Inside the Market’s roundup of some of today’s key analyst actions
While acknowledging a leadership change at Northland Power Inc. (NPI-T) introduces uncertainty for investors, National Bank Financial analyst Rupert Merer thinks the power utility “should stay the course.”
On Monday, it shares dropped over 7 per cent with the premarket announcement chief executive Mike Crawley will step down from the top job later this year. Board chair John Brace, who was CEO between 2003 and 2018, has been appointed executive chair to act as a bridge between Mr. Crawley and his successor.
“While any shake-ups in management can cause uncertainty with investors, we believe NPI should be able to manage through the change effectively with the leadership from its former CEO to guide the company in the interim,” said Mr. Merer. “NPI highlights that the company is currently in a period of stability, following an active year last year with a number of major development milestones reached in 2023 and continued portfolio rationalization into 2024. Today, it is focused on operations and construction execution, backed by a deep bench with experienced operators and project managers.
“With no major operational, financial or development milestones outstanding, it is a good time for NPI to identify a leader for the next steps in its evolution.”
Northland has paused its search for a new chief financial officer following the departure of Pauline Alimchandani in January.
“We believe the management changes should not impact NPI’s progress with its in-construction and development assets and there is adequate support and bench strength for the transition of the CEO role,” added Mr. Merer. “However, with the search for a new CEO and CFO ongoing, investors may be cautious in the near term.”
He maintained an “outperform” recommendation and $34 target for Northland shares. The average target on the Street is $31.50.
Elsewhere, Desjardins Securities’ Brent Stadler kept a “buy” recommendation and $29 target.
“There has been a fair bit of management change recently at NPI; however, in our view, the company has significant bench strength and is in good hands as it searches for permanent candidates for both the CEO and CFO roles,” said Mr. Stadler. “During the search for Mr Crawley’s replacement, former CEO John Brace will step into the role of interim CEO; recall that Adam Beaumont is currently serving as interim CFO. We believe NPI will likely prioritize filling the CEO role (could take 6‒12 months in our view). The timing of the management change may make sense in our view, as the company has just exited a substantial development phase and moved into a significant construction phase — it could be the right time for change as it looks out to the next 5‒10+ years.”
=====
RBC Dominion Securities analyst Darko Mihelic views Manulife Financial Corp.’s (MFC-T) deal to reinsure more than $5.8-billion of risk on its books “positively for [its] journey to an improved valuation.”
On Monday, Manulife announced RGA Life Reinsurance Company of Canada will reinsure $5.8-billion of the company’s reserves of lower return-on-equity Canadian universal life insurance contracts in an effort to increase the overall ROE in the company’s remaining portfolio. The agreement frees up about $800-million in capital that will be used for future share buybacks.
“We have a moderately positive view on the transaction as it will be mildly accretive to MFC’s core ROE and core EPS, despite the $50 million reduction in annual core earnings,” said Mr. Mihelic. “This transaction in addition to its recent LTC [long-term care] reinsurance deal suggests good appetite from reinsurers, and we are hopeful more reinsurance for LTC can happen.”
After updating his financial model to account for the foregone earnings and increased share buyback program, his core earnings per share estimates rose by 1 cent in 2024 (to $3.69) and 6 cents in 2025 (to $4.01).
“Our core ROE forecasts increase by 0.25 per cent and 0.48 per cent to 16.0 per cent and 15.9 per cent in 2024 and 2025, respectively,” he added. “We update our model to reflect a $37 million reduction in core earnings in 2024 and a $50 million reduction in core earnings in 2025 which decrease our core earnings expectations and are more than offset by 90 million in share buybacks by the end of Q4/24 (up from 50 million in share buybacks).;
Mr. Mihelic maintained his price target for Manulife shares of $38 with an “outperform” rating. The average is $34.62.
“This is the second reinsurance deal that MFC entered in short order; we believe that these transactions reflect MFC’s appetite to reinsure lower ROE parts of its business and also confirms that there are reinsurers in the marketplace that have an appetite to take on these exposures,” he said. “We view this as a positive as we believe that it may mean we could see MFC enter into additional U.S. LTC reinsurance deal(s) in the future.”
Elsewhere, in a research note titled Om nom nom nom..., Desjardins Securities’ Doug Young kept his “buy” rating and $36 target.
“MFC feeds the beast,” he said. “It has entered an agreement to reinsure $5.8-billion of Canadian universal life reserves to RGA Life Reinsurance Company of Canada. Impact—slightly positive.
“This is a simpler transaction vs December’s announcement, although it does not include U.S. long-term care insurance reserves. While the transaction is not materially accretive to core EPS and ROE, we like the steady progress in whittling down legacy exposures, as well as the focus on putting freed-up capital to work via stock buybacks.”
=====
While its operational performance remains “strong,” RBC Dominion Securities analyst Luke Davis downgraded Athabasca Oil Corp. (ATH-T) to “sector perform” from “outperform” on Tuesday, citing “strong relative performance year-to-date and premium valuation.”
“Athabasca has refocused on the thermal business with Leismer currently producing in excess of 24,000 bbl/ d, and on track to grow to 28,000 bbl/d by mid-year,” he said. “The company has approval in place to increase volumes to 40,000 bbl/d, which we expect will be phased in over the next several years. Beyond this the company has approval at Corner for 40,000 bbl/d, which likely requires outside financing given a build cost in the range of $1-billion, with a cycle time of roughly four years from FID.”
Mr. Davis also emphasized the Calgary-based company’s management” continues to deliver on key priorities including enhanced shareholder returns via the share buyback.”
“Management is allocating 100 per cent of FCF to shareholders through the NCIB, completing approximately $66 million in share buybacks (14 million shares, $4.70/share average price) from January to March 15, 2024, with the company exhausting the prior allowance,” he noted. “The company renewed the NCIB for up to 55.4 million shares, through to March 17, 2025. Based on our updated estimates, we see the company completing $233/$233 million in share buybacks in 2024/25, though the allocation framework could change into next year depending on key capital projects and prevailing market conditions.”
“While we see longer-term optionality within the company’s broader oil sands portfolio, financing and cycle time remain key hurdles.”
The analyst maintained a $6 target, exceeding the average target on the Street by 4 cents.
“Athabasca shares now trade at a material premium to oil-weighted peers, which we believe is justified by strong operational execution, free cash generation, exposure to WCS heavy oil, and management’s continued focus on shareholder returns,” he concluded.
=====
Scotia Capital’s Jonathan Goldman expects investor attention to focus on the full-year guidance from BRP Inc. (DOO-T) when the powersports manufacturer releases its fourth-quarter 2023 financial results on Thursday.
In a research report titled Meet Is the New Beat, the equity analyst thinks those projections will come close to the Street expectations for EBITDA of $1.6-billion, which is a decline of 12 per cent year-over-year.
“That outcome should be viewed positively in the context of the current share price: applying DOO’s midcycle multiple of 7.8 times – arguably conservative given our expectation for trough earnings this year – the market is pricing-in EBITDA of $1.200-billion (down 31 per cent). Our bear case is $1.400-billion (down 19 per cent).”
Mr. Goldman thinks top-line estimates from the Valcourt, Que.-based company could “be conservative” and believes the market is “underestimating margin resilience.”
“We forecast revenue growth of negative 6 per cent year-over-year in 2024 (Street at down 4.7 per cent),” he said. “At an investor conference on March 5, Polaris said that it expects the industry to be flat to down this year. We expect DOO to outperform given its skew towards the premium category. On its F3Q earnings call, management noted that premium was outperforming value with lower income consumers more hesitant to finance a purchase and facing higher credit rejections based on dealer feedback. DOO’s strategy to proactively manage channel inventory and avoid promo on current units could incentivize dealers to retail more BRP units as they earn higher margins (there is 70-per-cent network overlap between BRP and Polaris). Between F13 and F23, DOO outperformed the global powersports industry by 980 basis points per year on average – or 820 bp ex outliers.”
“We forecast EBITDA margins of 15.3 per cent in 2024 (Street at 15.2 per cent), in-line with management commentary for ‘100 bp or so’ of margin compression year-over-year. Our 2024 forecast is 200bp above 2019 levels. We believe BRP has levers to mitigate industry headwinds: in 2020, it reduced SG&A by $75 million on a 2-per-cent sales decline. Mix should be a tailwind given premium skew as could reducing Marine losses. Polaris is targeting EBITDA margins in the mid-to-high teens by 2026 compared to current levels of 11.4% – i.e., what BRP has achieved already. Moreover, Polaris is attempting to employ a similar playbook to BRP including expanding its Mexican manufacturing footprint, reducing costs and improving plant efficiency, and increased platforming (similar to BRP’s modularity approach).”
The analyst trimmed his target for BRP shares to $105 from $109, maintaining a “sector outperform” rating. The average is $101.72.
He explained: “What’s our margin of safety? (1) Our base case is more conservative than peer guidance (see p. 2); (2) DOO has a ten-year track record of outperforming the industry; (3) there is still plenty of runway for SSV share gains; (4) DOO’s mix skews premium which is faring better than value (tailwind to margin too); (5) structural margin enhancements; (6) management’s strategy to proactively manage channel inventory and limit promo on current units should somewhat insulate margins and could support share gains; and (7) we believe the company has levers to flex costs (as it did in 2020). With our expectation of robust FCF generation in 2024 and leverage below the comfort range, we expect the company to be opportunistic on the NCIB.”
=====
Stifel analyst Cole McGill thinks “there is an underappreciated copper demand story that the market has been overlooking.”
“This is informed by near-term PMI, mid-term emerging market infrastructure cycle and a long-term outlook by our proprietary, in-house copper demand model,” he said. “Near term, we have seen a rebound in global PMI now indicating expansion, which alongside sticky inflation provides the optimal outlook for copper demand and more broadly cyclical value stocks as indicated by our Chief Equity strategist Barry Bannister.
“Midterm, we opine that emerging markets globally have both historic precedents to increase infrastructure spending and the balance sheet room to do so. Not only does potential dollar weakness provide relative pricing relief for these markets to spend but the more moderate balance sheet growth of emerging markets through the pandemic provides the firepower to do so. G7 governments are sitting on balance sheets 117-per-cent the size of GDP, versus the more paltry 53 per cent exemplified by 30 per cent of the world’s population in emerging markets.”
In a research report released Tuesday, Mr. McGill resumed coverage of the copper sector, believing on the mid-tier sub-sector is “strategically best positioned to capture demand growth for the red metal, alongside a view that the group offers the best risk/return in the current market.”
“Recent metal strength has shown senior miners the most love, now trading up to 1.4 times P/NAV on average, a reward we think is solely due to capital discipline accompanied by a disincentive to provide growth (greenfield project IRRs mirror sector cost of capital),” he added. “With the mid-tier sub-sector trading at 0.89 times, and the majority of names below both replacement cost/build cost, we feel this increases the strategic value of the group and provides a rerate opportunity as investors/seniors take note of deleveraging balance sheets and growth profiles.”
Mr. McGill resumed coverage of five companies on Tuesday:
* Capstone Copper Corp. (CS-T) with a “buy” rating and $9 target. The average on the Street is $8.65.
Analyst: “Following the completion of the merger between Capstone Mining and Mantos Copper in early 2022, Capstone Copper has been on a transformational journey of growth, annually increasing production since 2022. Looking forward, the MVDP is expected to significantly increase total annual copper production, while driving costs lower. Benefitting from economies of scale, Capstone’s operating margins and cash flow provide torque to higher copper prices. Further opportunities in the pipeline offer line of sight to >380kt of annual copper production through organic growth, which are actively being de-risked..”
* First Quantum Minerals Ltd. (FM-T) with a “hold” rating an $14 target. Average: $16.44.
Analyst: “Now re-capitalized after the shock suspension of mining at Cobre Panama, FM will focus on growth from its Zambian operations. While remaining cautious on the Cobre Panama (our re-start date: mid-2026), we highlight the company’s high torque where a 10/20/30 cent move in copper above spot has the ability to see exit 2025 covenant ratio at 4.7 times/4.4 times/4.0 times ex asset sales and Cobre restart, above our base case of the company tripping covenants exit 2025.”
* Hudbay Minerals Inc. (HBM-T) with a “buy” rating and $11.25 target. Average: $10.13.
Analyst: “HudBay is a growth-oriented mid-tier base metals producer with significant leverage to copper and zinc. HudBay offers investors exposure to base metals, primarily to copper through its top tier Constancia mine in Peru. HudBay is also expected to deliver zinc growth through its operations in Manitoba. HudBay also offers investors material exposure to gold, as higher gold grades from Constancia are expected to push gold production to over 350koz in 2024. Copper World in Arizona is the company’s main growth project, but a complex permitting picture means we model Phase 1 of this project entering production only in 2030. Growth could also come from the Maria Reyna and Caballito satellite deposits in Peru, located just 12km and 6km from Constancia’s mill – though these are dependent on successfully realizing their substantial exploration potential and obtaining community support for drilling, an often time-consuming process.”
* Lundin Mining Corp. (LUN-T) with a “buy” rating and $14.50 target. Average: $12.67.
Analyst: “Lundin Mining is a growing mid-tier diversified base metalsr producer, and will be increasingly anchored in the Andean region. Chilean copper mines Candelaria and Caserones will be joined in future by flagship growth project Josemaria, located just across the border in Argentina. With all three assets located in proximity to one another, we believe the company will be able to reap synergies as they develop this emerging copper district..”
* Taseko Mines Ltd. (TKO-T) with a “buy” rating and $3.75 target. Average: $3.22.
Analyst: “Proven operational viability, world-class jurisdictions, readily available funds to start construction and a strong copper market backdrop, ideally position Taseko to propel its growth trajectory by moving Florence into production. With permits and funding secured, we see 2025 production start-up as achievable, ultimately resulting in Taseko’s consolidated copper production increasing to nearly 200 Mlb by 2027.”
Mr. McGill added: “Our favored growth idea remains TKO, which represents a step change, funded growth story able to lift volumes by 71 per cent over the next three years and decrease costs 30 per cent alongside a re-rate as the Florence project gains market confidence. For the risk-aversed we point to LUN, which while expensive provides a 1-2 punch of step change growth via the generational giant Vicuna alongside a peer leading 2.6-per-cent divvy.”
=====
Pointing to “geopolitical tensions and an increasing focus on onshoring strategies to fortify domestic supply chains,” Stifel analyst Madison Tapscott thinks Talon Metals Corp.’s (TLO-T) Tamarack project in Minnestoa is “ideally suited to capitalize on the United States’ increasing demand for locally sourced, high-grade nickel.”
“In our view, Talon offers asymmetric upside potential underpinned by 1) Talon’s strategic partnerships and support from Tesla, the DoD and the DOE set the company apart from its peers, further solidifying the local demand outlook for nickel, 2) we believe there is further value to be unlocked through exploration, culminating in additions to the current resource estimate for the project and 3) the project is in the first quartile of cash costs compared to peers, providing attractive margins that are more resistant to metal price volatility,” she said.
Seeing its upcoming feasibility study serves as “a substantial de-risking milestone” and emphasizing the firm’s view of “an opportunity in the mid to long-term outlook for nickel,” she resumed coverage of
Talon with a “buy” rating and 50-cent target. The average is 63 cents.
=====
In other analyst actions:
* TD Securities’ Craig Hutchison raised his Taseko Mines Ltd. (TKO-T) target to $3.50 from $3.25 with a “buy” rating, while BMO’s Rene Cartier bumped his target to $3 from $2.75 with an “outperform” recommendation. The average is $3.22.
David Leeder