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Inside the Market’s roundup of some of today’s key analyst actions

Though the outlook for Canadian Natural Resources Ltd. (CNQ-T, CNQ-N) remains in “great shape,” RBC Dominion Securities analyst Greg Pardy downgraded his rating for its stock to reflect changes to the firm’s commodity outlook as well as its relative rate of return.

On Thursday, RBC lowered its Brent forecast for 2018 to US$75.01 from US$75.60 while maintaining a 2019 estimate of US$85.64 and introducing a 2020 forecast of US$88. Its WTI forecast for 2018 increased slightly to US$68.08 from US$67.87 with an unchanged 2019 estimate of US$75.91 and a new expectation of US$83 for 2020.

“Brent prices have caught a tailwind, but differentials in Canada and the U.S. dominate narratives amid pipeline constraints and supply growth,” the firm said. “Our Brent/WTI outlook is consistent with our FIC forecast.”

With those changes, Mr. Pardy moved CNQ to “outperform” from “top pick,” though he emphasized the company remains his favorite senior producer, citing its “shareholder alignment, free cash flow generation, improving balance sheet, and low natural decline rate of 9 per cent.”

“We also like the company’s ongoing evolution towards a growth-income model under which shareholder distributions are broadening from dividend growth towards share buybacks,” the analyst said. “CNQ remains a part of our Global Top 30 Ideas.”

Mr. Pardy lowered his 2018 and 2019 earnings per share projections to $3.81 and $5.43, respectively, from $4.37 and $6.81.

His target for CNQ shares fell to $55 from $58. The average target on the Street is currently $57.30, according to Bloomberg data.

“Following our commodity price update, we believe CNQ’s outlook remains strong,” he said. “We peg the company’s free cash flow (post dividends) at $6.4-billion ($5.25 per share) in 2019, and $7.9-billion ($6.37 per share) in 2020. This outlook reflects capital spending levels of $5.0-billion in 2019, and $5.2-billion in 2020.”

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Seeing weakness in the Canadian frac market, RBC Dominion Securities analyst Kurt Hallead downgraded Trican Well Service Ltd. (TCW-T) to “sector perform” from “outperform.”

“Recent channel checks suggest unexpected softness in the Canadian frac market heading into 4Q18 with a ripple effect through 2019,” he said. “The primary drivers appear to be E&P budget exhaustion, low natural gas prices and wider than expected WCS differentials.

“In an effort to maintain utilization and absorb fixed costs, some companies have become willing to bid aggressively to keep crews busy. This has led to price discounts of at least 10 per cent.”

Given the lower pricing and utilization, which he expects to continue, Mr. Hallead shrunk his 2018 and 2019 EBITDA projections for Calgary-based Trican to $114-million and $124-million, respectively, from $184-million and $292-million. The Street is expecting $164-million and $223-million.

With those changes, he dropped his target price for Trican shares to $3.50 from $5. The average is $4.79.

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Citing its current relative valuation, RBC’s Scott Hanold lowered his rating ConocoPhillips (COP-N).

Moving it to “sector perform” from “outperform,” Mr. Hanold said the U.S. energy giant’s absolute valuation does not appear to be “stretched”, however he prefers the “attractiveness” of its peers currently.

“COP led performance among its peers, up roughly 40 per cent year-to-date and 60-plus per cent year-over-year,” he said. “COP’s outperformance was driven by its successful FCF [free cash flow] generation, shareholder returns, debt reduction efforts, asset monetizations, and high exposure to international oil prices (80-plus per cent).

“Valuation multiples on 2020 are above average a stark contrast from the past when COP traded at a discount to peers in bull markets. We think its premium FCF generation in 2018-2019 warrants a stronger multiple. However, by 2020, actions by peers and our constructive oil outlook (buoyed by narrowing Permian differentials) allows peers to quickly catch-up and would justify a more inline multiple for COP.”

Mr. Hanold said he remains a “fundamental advocate” for ConocoPhillips, seeing it as a “long-term core holding” and projecting good upside for its share as well as “the likelihood for more shareholder returns.”

He raised his target for the stock to US$90 from US$85. The average is US$81.25.

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Brookfield Asset Management Inc. (BAM-N, BAM.A-T) differentiated model should “continue attracting capital and generate recurring fee revenues in its asset management platform,” said BMO Nesbitt Burns analyst Sohrab Movahedi, who initiated coverage of the stock with an “outperform” rating.

“With increasing institutional investors' allocations to alternative assets, as well as momentum in capital deployment, we believe there could be upside to our estimates,” he said.

Mr. Movahedi set a target price of US$54, which exceeds the consensus of US$49.03.

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Baird analyst Mircea Dobre thinks the risk-reward for the U.S. machinery sector currently appears attractive for investors, pointing to “still-robust demand” and lower valuations as well as the expectation of peaking prices for raw materials and seasonal effects through the end of the year.

Also emphasizing the group’s relative underperformance versus the overall market, Mr. Dobre raised his rating for Caterpillar Inc. (CAT-N), Manitowoc Co. (MTW-N) and Sun Hydraulics Corp. (SHNY-Q) to “outperform” from “neutral” in a research note released Thursday.

The analyst expects Caterpillar to benefit from a growth in demand into 2019, leading him to raise his target to US$191 from US$155. The average is US$170.56.

“While some end markets (China, U.S. light construction equipment) are closer to peak, most of CAT’s demand is still at or below mid-cycle levels (we estimate more than 60 per cemt of sales at mid-cycle or below),” said Mr. Dobre. “Capital deployment remains a catalyst (potential greater than $6-billion), 2019 multiple rerating closer to a mid-cycle level should drive shares above $190.”

His target for Manitowoc, a Milwaukee-based crane manufacturer, increased to US$32 from US$27, exceeding the consensus of US$30.75.

Mr. Dobre bumped his target for Florida-based Sun Hydraulics to US$65 from US$50. The average is US$59.

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Khiron Life Sciences Corp. (KHRN-X) is “cultivating a first-mover-advantage,” said Canaccord Genuity analyst Kimberly Hedlin.

She initiated coverage of the Toronto-based cannabis company, which has its core operations in Colombia, with a “speculative buy” rating.

“Following a recent wave of medical cannabis legalizations in Latin America, we believe the market is on the cusp of exponential growth,” said Ms. Hedlin. “In our view, Khiron Life Sciences is positioned to secure a sizeable market share given its first-mover advantage, low-cost operations, robust medical platform and strong management team. We believe the stock provides an attractive entry point with rare exposure to LATAM medical cannabis.”

Currently the lone analyst on the Street covering the stock, according to Bloomberg, she set a target price of $3 per share.

“Our target reflects an [enterprise value] of $210-million and a 2020 estimated EV-to-EBITDA multiple of 9.2 times,” said the analyst. “We believe this is reasonable in light of recent transactions in the region (which averaged $250-million) and current Canadian trading multiples of 16.5 times. The key risks to our target include Colombian cannabis pricing, receipt of commercial quotas, patient conversion rates and closing of the ILANS acquisition. We believe a ‘Speculative’ classification is appropriate given Khiron’s pre-revenue status.”

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In other analyst actions:

Macquarie analyst Konark Gupta upgraded Canadian National Railway Co. (CNR-T, CNI-N) to “outperform” from “neutral” with a target of $118, rising from $90.80. The average target on the Street is $90.29

With files from Bloomberg News

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 4:00pm EDT.

SymbolName% changeLast
BAM-N
Brookfield Asset Management Ltd
+0.53%42.02
COP-N
Conocophillips
+0.35%127.28
TCW-T
Trican Well
0%4.15
CNQ-T
Canadian Natural Resources Ltd.
+0.87%103.33
CNQ-N
Canadian Natural Resources
+1.13%76.32
CAT-N
Caterpillar Inc
+0.49%366.43
MTW-N
Manitowoc Company
+0.86%14.14
CNR-T
Canadian National Railway Co.
-0.15%178.37
CNI-N
Canadian National Railway
+0.05%131.71

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