Inside the Market’s roundup of some of today’s key analyst actions
A pair of equity analysts on the Street initiated coverage of Brookfield Asset Management Inc. (BAM.A-T) on Tuesday a day after its unique market debut.
In May, Brookfield Asset Management Inc. revealed a plan to spin off its asset-management business to shareholders. The spinoff takes the ticker BAM.A-T and is called Brookfield Asset Management, while the original company changed its name to Brookfield Corp. and trade under the ticker symbol BN-T.
Goldman Sachs analyst Alexander Blostein initiated coverage of Brookfield Asset Management with a “buy” rating, believing it provides investors with an “outsized exposure to some of the fastest growing parts of the market.”
Expecting the company to drive “robust” 20-per-cent-plus annual earnings growth through 2024, he set a US$40 price target, representing 25-per-cent upside.
BMO Nesbitt Burns analyst Sohrab Movahedi think BAM offers investors “access to a ‘pure-play’ alternative asset management franchise with a proven track record for double-digit fee-bearing capital growth, stable fee rates and margins coupled with the financial and operating synergies of Brookfield Corporation’s capital.”
“However, we are mindful of multiple upside to BAM’s premium valuation absent a further acceleration to fee-bearing capital growth,” he added.
Admitting he would take a more constructive view if its valuation pulled back, Mr. Movahedi gave it a “market perform” rating and US$32 target.
Elsewhere, analysts reducing their targets for Brookfield Corp. include:
* Credit Suisse’s Andrew Kuske to US$42 from US$50 with an “outperform” rating. The average target on the Street is US$59.03.
“With the spin successfully completed, the focus on BN is multi-faceted and partly revolves around surfacing value across the portfolio and executing the strategic plan,” he said. “Given the nature of the structure, we believe BN has many levers to pull amidst an overall environment that is relatively conducive to many of the Group’s strengths.
“BN’s core franchise continues to be positively positioned on a longer-term basis from a legacy of value-oriented investing and a holdco structure often trading at a discount. The greater segregation of business lines offers a unique exposure across the group that is enhanced by some privately owned assets at the top of the house.”
* Scotia Capital’s Mario Saric to US$55.75 from US$64 with a “sector outperform” rating.
“Our initial observation is that BN looks very cheap relative to BAM, perhaps understandable as near-term relative positioning decisions are firmed up,” said Mr. Saric. “That said, we believe BPG (a source of near-term investor consternation)is valued at less than $0 in BN share price based on BAM’s implied 20 times FRE trading price and 9 times carry (i.e. ‘hold-co’ discount = approximately 65 per cent). We chose BN/BAM as a top pick in Scotiabank’s 2023 Focus Report. … We think it will take time for the dust to settle, but we expect BAM to trade well, with BN narrowing the gap.”
* BMO’s Sohrab Movahedi to US$49 from US$51 with an “outperform” rating.
“BN stock provides investors access to Brookfield’s ecosystem, a proven 15-per-cent-plus return track record and substantial cash generation,” he said. “:We argue price is fundamentally disconnected from value with BN’s stock trading at a 30-per-cent-plus discount to our target. Potential catalysts to unlock value include: i) the consistent realization of carried interest; ii) reduced capital intensity; iii) the return of capital via shareholder distributions.”
* Canaccord Genuity’s Mark Rothschild to US$50 from US$60 with a “buy” rating.
* RBC’s Geoffrey Kwan to US$53 from US$63 with an “outperform” rating.
After Pembina Pipeline Corp.’s (PPL-T) sold its 50-per-cent ownership in the Key Access Pipeline System (KAPS) for less than he anticipated, Raymond James analyst Michael Shaw lowered his recommendation for Keyera Corp. (KEY-T), which holds the remaining stake, to “outperform” from “strong buy” previously.
On Monday before the bell, Pembina announced the deal with private equity firm Stonepeak Partners for $662.5-million, less an approximate $50-million adjustment for the cost to complete the pipeline that would have fallen to it.
“We had expected the PPL/KKR share of the pipeline would fetch more than $700 -million (without the cost adjustment) implying a valuation multiple of 10 times on run rate EBITDA,” he said. “The lower valuation likely reflects some combination of the uncertainty of future cash flow execrations from the pipeline and compressed infrastructure multiples due to higher interest rates.”
Mr. Shaw does think the valuation for KAPS will “ultimately look very attractive,” adding: “KAPS has contended with a difficult pipeline construction market in 2022 – inflation and labour competition from other major pipeline projects – resulting in a series of cost overruns that have hurt the return outlook. Nonetheless, the fundamental outlook for the pipeline has improved considerably through 2022. Natural gas liquids volumes from the Alberta Montney have grown steadily this year. We expect KAPS will be well positioned to capture incremental production volumes from a growing market, improving the economics of the pipeline, excluding options to bolt on lower cost growth phases.”
His target for Keyera shares remains $32. The average is $33.43.
“We are introducing our 2024 estimates for Keyera and are moving our rating to Outperform,” he said. “We expect core infrastructure EBITDA to grow by 6 per cent year-over-year in 2024. Infrastructure growth is ffset by a lower contribution from the marketing segment as we move to the mid-point of KEY’s long-term marketing guidance from a relatively strong marketing environment in 2022 and 2023.Keyera is trading at 10.2 times our 2023 and 9.8 times our 2024 EBITDA – at the lower end of its 10.1-times to 10.5-times range since 2019 (excluding 2020 Covid lows). We are lowering our raring to Outperform to reflect the forward multiples moving towards KEY’s recent trading ranges.”
In a separate note, Mr. Shaw raised his target for shares of Pembina Pipeline Corp. (PPL-T) to $47 from $46 with a “market perform” rating, while CIBC World Markets’ Robert Catellier bumped his target to $50 from $49, keeping a “neutral” rating. The average is $50.63.
“Pembina’s 2023 EBITDA guidance and capital spending outlook were in-line with both our and consensus estimates,” he said. “Pembina expects 2023 EBITDA 2023 to fall between $3.5 and $3.8-billion. The midpoint of the guidance would imply effectively flat EBITDA year-over-year from the mid-point of 2022 guidance and a decline of 2 per cent from the 2022 consensus estimate.
“The flat-to-lower EBITDA year-over-year is a product of Pembina coming off an exceptionally strong marketing year in 2023. The headline EBITDA hides impressive underlying growth in its core fee-based segments despite fairly modest growth capex. PPL expects fee-based EBITDA – the Pipeline and Facilities segments – to grow by 5 per cent in 2023, which itself implies Marketing EBITDA is forecast to be down 27 per cent year-over-year.”
Equity analysts at BMO Nesbitt Burns remain bullish on oil and the energy sector in 2023 despite lingering recession risks.
“2022 was another excellent year for oil and gas investors with the North American oil and gas group delivering a gain of roughly 50 per cent versus a decline of 15 per cent for the S&P 500 (5 per cent for the TSX).” the firm said. “The group also managed to materially outperform crude oil prices, which were relatively flat. As we enter 2023, the key question for oil and gas investors is how much upside is left after two-years of outperformance, especially against the backdrop of a recession. We think the sector has more upside to offer. Valuations remain attractive and the oil and gas group is in the strongest financial position in its history amid what we believe is a multi-year up cycle in crude oil prices. In 2022, the oil and gas group was focused on paying down debt alongside raising cash returns to investors; in 2023, we think that the group will pivot to more aggressive cash distribution strategies.”
They note consensus multiples remain in the bottom half of their historical trading range based on current strip prices. Also noting balance sheets “have never been stronger and returns on capital have never been higher” and believing the sector could “provide a market-leading real cash yield,” the analysts see the valuation for the group remaining “very compelling.”
“Our top recommendations are companies that we believe are best positioned to increase cash returns to investors in 2023. This group includes Canadian Natural Resources (CNQ-T), Cenovus Energy (CVE-T), Chesapeake Energy (CHK-Q), Chevron (CVX-N), EOG Resources (EOG-N), Hess (HES-N), Matador Resources (MTDR-N), Marathon (MPC-N) and Tourmaline (TOU-T). We also like Step Energy Services (STEP-T) and Schlumberger (SLB-N) among the oil field services companies,” they said.
With revisions to their commodity price forecasts for 2023, including lowering their Brent/WTI price assumptions for 2023 to US$95 and US$90 per barrel from US$103 and US$100, the analysts made a series of target price adjustments to stocks in their coverage universe.
For Canadian large-cap companies, their changes were:
- Crescent Point Energy Corp. (CPG-T, “outperform”) to $12 from $13. Average: $14.75.
- MEG Energy Corp. (MEG-T, “outperform”) to $21 from $23. Average: $24.14.
- Suncor Energy Inc. (SU-T, “outperform”) to $54 from $55. Average: $54.05.
- Vermilion Energy Inc. (VET-T, “market perform”) to $32 from $36. Average: $39.36.
- Whitecap Resources Inc. (WCP-T, “outperform”) to $12 from $14. Average: $15.
Desjardins Securities’ Benoit Poirier is “encouraged by the steps taken” by Canadian National Railway Co. (CNR-T) chief executive officer Tracy Robinson so far.
In a research note titled A return to the glory days, the analyst said he sees the railway company “well-positioned” following meetings last week with its management team.
“We believe investors who attended the event came away impressed with the depth of the bench as well as the company’s strong grasp of its plan and strategy,” he said.
“CN is no longer running a long-train strategy, pun intended — Ms Robinson’s results speak for themselves. Ms Robinson stated that CN moved away from running a longtrain operating strategy in April and switched to running a scheduled operation with a focus on velocity. She indicated that it is clear this is what works on a network like CN’s. The renewed emphasis on on-time train departures has made a big difference so far, as both train speed and dwell posted the strongest 2Q and 3Q numbers in three years.”
Mr. Poirier thinks the macro environment for CN is “softening” heading into 2023, seeing pressure on its international intermodal business. However, he sees a possible tailwind from record lower water levels in the Mississippi river, which competes with CN to move U.S. grain.
“We forecast adjusted fully diluted EPS growth of 7 per cent in 2023 (consensus 8 per cent), which we believe is achievable in the current environment,” he added.
“Pricing environment remains solid; however, CN will be facing a tough comp in 2023. We expect pricing to moderate in 2023 as CN begins to lap very strong quarters, with boosts frim surcharges for additional storage and services caused by supply chain disruptions.
Though he sees CN shares as “fairly valued,” believing “significant” operating ratio improvements are already priced in,” Mr. Poirier raised his target to $181 from $171, keeping a “hold” recommendation. The average is $161.43.
“Since only one month remains in 2022, we have compared CN’s EV/EBITDA FY2 multiple with its five-year average EV/EBITDA FY1 multiple,” he said. “CN is currently trading in line with its five-year average (14.1 times vs 14.2 times). In addition, CN is still trading at a premium vs U.S. railroads, which is justified in light of its network and growth opportunities, but could be a risk in the event of an economic downturn.”
Canaccord Genuity analyst Aravinda Galappatthige expects Corus Entertainment Inc. (CJR.B-T) to continue to be hurt by “soft” television advertising trends through the first quarter of its 2023 fiscal year, warning of “near-term pain despite underlying value.”
“While we continue to believe that Corus’ FCF generative potential offers greater intrinsic value than the market affords it currently, there is an increasing likelihood that conditions could weaken before they get better,” he said. “Results through H1/23 are likely to look optically troubling with EBITDA declines in the 25-per-cent vicinity, and we cannot dismiss the prospect of double-digit ad declines through the middle of the year (particularly the seasonally significant Q3). As EBITDA estimates are lowered, the leverage ratio keeps rising. In fact, on our revised estimates, the leverage ratio (net debt/LTM EBITDA) touches 3.5 times again by Q3/23, which is likely to further impact the risk profile of the stock.”
Pointing to recent quarterly results of other linear and digital platforms, “as well as intra-quarter comments from public companies,” Mr. Galappatthige lowered his TV ad revenue expectation for the quarter to a decline of 12 per cent from 9 per cent previously. That’s narrowly better than the 14-per-cent drop seen in the fourth quarter of 2022.
He also expects profitability to be hurt by “elevated” programming costs, warning a “weakening EBITDA picture remains a concern.”
“While the ad weakness is understandable given the present macro picture and advertiser tendencies to pull back sharply during the initial phase of a slowdown, lack of flexibility on the cost side remains a major challenge for Corus’ financial outlook,” he said. “Programming costs, which make up nearly 60 per cent of TV opex, is expected to grow mid-single digits in F2023 regardless of ad market conditions due to programming commitments to U.S. studios as Corus attempts to secure key content in a competitive market, maintain ratings at its linear channels, and also drive growth in digital. This leaves a lot of cost rationalization to be done on the SG&A side, which frankly we have seen very little of at this point. Hence, another step down in terms of advertising expectations would likely have a disproportionate impact on EBITDA, if we are forced to revise down again.”
Maintaining a “speculative buy” rating for Corus shares, Mr. Galappatthige trimmed his target to $2.60 from $2.75. The average is $3.18.
In a research report titled The Four-step Guide to Find Value in Canadian Cannabis, ATB Capital Markets analyst Frederico Gomes named Calgary-based Nova Cannabis Inc. (NOVC-T) his “top pick in retail,” a sector which he called “largely undervalued” and presenting “a more straightforward opportunity for investors.”
“NOVC is one of the best and largest retail operators in Canada,” he said. “The Company has been consistently gaining market share due to the success of its discount strategy with the Value Buds banner. We believe NOVC has sufficient access to capital due to its strategic relationship with SNDL Inc. (SNDL-Q, Restricted), which should support continued brick-and-mortar expansion, especially in Ontario. In terms of geographical exposure, NOVC is concentrated in AB and ON, but we view opportunities for expansion to other markets, notably BC, SK, and MB.
“In addition to sales growth, we view a path to margin expansion as competition in the retail sector eases (with many smaller players closing doors), as NOVC leverages its relationship with SNDL for higher-margin private label products, and as operating leverage kicks in (the shared services model with SNDL should help NOVC keep a lean cost structure as it scales operations).”
Estimating a total addressable market for retailers of a total $3.9-billion in 2022 growing to $8.7-billion in 2030 (versus $2.2-billion and $5.2-billion for licensed producers, Ms. Gomes thinks Nova stock has been “flying under the radar” due to low liquidity, however a potential distribution of SNDL shares, which he expects in the first half of 2023, could be “a material catalyst that would lead to multiple expansion.”
“We see large upside, as the stock trades at an extremely attractive valuation,” said Mr. Gomes. “Despite NOVC being one of the leading retailers in Canada, the stock trades at 2024e EV/Sales and EV/EBITDA multiples of 0.1 times and 1.4 times (excluding leases), respectively, which are large discounts to our sector valuation multiples of 0.6 times and 12.6 times.”
He has a “speculative buy” rating and $1.60 target for Nova shares. The current average is $2.05.
Citing “strong fundamentals, attractive upsides, and reasonable valuations (below fair industry multiples,” Mr. Gomes named Organigram Holdings Inc. (OGI-T) and Village Farms International Inc. (VFF-T) his top picks for LPs, a sector he thinks is “slightly overvalued.”
He has an “outperform” rating and $2.50 target for Organigram. The average is $2.28.
“OGI ranks well in terms of market share, product category diversification (one of the leaders in flower and edibles), geographical exposure (wide distribution across provinces in Canada and supply agreements for international markets), access to capital for growth (large net cash position), and a diversified asset base (with the flagship facility in Moncton, the edibles facility in Winnipeg, and the cultivation and manufacturing facility in Quebec),” he said. “The Company is also one of the most efficient operators in Canada, as evidenced by its adj. EBITDA profitability and relatively low use of cash in operations (before changes in WC).
“We view more opportunities than risks ahead for OGI. The Company has plenty of access to capital and will continue to invest in growth by expanding and improving its facilities, which could prove to be a long-term differentiator. Product category diversification presents low-hanging fruit as OGI leverages its flower production capacity expansion and invests in automation.”
Mr. Gomes has an “outperform” rating and US$3.50 target for Village Farms. The average is US$5.24.
“VFF is gaining market share in flower as a result of its brand portfolio expansion,” he said. “The Company ranks well in segment diversification and geographical exposure, with material sales coming from the North American produce business and U.S. CBD. We view opportunities as VFF expands its presence in the value flower segment and in other product categories, notably in pre-rolls, where it is under-indexed. We also view upside in terms of geographical exposure as VFF commences exports to international markets (e.g., Israel and Germany) and starts operating in the adult-use market in the Netherlands (we expect sales to start in 2024).
“We believe VFF is one of the low-cost producers in Canada, with streamlined operations and a lean cost structure; the Company’s Canadian cannabis operations have been adj. EBITDA positive for the last 16 quarters. In terms of liquidity, we view VFF as having access to capital through its ATM facility, which should allow the Company to weather the near-term headwinds in the Canadian cannabis market with moderate dilution (already factored into our valuation).”
Mr. Gomes made his picks after evaluating the market opportunity, attempting to determine a fair industry multiple, identifying potential outperformers and seeking value.
“Canadian cannabis stocks have been a land mine for investors; however, while negative returns have been difficult to digest, valuations have become more reasonable. As the negative sentiment persists, the market is throwing out the baby with the bathwater. Certain companies are growing and getting closer to real profitability (through earnings and FCF, not only adj. EBITDA), though their share prices do not reflect their fundamentals,” he concluded
H.C. Wainwright analyst Amit Dayal sees Graphene Manufacturing Group Ltd. (GMG-X) as an “under followed stock with meaningful upside.”
Seeing the Brisbane-based company “commercialized a disruptive graphene production process,” he initiated coverage with a “buy” recommendation on Tuesday.
“Graphene Manufacturing Group Ltd. is an early-stage company seeking to commercialize, we believe, a disruptive graphene-producing technology that uses methane gas to produce high-grade graphene in bulk quantities at a very low cost, as compared to the conventional graphene extraction process,” the analyst said. “The company’s current product pipeline includes graphene powder, graphene-based Thermal-XR (TXR) HVAC coating systems, graphene aluminium-ion (G+AI) batteries, and liquid graphene in the form of lubricants, coolants, and graphene-enhanced diesel solutions. Initial testing results from the company’s flagship G+AI batteries have shown the potential to compete or beat lithium-ion (Li-ion) battery applications in consumer electronics, electric vehicles, and the energy storage market. GMG’s HVAC coating solutions and automotive fluids utilize graphene’s high thermal properties, superior electric conductivity, and lubricating properties to enhance energy efficiency that support the energy conservation value proposition.”
Believing graphene could take market share from competing materials “providing a unique growth opportunity,” Mr. Dayal, currently the lone analyst covering the company, set a target of $8 per share.
“We believe the company’s small size, Canadian listing, and limited sell-side coverage have prevented discovery of the stock,” he said. “We believe both the graphene industry and the company stand at an important inflection point, moving from R&D to commercialization, that should create broader awareness of the associated growth opportunity. We are anticipating several developments for the company over the next 12-18 months that should act as favorable catalysts for the stock. These include: (1) launch of the company’s graphene automotive lubricants; (2) establishing larger production infrastructure; (3) commercializing coin cell batteries and advancing the pouch pack design; and (4) G+AI batteries making progress towards being market ready. We believe current levels present an attractive long-term entry point into the story.”
In other analyst actions:
* Canaccord Genuity’s Roman Rossi lowered his target for Frontera Energy Corp. (FEC-T) to $16, below the $16.71 average, from $19 with a “buy” rating.