Friday’s analyst upgrades and downgrades

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

Though he sees a “healthy” outlook for TC Energy Corp. (TRP-T, TRP-N) following Thursday’s release of in-line fourth-quarter 2019 financial results, Industrial Alliance Securities analyst Jeremy Rosenfield lowered his rating for its stock to “hold” from “buy” on Friday in response to its recent “strong” share price performance.

“TRP reported Q4/19 financial results that were largely in line with expectations, driven by solid contributions across the Company’s portfolio of natural gas pipelines, partially offset by weakerthan-expected Liquids results,” he said in a research note released before the bell.

With the results, TC also announced $1.3-billion in new growth investments for its gas pipeline business, which Mr. Rosenfield estimates could lead to $125-$150-million in incremental annual EBITDA.

"TRP’s secured growth portfolio of $30-billion is expected to drive EBITDA growth to more than $10-billion by 2022, and we continue to forecast mid-single-digit average annual DCF [discounted cash flow] per share growth over the forecast period, which should support the Company’s 5-7 per cent per year dividend growth target (post 2021), within a sustainable less than 50 per cent DCF payout ratio."

Mr. Rosenfield increased his target price for TC Energy shares to $75 from $72. The average target on the Street is $71.70, according to Thomson Reuters Eikon data.

“TRP offers investors a combination of (1) stable earnings and cash flows (95 per cent regulated/contracted EBITDA), with an emphasis on gas infrastructure assets (70 per cent of EBITDA), (2) sustainable organic growth (5-7 per cent per year DCF/share growth, CAGR 2019-24), driven by $30-billion of secured investment (2019-23), (3) significant potential upside from more than $20-billion of longer-term development (e.g., KXL), and (4) attractive income characteristics (4-per-cent yield and 8-10 per cent per year DPS growth through 2021, 5-7 per cent per year thereafter),” he said. “We are increasing our relative valuation to 10 times 2021 estimated P/DCF (up from 9 times 2021 estimated P/DCF previously), and increasing our price target to $75.00 accordingly. However, following strong share price performance in 2019 (up approximately 42 per cent) and the limited upside to our revised price target, we are taking a more neutral stance on TRP.”

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With its growth outlook “more favourable than it was a year ago," CIBC World Markets analyst Paul Holden raised Sun Life Financial Inc. (SLF-T) to “neutral” from “underperformer" following the release of “solid” fourth-quarter results.

“Our downgrade of SLF to Underperformer roughly a year ago was primarily premised on our view that 2019 would be a slower growth year, a substantial proportion of excess capital would remain on the balance sheet while peers put capital to work, and that the valuation premium to peers would narrow,” he said. "2019 has passed, with only 3-per-cent growth in pre-tax underlying earnings, and with lots of capital still on the balance sheet. The difference now is that we have a more positive view towards growth over the next 12 months. Canada, which accounts for 30 per cent of earnings, may have reached an inflection point. Expected profit has been trending well (high single digits), and sales results were strong across all products. Our view on growth for SLF Canada has improved.

Also expressing optimism about its outlook in Asia and seeing its asset management business “performing well” and providing “potential earnings upside related to rising equity market,” Mr. Holden increased his target for Sun Life shares to $70 target from $59. The average on the Street is $68.11.

“We do see limitation to upside given SLF is trading at a substantial premium to peers and historical averages,” he said.

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Desjardins Securities analyst Benoit Poirier upgraded Bombardier Inc. (BBD.B-T) on Friday, expressing confidence in its ability to unlock value from its strategic review.

“Our analysis gives us confidence that Alstom can afford to pay a high valuation multiple for BT considering the strong strategic rationale behind the transaction and the depressed financial results at BT,” he said. “Our analysis also demonstrates that BA would have a decent balance sheet while trading at an attractive valuation post the divestiture (we derive an EV/FY2 EBITDA of 4.4 times vs the peer average of 9.0 times). Therefore, we recommend investors revisit the story and buy the shares.”

Mr. Poirier raised his rating to "buy" from "hold" in the wake of Thursday's release of fourth-quarter results that fell in line with pre-released figures and 2020 free cash flow guidance that met expectations.

"BBD expects revenue from BT and the business jet segment to grow organically in the double digits from the US$13.7-billion reported in 2019 (excluding divestiture of the CRJ program and aerostructures business)," he said. "Total revenue from the legacy business should be in excess of US$15b. BBD expects an adjusted EBITDA margin of 7.0 per cent and adjusted EBIT margin of 3.5 per cent (includes divestitures). Finally, management anticipates positive FCF in 2020 excluding RVG payments of US$200-million (not included in our initial forecast). Management highlighted that these payments will be skewed to 1H20. Nevertheless, our model did not formerly include the release of capital requirements for the A220 of US$175-million for each 2020 and 2021, which partially offset RVG payments."

Though he lowered his 2020 and 2021 revenue and earnings expectations for the company, Mr. Poirier increased his target for its shares to $2.75 from $2.25. The average is now $1.87.

“We initially downgraded the stock to Hold (from Buy) because of the lack of clarity on the potential outcome of the strategic review and our belief that reaching a transaction would take time,” the analyst said. “Now that we have more visibility on the potential outcome of the strategic review, we are in a better position to assess the value creation that may arise from the divestiture of BT. Our analysis gives us confidence that the acquisition of BT by Alstom would make sense both strategically (greater scale to compete against CRRC and Siemens) and accretively (significant opportunity for cost synergies, based on our estimates). Our analysis also demonstrates that BA would enjoy a decent balance sheet (net debt to EBITDA of 1.6 times at the end of 2021) while still trading at an attractive valuation post divestiture. In summary, we are encouraged by the new development with the story and are upgrading the stock.”

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Citi analyst P.J. Juvekar downgraded a trio of fertilizer producers on Friday, believing lower prices are likely to leave them range bound through 2020.

"Price weakness despite significant supply discipline in phosphate (P) and potash (K), and a flattening nitrogen (N) cost curve move us to the sidelines," he said. "Compared to our previous price forecast for 1Q20, N, P and K prices are trending 10 per cent lower (on average), which we believe will carry through the rest of 2020. On lower price expectations, we take down estimates and target prices."

Mr. Juvekar lowered Nutrien Ltd. (NTR-N, NTR-T), Mosaic Co. (MOS-N) and CF Industries Holdings Inc. (CF-N) to “neutral” ratings from “buy.”

He also emphasized investors should focus on his top pick for the sector FMC Corp. (FMC-N) as well Corteva Inc. (CTVA-N) as ways to play the agricultural sector, “given their competitive moat based on R&D-led innovation and patent protection.”

In justifying his stance, Mr. Juvekar pointed to three factors:

1. "Fertilizers are pure commodities and are getting buffeted by additional supply."

2. "The impact of the coronavirus seems negative for demand in China."

3. "We had expected 2020 to be a bounce-back year in NAM following a wet 2019 on the back of higher acres, and while that is still likely, the curtailed capacity in P and K is likely to come back soon capping any upside."

To reflect the current conditions, he lowered his nutrient price deck, leading to changes to his financial estimates and reductions in his target prices for stocks.

In order of preference, Mr. Juvekar made the following changes:

Nutrien to US$47 from US$61. The average on the Street is US$57.45.

CF Industries to US$43 from US$56. Average: US$49.42.

Mosaic to US$21 from US$29. Average: US$26.18.

“An upside risk to our thesis is if Chinese fertilizer production remains low and the country begins to import more grains and meat,” he said. “A downside risk to our thesis is if the overall Chinese consumption declines in the face of the outbreak and leads to lower grain prices.”

“NTR estimates come down the most relative to consensus. While our estimates are generally below consensus for all three companies, we believe the street has yet to fully update numbers for year-to-date price weakness. We expect downward estimate revisions post 4Q19 results from NTR and MOS (report 2/18 and 2/19, respectively).”

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Following the recent close of the US$163-million sale of its U.S. sawmill business, Raymond James analyst Daryl Swetlishoff lowered Conifex Timber Inc. (CFF-T) to “market perform” from “outperform.”

"After a bullish start to 2018, 2H18-2019 proved to be an extremely difficult 18 months for even the largest, best positioned B.C. lumber producers," he said. "With a more concentrated B.C. footprint and higher leverage, Conifex had a particularly difficult time necessitating asset sales and other measures to shore up the balance sheet.

“With the sale of the U.S. operations to Resolute Forest Products now closed, we believe the debt position is manageable, with the bioenergy secured term loan of $64-million outstanding. Our NAV (risked at 50 per cent) pegs Conifex current equity value at 80 cents per share. Longer term, we see the potential for additional value in Conifex’ shares should Mackenzie TSA delivered log costs decline sufficiently to allow for a profitable restart of the Mackenzie sawmill.”

After lowering is 2020 earnings per share projection to a 9-cent loss from a 30-cent profit, Mr. Swetlishoff reduced his target for Conifex shares to 80 cents from $2.30. The average is $1.35.

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With its 2020 earnings per share guidance suggesting a “softer” performance, Canaccord Genuity analyst Scott Chan lowered iA Financial Corp. (IAG-T) to “hold” from “buy.”

The move comes following Thursday's release of "relatively" in-line fourth-quarter financial results.

“This comes after two consecutive substantial quarterly core EPS beats with earning expectations heightened heading into this quarter,” said Mr. Chan. “IAG reported core EPS of $1.62 (up 17 per cent year-over-year), which was in line with Canaccord Genuity’s estimate, and compared to the Street at $1.60. Results exceeded the company’s Q4 guidance of $1.50-$1.60 and benefited from several items (e.g. taxes, strain, markets, iA Auto and Home, year-end actuarial assumption review).”

“For 2020, IAG targets core EPS in the range between $6.30-$6.90 (excludes integration charges of estimated $0.15 on recent acquisitions). The firm closed 2019 with core EPS at $6.26 (up 13 per cent year-over-year). If we take the mid-range of its new guidance, it would imply EPS growth of 5.4 per cent with the high-end of its range at 10-per-cent growth. Over the past 6-years, IAG has achieved avg. core EPS growth of 11 per cent, slightly above their committed 10-per-cent annual EPS growth. To be fair, the firm’s core EPS growth in 2018 / 2019 was 14 per cent/13 per cent, which leaves room for potential upside in 2020 guidance. That said, we get a sense that this year will be tougher. Management called out several headwinds currently that include: (1) higher spend towards investment/technology (more to come on this at their Investor day on June 5); (2) IFRS 17 preparation and data security; and (3) lower interest rates. Further, recent acquisition activities will likely be neutral to earnings this year and past transactions are expected to contribute a modest amount to 2020 earnings growth.”

With the guidance, Mr. Chan lowered his 2020 EPS projection by 1 per cent to $6.75 from $6.83, which represents an increase of 7 per cent year-over-year. He also introduced a 2021 estimate of $7.38.

His target for iA shares slipped to $76 from $81. The average on the Street is $78.70.

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Believing New Gold Inc. (NGD-T, NGD-N) has “outlined a path to profitability,” Laurentian Bank Securities analyst Ryan Hanley raised his rating to “buy” from “hold” following Thursday’s release of its quarterly results and 2020 outlook.

"As Q4/19 is now behind us, the only key take-away from the quarter, particularly given NGD pre-released operating results, is that the company ended the year with $83.4-million in cash and available liquidity of $335-million.

“With respect to 2020 guidance, NGD has indicated a relatively flat year ahead, with gold production guidance set at 313-343koz (vs. 322.6koz produced in 2019), while cash cost guidance of $755-$855/oz is also relatively flat with the $792/oz achieved in 2019. Although with a similar level of capital spending expected, we believe that NGD should be able to achieve its goal of becoming FCF positive by year-end. For 2020, we now expect production of 327koz at cash costs of $802/oz, leading to $75-million in negative FCF (or negative $35-million at spot pricing.”

Mr. Hanley lowered his target to $1.50, which exceeds the average by 7 cents.

“We do caution however, that NGD is not expected to be FCF positive until the end of 2020, so an immediate re-rating is not expected,” he said.

Conversely, after its near-term FCF fell short of her expectation, CIBC World Markets analyst Anita Soni cut New Gold to “underperformer” from “neutral” and lowered his target to 60 US cents from US$1.20.

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Though it’s facing near-term headwinds and presented some fourth-quarter “disappointments,” Manulife Financial Corp.'s (MFC-T, MFC-N) valuation is “hard to ignore,” said RBC Dominion Securities analyst Darko Mihelic.

"We found the conversation around potential headwinds in Asia a little disappointing as it was a little too vague (we agree it's early, but any small perspective would be helpful)," he said. "We now forecast Asia earnings growth of just 1 per cent (was 6 per cent) in 2020 assuming lower new business gains in China and Hong Kong in the first half of 2020. We expect earnings to rebound and improve 19 per cent in 2021 but we suspect that long term forecast is scant comfort to investors at the moment."

Mr. Mihelic also expressed concern about Manulife’s hesitancy to target a new, higher amount of legacy capital release," noting: “We interpret this shift to mean that the ‘low hanging fruit’ has been picked and future capital release may be episodic, like a reinsurance agreement and low probability too.”

As well, he was disappointed by its “lack of commitment to significant buybacks,” adding: “Yes, we believe it is probably somewhat prudent to not rush out and buy back stock right this minute as Asia slows, nevertheless we still think that if the company is committed to its medium-term objectives that it could have signaled significant buybacks later in the year as things stabilize and capital is organically added to. As it stands now, we assume no buybacks in our model (could be a source of upside).”

Pointing to lower assumed earnings in Asia, Mr. Mihelic dropped his target for Manulife shares by a loonie to $32, which exceeds the $31.03 average.

He kept an "outperform" rating.

“We believe MFC is being cautious with respect to its outlook/targets as the company is trying hard to not negatively surprise investors,” the analyst said. “Thus we have some confidence that H2/20 will improve and when combined with the relatively low valuation we continue to view this stock as having significant longer-term upside potential."

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Vancouver-based cannabis producer Rubicon Organics Inc. (ROMJ-CN) brings a “addresses a niche market need that has been underserved in a fast-growing industry,” said Desjardins Securities analyst John Chu.

“Rubicon is uniquely positioned as an organic super premium cultivator which has a management team with a successful track record growing organic super premium flower from its days at Whistler Medical Marijuana Corporation — considered to have one of the top brands in the industry,” said Mr. Chu. “We forecast strong growth and the potential to generate higher margins vs peers.”

In a research report released Friday, he initiated coverage with a "buy" rating, saying Rubicon brings a "rare combination of organic and super premium."

“The industry has been plagued by poor-quality product and a shortage of super premium products,” said Mr. Chu. “Ontario currently has only 9 per cent of listed dry flower products categorized as super premium, and only a couple are organic. Rubicon is planning to bring 11,000 kilograms of capacity online to help address this shortfall.”

“With modest operations, albeit almost double that of most of its specialized peers, we believe Rubicon is well-positioned to realize robust near-term growth while generating positive EBITDA faster than most of its larger peers. We forecast Rubicon could be EBITDA-positive by 3Q20 (ending September 2020).”

Mr. Chu set a $5 target for Rubicon shares, which exceeds the consensus by a loonie

“Rubicon addresses a niche market need that has been underserved in a fast-growing industry,” he said.

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Laurentian Bank Securities analyst Jonathan Tempro initiated coverage of Calgary-based Headwater Exploration Inc. (CDH-T), formerly known as Corridor Resources Inc., with a “buy” rating and $1.75.

“We view the new management team favourably and believe that the team can acquire assets at attractive metrics, grow production, and ultimately provide significant shareholder returns,” said Mr. Tempro. “This team has created value through multiple business cycles by providing high-growth oil-focused companies through a strategy of acquiring, exploiting, and monetizing. The strategy of consolidating undervalued oil-weighted assets in western Canada, while maintaining a strong balance sheet, provides a foundation for success.”

He added: “This management team has a proven track-record of growing production to over 20,000 boe/d [barrels of oil equivalent per day] and providing shareholder returns that exceed the S&P/TSX Energy Index returns. An experienced and successful team with a fresh set of assets may be what the market warms up to, following years of a survival mindset from more established companies.”

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Seeing exploration upside and takeout potential, CIBC World Markets analyst Bryce Mr. Adams raised Lundin Gold Inc. (LUG-T) to “outperformer” from “neutral.”

Mr. Adams said Lundin’s Fruta del Norte project in Ecuador is “highly attractive,” calling it “one of the highest-grade gold projects globally.”

"We estimate company-wide LOM AISC [life-of-month all-in sustaining cost] of $600 per ounce, providing robust operating margins and placing LUG firmly in the lowest-cost quartile," he said. "The deposit hosts 2P reserves of 5Moz gold at 8.7g/t, with a 15-year mine plan that supports an attractive FCF yield of 10 per cent in 2021, FDN’s first full year of operations.

"FDN hosts 2.3Moz at 12.1g/t in M&I, as well as 2.1Moz at 5.7g/t in Inferred outside of the current mine plan. During the construction phase, these ounces have not been a focus, but with commercial production nearing, we see potential for Lundin to commence conversion drilling on those ounces in the back half of 2020. Longer term, regional exploration has a role to play as FDN has an expansive land package with several key targets. We understand that the highest-priority target on the property, outside of FDN, is Barbasco which demonstrates potential for another FDNlike epithermal gold-silver mineralized system."

Based on that potential and Newcrest’s 32-per-cent ownership, Mr. Adams expects Lundin to “be in play later this year or early in 2021, once commercial production has been declared and the asset delivers two consecutive quarters of steady-state operation.”

He raised his target to $13 from $8. The average is $11.52.

“Lundin Gold shares, up 22 per cent, have outperformed the GDX, down 3 per cent year-to-date,” the analyst said. “That said, we see upside from current trading levels.”

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Calling it a “show me story,” BMO Nesbitt Burns analyst Tom MacKinnon lowered Power Corp. of Canada (POW-T) to “market perform” from “outperform” upon resuming coverage of the stock.

“Reorganization simplifies corporate structure with modest EPS accretion (2 per cent in 2020),” he said. "But a heavier reliance on GWO (increases under reorg to 72 per cent of POW’s NAV) makes it difficult to get constructive on NAV growth given our makret view on GWO.

“As well, we need to see a much smaller negative contribution from the holdco (forecast at -14 per cent of GWO/IGM/Pargesa contribution in 2021 versus long-term averages of -6 per cent and -9 per cent for POW and PWF, respectively), in order to see the discount narrow beyond the 19 per cent represented by our $37 target price.”

His target price of $37 is 14 cents below the consensus.

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In other analyst actions:

National Bank Financial analyst Adam Shine cut Telus Corp. (T-T) to “sector perform” from “outperform” with a $55 target. The average on the Street is $54.78.

TD Securities analyst Greg Barnes cut Agnico Eagle Mines Ltd. (AEM-N, AEM-T) to “hold” from “buy” with a US$63 target, down from US$74. The average is US$70.81.

Cormark Securities analyst David McFadgen lowered WildBrain Ltd. (WILD-T) to “reduce” from “market perform” with a 90-cent target, falling from $1.80. The average is currently $1.88.