Monday’s analyst upgrades and downgrades

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

Raymond James slashed its price target by more than half on shares on CAE Inc. (CAE-T), believing that a recovery in the stock will take considerable time as COVID-19 diminishes demand for its airplane training simulators.

Analyst Ben Cherniavsky cut his price target to C$19 from $40 and maintained a “market perform” rating.

“Having been recently concerned about the overly aggressive expectations that were priced into CAE’s stock during its bullish phase—and believing that the verylong-term cash flow prospects for the business have arguably not changed radically post Covid—it stands to reason that we feel more comfortable about the company’s share price today at $19 compared to when we published on the company’s F3Q20 results at $42 less than four months ago,” the analyst said in a note.

"That said, our rating remains market perform based on our prevailing concerns about the company’s near-term financial performance, balance sheet risk, and a general lack of positive catalysts in the aerospace market. ... We expect the current recession to resemble most closely the post 9/11 downturn for the aerospace markets, when a long stretch of robust demand was similarly destroyed by an extraneous shock that fundamentally changed the nature of air travel."

“Although CAE’s business has evolved considerably over the past 20 years, we do not believe that the fundamental supply/demand dynamics of airline capacity or the related implications for training have changed much. Accordingly, as we experienced in the wake of 9/11, we believe it could take some time before CAE’s stock hits bottom and recovers sustainable upward momentum). In short, although its massive correction has given us reason to reconsider a more constructive view on CAE’s stock, we believe it is still too early to buy.”

Elsewhere, Desjardins Securities increased its price target to $21 from $19. It commented, “CAE reported solid 4Q results, supported by the Civil segment, while Defence and Healthcare reported weaker results. The COVID-19 pandemic is expected to have a material impact on CAE’s businesses, especially the Civil segment. At this point, we prefer to remain on the sidelines as we note the considerable uncertainty related to the eventual recovery of the commercial aerospace industry.”

Also, TD Securities cut its price target to C$20 from $23.

***

Desjardins Securities analyst Maher Yaghi maintained a “buy” rating and C$100 price target on CGI Inc. (GIB-A-T) after liking what he heard from the company’s management during marketing meetings last week.

“Resiliency in the business model was again the focus of discussions, and management continues to demonstrate this resiliency with actions that protect the bottom line. While management continues to reposition certain parts of the company to realign the business given fresh economic weakness, thus foreshadowing potentially more restructuring initiatives ahead, it also indicated that in certain countries that have begun to reopen their economies, business has been slowly improving. This has prompted GIB to begin bringing back employees who were temporarily laid off in the early stages of the pandemic,” Mr. Yaghi said.

“There are M&A opportunities, and management believes that the current economic weakness could put some of its smaller competitors, with less client diversification, at a disadvantage and thereby potentially improve GIB’s chances to identify promising takeover candidates. Past recessions have enabled the company to close a few M&A deals.”

He concluded: “We expect GIB to implement cost-saving initiatives to maintain positive EPS growth in FY20 provided the current shutdown does not last longer than six months. Combined with a robust balance sheet to undertake accretive M&A transactions and a relatively attractive valuation compared with large IT service companies, we believe the current share price still offers a good entry point.”

**

BMO Capital Markets trimmed its price target on Innergex Renewable Energy (INE-T) following the company’s announcement that it has received force majeure notices from BC Hydro related to reduced energy demand amid the COVID-19 pandemic.

BC Hydro stated it will not accept and purchase energy under certain electricity purchase agreements above a specified curtailment level for the period starting on May 22, 2020 and ending on July 20, 2020.

BMO analyst Ben Pham cut his price target on Innergex to $19.50 from $20, but maintained an “outperform” rating. “While BC Hydro’s claim of force majeure on several hydro assets is a negative development for INE and investors may begin to question the revenue security of long-term contracted power contracts in general, the impact is likely transitory and does not alter our positive long-term thesis,” the analyst said.

**

AltaCorp Research analyst Patrick O’Rourke reiterated an “outperform” rating on Vermilion Energy Inc. (VET-T) following news Monday morning that its president and CEO, Anthony Marino, is departing.

Former CEO Lorenzo Donadeo has been appointed as executive chairman of the company, while former CFO, Mr. Curtis Hicks, rejoins the company as president.

“While the timing of the move comes as a bit of a surprise, given the challenges recently and currently faced by industry and specifically Vermilion, we believe that some investors may view the reboot to a previously very successful management structure (and top duo) positively, but further time to define the path forward will be required for other investors,” Mr. O’Rourke said.

Rather than filling the role of CEO for the time being, Vermilion has created an executive committee which will contain a minimum of five senior executives, with Vermilion having used an executive committee structure in the past.

The analyst maintained a C$10 price target.

**

CIBC analyst Daine Biluk trimmed his target price on Step Energy Services Ltd. (STEP-T) following the company’s latest quarterly results, citing continued near-term uncertainty.

While he termed the quarter largely in line with expectations, he cited some negatives that included asset impairments and covenant relief discussions that are still underway.

"While the company is clearly in a tough place, we do believe it will be able to secure covenant relief as it continues to generate positive cash flow and we forecast it will be able to hold net debt largely flat over 2020/2021. However, this is not without risks and will likely include incremental financial restrictions. We believe the stock will remain range-bound until covenant relief discussions conclude and a decision is reached.

“From an industry perspective, activity has softened materially across North America thus far through Q2/20 and will likely stay fairly muted outside of a potential modest improvement in gas activity. However, as we have talked about for some time now, STEP has a solid track record of securing large core clients via strong in-field execution and we believe that these core relationships will provide a baseline of activity going forward.”

He cut his price target to 75 cents (Canadian) from $1 and maintained a “neutral” rating.

**

In other analyst actions

Well Health Technologies Corp: Eight Capital raises price target to C$3.50 from C$2.50