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

Rising yields could "keep a lid on" near-term share prices for Canadian independent power producers and regulated utilities, according to Industrial Alliance Securities analyst Jeremy Rosenfield, who believes "long-term growth is now on sale."

"Following news of a new U.S.-Mexico-Canada trade agreement (USMCA, replacing NAFTA) on Oct. 1, market expectations have shifted to incorporate more aggressive monetary policy tigtening assumptions over the next 12 months," said Mr. Rosenfield in a research report released Tuesday in which he updated his valuations for the sector.

"The negative market reaction in the Power & Utilities sector last week was swift to incorporate revised expectations, reminding investors of potential negative implications from rising interest rates (ie negative funds flow out of sector equities, weak stock performance, compressed valuation multiples, weaker cost of capital, and potential weaker growth)."

With that shift, Mr. Rosenfield believes an enticing opportunity has opened up for investors, noting: "In line with recent periods of sharp interest rate increases, the most recent pullback could represent a good longer-term buying opportunity, particularly in stocks where valuation appears inexpensive, and growth remains relatively robust."

Mr. Rosenfield raised his rating for shares of Boralex Inc. (BLX-T) to “strong buy” from “buy” while lowering his target to $22 from $26. The average target on the Street is $25.38, according to Bloomberg data.

"We continue to like BLX's (1) highly contracted renewable power portfolio (14-year weighted average term), (2) healthy free cash flow per share growth (more than 10-per-cent compound annual growth rate 2017-22), driven by capacity additions in Canada and Europe, (3) substantial potential to increase the dividend (4-per-cent yield, 40-60-per-cent FCF payout target), and (4) potential upside associated with the company's large development pipeline (greater-than 1 GW of prospects), and/or strategic investment partnerships," he said. "Based on BLX's sharp year-to-date price depreciation, we believe that investors now have a highly attractive long-term investment opportunity in BLX; accordingly, we are upgrading the stock."

Mr. Rosenfield downgraded his rating for a trio of stocks:

- Capital Power Corp. (CPX-T) to “hold” from “buy” with a target price of $30, falling from $31. The average target is $29.59.

"CPX continues to offer investors (1) a mix of contracted and merchant cash flows, (2) longer-term leverage to rising power prices and new capacity payments in Alberta, (3) contracted growth projects in Canada and the U.S., expected to drive mid single-digit free cash flow per share growth, and (4) an attractive income profile (6-per-cent yield, 7-per-cent dividend growth through 2020, with a 45-55-per-cent FCF payout ratio," the analyst said. "However, CPX shares have outperformed all peers in the market on a year-to-date basis. With limited additional upside to our price target, we are taking a more neutral stance."

- Northland Power Inc. (NPI-T) to “buy” from “strong buy” with a target of $26, down from $28 and 94 cents below the average.

"NPI continues to offer investors an attractive mix of (1) stable cash flows from contracted power assets, (2) 8-10-per-cent FCF per share growth (CAGRE 2017-22 estimates), (3) potential longer-term upside from organic development activity, and (4) an attractive dividend profile (6-per-cent yield, greater-than 70-per-cent payout over 2018-22)," he said. "Share price performance has been mixed on a year-to-date basis, and with lower total potential return to our price target, we are downgraded NPI."

- TransAlta Corp. (TA-T, TAC-N) to “hold” from “buy” with a $8 target. The average is $8.25.

“TA offers investors (1) a balanced mix of contracted and merchant power exposure, (2) upside to rising power prices in Alberta, margin expansion from coal-to-gas conversions, and renewable development opportunities, and (3) a deeply discounted relative valuation versus IPP peers,” he said. “We continue to see TA’s fundamental outlook improving, although the macro-economic environment could hinder longer-term growth opportunities. Overall, we remain neutral on the name at this time.”

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Macquarie analyst Brian Kristjansen raised his rating for Suncor Energy Inc. (SU-T, SU-N) to “outperform” from “neutral” with a target of $58, rising from $53. The average is $61.59.

Mr. Kristjansen lowered Canadian Natural Resources Ltd. (CNQ-T, CNQ-N) to “neutral” from “outperform” and dropped his target to $46 from $58. The average is $56.52.

He also downgraded Cardinal Energy Ltd. (CJ-T) to “underperform” from “neutral” with a target of $4.25, down from $6. The average is now $6.57.

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All eyes are on Canadian National Railway Co.'s (CNR-T, CNI-N) infrastructure projects ahead of the winter season, said Desjardins Securities analyst Benoit Poirier in a research note previewing its third-quarter financial results, which are scheduled for release on Oct. 23.

“With record capex of $3.5-billion, management plans to invest in track and railway infrastructure maintenance ($1.6-billion), and to increase capacity ($1.5-billion),” he said. “Equipment spending on items such as new rail cars for the lumber market will account for $500-million, and $1.0-billion will be used for infrastructure expansion in yards and intermodal terminals, as well as information technology to improve safety and operational efficiency. At present, CN has completed 10 major infrastructure capacity expansions (out of 29 projects) on time and on budget. Another 12 projects are targeted for completion before the end of 3Q18, with the remainder completed in 4Q18. With these investments, CN should be able to add 60 miles of double track across seven new sections through its 800-mile Western Corridor (Edmonton–Winnipeg), representing a significant addition to the 100 miles already available in this section. We will continue to closely monitor progress on these projects, which are key to volume growth and network resiliency to ensure that CN continues to provide adequate service to its existing customers this winter.”

For the quarter, Mr. Poirier is projecting fully diluted earnings per share of $1.42, which sits 7 cents beneath the consensus on the Street.

"CN ended 3Q18 with RTM [revenue ton mile] growth of 4.8 per cent, below our initial forecast of 7.0 per cent," he said. "The company had a tough start to the quarter due to flooding in Wisconsin, which negatively impacted the frac sands business. Maintenance activity also weighed on volume growth. Nevertheless, we believe that volume will rebound strongly in 4Q18 as new infrastructure projects come online."

Though he lowered his revenue expectations for fiscal 2018 through 2020, Mr. Poirier did raise his adjusted EPS estimates for 2019 and 2020 to $6.16 and $6.74, respectively, from $6.12 and $6.71.

Keeping a "buy" rating for CN shares, he raised his target price to $127 from $121. The average target is currently $120.

"In light of the potential return and strong outlook for commodities overall, we are maintaining a bullish stance on CN," the analyst said. "Given its more diversified business (less exposure to CBR), sizeable growth opportunities and stronger balance sheet, we expect CN to continue to trade at a slight premium to CP."

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Separately, Mr. Poirier raised his target price for shares of Canadian Pacific Railway Ltd. (CP-T, CP-N), believing “the engine is rebuilt and the focus is now on growth.”

In the wake of CP’s Investor Day event on Oct. 3 in Calgary, Mr. Poirier sees “sizeable growth opportunities ahead” for the railway company.

"Management provided numerous examples of new initiatives that have led to incremental growth opportunities (Glovis, ONE, new automotive compound)," he said. "Overall, approximately $1.0-billion of contracts are up for renewal in 2019 and beyond. Management is confident it will win its fair share of contracts in light of CP’s improved service."

Mr. Poirier called the pre-release of its third-quarter financial results during the event a "nice surprise." With better-than-expected results, the company also increased its full-year guidance.

"Long-term financial targets for 2018–20 are conservative; further opportunities for margin improvement; core pricing growth expect to remain at 3–4 per cent per year," he said.

“In connection with its investor day, CP also provided details of its multi-year strategy to deliver superior service and financial results through 2020. Over this period, management expects an RTM CAGR in the mid-single digits (above our expectation of 3.0-per-cent average RTM growth), a double-digit CAGR in adjusted diluted EPS (in line with our initial estimate and consensus), continued margin improvement through cost control and operating leverage (in line; we previously expected OR to decrease by 110 basis points through 2020 to 61.9 per cent), and annual capex of $1.6-billion. Management reiterated that it has further opportunities for margin improvement and forecasts that it has six key levers to reduce OR by 1% over the period: (1) strategic investments, (2) longer and heavier trains, (3) increased asset velocity, (4) improved fuel efficiency, (5) leveraging labour agreements, and (6) strong pricing environment. Related to pricing, many participants pointed out that pricing is the strongest it has ever been in the last 10–20 years. CP forecasts that a 3–4-per-cent year-over-year improvement is sustainable in light of the strong market environment.”

Mr. Poirier raised his adjusted EPS estimates for fiscal 2018, 2019 and 2020 to $14.07, $15.71 and $17.67, respectively, from $13.56, $15.10 and $16.84.

With a "buy" rating, his target for CP shares jumped to $311 from $274. The average is $309.76.

"We came back from the investor day quite impressed with the new management team and its bench strength," he said. "We remain confident that CP’s available capacity will enable it to grab the growth opportunities it foresees. We continue to like the name and recommend investors buy the shares."

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Mercer International Inc.'s (MERC-Q) $465-million acquisition of Daishowa-Marubeni International is a “strong strategic fit,” according to Raymond James analyst Daryl Swetlishoff.

“The company already has exposure in Western Canada through its Celgar mill, and provides for additional exposure to Asian markets,” he said. “In addition, as the PRP mill is a swing mill that can produce both NBSK and NBHK, it provides MERC with exposure to NBHK further diversifying their product offering.”

On Oct. 4, Mercer announced the deal with Marubeni Corporation, Nippon Paper Industries Co. Ltd., and Daishowa North America Corp. to acquire all of the issued and outstanding shares of DMI. DMI owns 100 per cent of a bleached kraft pulp mill in Peace River, Alta., and has a 50-per-cent interest in the Cariboo Pulp and Paper Company, a joint venture which operates a bleached kraft pulp mill in Quesnel, B.C.

Mr. Swetlishoff said the deal provides an expansion of Mercer’s Western Canadian asset base at “attractive” metrics, providing a boost to his valuation and outlook for the company and possessing synergies that could make it “a home run.”

“MERC has identified operating synergies in the range of $15-20-million per year, which they expect could be largely achieved within 12 months of the transaction closing,” he said. “The synergies are targeting improvements in logistics, freight and geographic market mix. We are confident in MERC’s ability as operators and these targets seem reasonable.”

Keeping an “outperform” rating for its stock, the analyst raised his target to US$22.50 from US$19.50. The average target is US$25.70.

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Proposed changes to Zambia’s tax code are likely to have an adverse impact on the profitability of First Quantum Minerals Ltd.'s (FM-T) Sentinel and Kansanshi mines, said RBC Dominion Securities analyst Stephen Walker.

The changes include an increase in mineral royalty rates by 1.5 per cent, making mineral royalty tax non-deductible for income tax purposes and the introduction of a export levy on precious metals.

“Marking to market commodity prices and incorporating higher Zambian royalties and sales tax on gold, our NAVPS [net asset value per share] decreases from $27.62 to $25.73,” said Mr. Walker. “We maintain our Outperform rating and continue to believe that First Quantum offers investors copper production growth and management’s favourable operating track record.”

Maintaining an “outperform” rating, Mr. Walker’s target fell to $18 from $20. The average is $21.71.

“We believe that First Quantum offers investors potential for attractive returns based on our forecast of 56-per-cent total copper production growth over 2017 to 2020 and management’s favorable track record of project development and mining expertise,” he said. “Over the 2018–22 period, we estimate a 4-year copper production CAGR of 12 per cent.”

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Boston Pizza Royalties Income Fund (BPF-UN-T) offers a “compelling investment at current levels,” said Acumen Capital analyst Nick Corcoran, citing an improving economic climate in Western Canada, a yield of 8.1 per cent and potential upside from a future acquisition.

He initiated coverage with a “buy” rating.

“With 132 out of 391 locations in Alberta and Saskatchewan, we believe that BPF.UN is well positioned to benefit from a recovery in Western Canada driven by higher commodity prices and industry activity,” said Mr. Corcoran.

“We highlight that BPF.UN’s concentration in oil and gas producing regions (approximately 42 per cent of gross sales are from Alberta, Saskatchewan, Newfoundland and Northern British Columbia) created a drag on same store sales growth as industry activity slowed. While BPF.UN’s same store sales growth were adversely impacted by its concentration in oil and gas producing regions on the downswing, we believe that it will be favourably impacted by its concentration in these regions on the upswing.”

Mr. Corcoran set a target price of $19.50, which sits below the consensus of $20.

“With the Boston Pizza concept well represented across Canada and growing at a relatively modest rate (current same store sales growth plus 8–10 net new restaurants per year), we believe that an acquisition could provide the next leg of growth and create value for unitholders,” he said. “Based on our knowledge of the intercorporate relationships between BPF.UN and BPI, we believe a potential acquisition could occur through (1) BPI acquiring a concept and selling the rights to BPF.UN in exchange for an ongoing royalty, or (2) BPF.UN acquiring the rights to a concept from an operating company in exchange for an ongoing royalty.”

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Canaccord Genuity analyst Matt Bottomley initiated coverage of a pair of cannabis producers in Florida that he thinks provides investors with “attractive and the most direct exposure to this growing market.”

“Since medical cannabis became legal in Florida in late 2016 via ballot initiative (with 71 per cent voting in support), the Florida market continues to see strong growth in its registered patient base, which currently sits at more than 170,000 (up 300 per cent year-over-year),” he said. “With a population of 21 million and an aging demographic, we believe Florida’s annual medical revenues could grow to greater than US$1.5-billion over the next five years. Further, should the state legalize recreational cannabis (with lobbying in place to have it on the ballot in 2020), we believe the annual revenue opportunity has attractive optionality to grow to as much as US$5.0-billion over the long term.”

Mr. Bottomley gave Trulieve Cannabis Corp. (TRUL-CN) a rating of “speculative buy” with a $24 target.

He said: “Trulieve was the first to market when medical cannabis officially became legalized in Florida. Since then, the company has grown to become the largest operator in Florida on virtually all metrics, including its production footprint, retail reach, employees, home delivery platform and revenues. The company’s retail locations account for more than 30 per cent of all locations in the state and its trailing sales represent 70 per cent of all sales in Florida by volume. As a result, the company currently has a revenue and adjusted EBITDA run rate of US$93-million and US$45-million, respectively, virtually unheard-of levels in the cannabis industry today given its nascent stage (and higher than any other public cannabis company to date). Although already a market leader, as the Florida market continues to ramp-up, we forecast Trulieve’s top line to grow at a CAGR of 30 per cent over the next 5 years, reaching US$336-million by FY2022.”

He also gave a “speculative buy” rating to Liberty Health Sciences Inc. (LHS-CN) with a $2 target.

Mr. Bottomley said: “We believe Liberty is starting to establish a strong presence in Florida’s rapidly growing medical cannabis market. Over the past year, the company has demonstrated strong execution by securing a variety of strategic partnerships and brand licences (including with Aphria Inc., one of Canada’s largest Licensed Producers), while continuing to roll out its retail presence in Florida. Further, the company is in the midst of a multi-state expansion strategy, with licences/assets already secured in both Massachusetts and Ohio. As a result, we estimate that LHS will reach $20-million in revenues in its current fiscal year (FY2019), increasing by a CAGR of 90 per cent to $267-million by FY2023.”

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In other analyst actions:

RBC Dominion Securities analyst Steven Arthur upgraded BRP Inc. (DOO-T) to “outperform” from “sector perform” with a $70 target (unchanged). The average is $68.25.

Bank of America Merrill Lynch initiated coverage of Fortis Inc. (FTS-T) with a “buy” rating and $45 target. The average target is $47.50.

GMP analyst Ian Gillies downgraded Source Energy Services Ltd. (SHLE-T) to “hold” from “buy."

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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 3:59pm EDT.

SymbolName% changeLast
CNQ-T
Canadian Natural Resources Ltd.
+0.87%103.33
CNQ-N
Canadian Natural Resources
+1.13%76.32
SU-N
Suncor Energy Inc
+1.18%36.91
SU-T
Suncor Energy Inc
+0.99%49.99
BLX-T
Boralex Inc
+0.25%28.62
CPX-T
Capital Power Corp
+0.03%38.21
TAC-N
Transalta Corp
-0.31%6.43
TA-T
Transalta Corp
-0.69%8.69
CJ-T
Cardinal Energy Ltd
0%7.08
CNR-T
Canadian National Railway Co.
-0.15%178.37
CNI-N
Canadian National Railway
+0.05%131.71
CP-T
Canadian Pacific Kansas City Ltd
-0.54%119.43
CP-N
Canadian Pacific Kansas City Ltd
-0.33%88.17
DOO-T
Brp Inc
+5.35%90.95
FTS-T
Fortis Inc
+0.22%53.52
MERC-Q
Mercer Intl Inc
-1.68%9.95
FM-T
First Quantum Minerals Ltd
+2.32%14.56
SHLE-T
Source Energy Services Ltd
+9.41%13.84
TRUL-CN
Trulieve Cannabis Corp
+2.25%16.78

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