather raised his Vitalhub Corp. (VHI-T) target by $1 to $10.50, exceeding the $9.83 average, with a “buy” rating.
* Peel Hunt’s Alex Gorman hiked his Wheaton Precious Metals Corp. (WPM-T) target to $95 from $82 with a “buy” rating. The average is $93.34.