Inside the Market’s roundup of some of today’s key analyst actions
Pointing to the potential gains brought by the sale of its equity interest in Echo Realty LP, RBC Dominion Securities analyst Jimmy Shan raised his recommendation for H&R Real Estate Investment Trust (HR.UN-T) to “outperform” from “sector perform” previously.
“Our upgrade is not a call on a permanent re-rate but an opportunity to capitalize on a potential positive catalyst of a sale of its equity interest in Echo Realty at a time when sentiment and valuation on HR are low,” he said.
“Its 33-per-cent interest in Echo is valued at $1.67 per unit, 18 per cent of current price. If realized, it would be the largest sale since The Bow and could see the stock respond higher than the 10-per-cent move on sale of Corus Quay in Dec ‘23, closer to our TP of $11.50, based on 30-per-cent discount to forward NAV.
Echo was formed in March of 2000 as Giant Eagle Supermarket spun out its real estate holdings. In August of 2013, Toronto-based H&R acquired a one-third interest in the privately held real estate company with a portfolio value amounts to approximately US$1.165-billion.
“We see near-term potential for a 10-per-cent to 15-per-cent move if Echo is sold while clipping 6.3-per-cent yield, against what appears to be limited downside,” he explained. “The sale of Corus Quay in Dec 2023 saw a 10-per-cent move – we believe a possible Echo sale next year could see a bigger move given reported equity of Echo ($1.67/unit) is 3 times Corus Quay. $1.67/unit implies 8-per-cent cap on Q3 NOI, US$222 PSF [per square foot]. We think the portfolio could even clear at 7-per-cent cap or $2.10/unit if sold entirely, free of any encumbrance.”
“Why there is a decent chance of an Echo Realty sale: 1) We believe that investors, comprising mostly multi-generations of families related to founder of Giant Eagle, desire liquidity. On the Q3 call, with regard to Echo, HR ‘expect[s] something to occur no later than the end of [2025]’. 2) We believe demand for grocery retail is healthy, exemplified by recent Blackstone/ROIC transaction. 3) Sale of GetGo to Alimentation Couche-Tard in August 2024 has resulted in a more diversified tenant base and improved credit profile of Giant Eagle.”
Mr. Shan cautioned that H&R is “not driving the bus” on a potential transaction, given its owns only a 33-per-cent equity interest and has just two of six board seats.
“While there appears to be desire by the families for liquidity, it is unclear what terms and pricing would be acceptable to them and whether consensus will be achieved by some 450+ investors. The sale of HR’s interest should only fetch a lower price,” he noted.
The analyst maintained a $11.50 target for H&R units. The average target on the Street is $11.63.
“H&R’s price has materially disconnected from segmented peers,” he said. “HR’s fall of 3 per cent year-to-date compares with U.S. MFR [multi-family residence] sunbelt REITs at up 21 per cent, U.S. NY office REITs at up 65 per cent, U.S. grocery retail up 21 per cent, CDN triple net retail up 1 per cent, with these segments totalling 2/3 of its portfolio,” he said. “Moreover, USD/CAD is up 7 per cent year-to-date with 2/3 of portfolio in the U.S.. HR trades at implied cap rate of 8.5 per cent, notably higher than CDN office REITs (6.8 per cent), when U.S. apts. = 43 per cent. HR trades at 38-per-cent discount to our NAV, 51 per cent to IFRS NAV. We attribute the discount to several factors, including ‘scars’ from past capital allocation, diversified asset classes and execution risks in asset sales. We attribute year-to-date stock underperformance simply to apathy, in a REIT market characterized by lack of fund flows.”
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RBC Dominion Securities analyst Maurice Choy thinks investors “who are bullish on the WCSB volume growth theme” will find the stock investment thesis for Keyera Corp. (KEY-T) “attractive given the company’s torque via filling its existing integrated platform, with relatively modest growth capex needed to meet its newly-introduced 7-8-per-cent fee-based 2024-2027 EBITDA CAGR [compound annual growth rate].”
“Beyond watching out for the sanctioning of new growth projects ahead and the underlying contracting profile to support the company’s 10-15-per-cent target return on a stand-alone basis, we anticipate that investors will be keeping a close eye on the company’s Marketing outlook and stock valuation relative to its Canadian Midstream peers,” he added.
Before the bell on Tuesday, the Calgary-based company said it’s on track to achieve the upper end of its CAGR of 6-7 per cent for the period from 2022 to 2025 and revealed a new 2024-2027 fee-based adjusted EBITDA guidance of 7-8 per cent per year. It said that growth is also supported by yet-to-be sanctioned capital-efficient growth projects.
“Besides having new projects contribute to the EBITDA CAGR (as KAPS did in the previous three-year CAGR), we like that the vast majority of the 7-8-per-cent CAGR is based on filling up available capacity at Keyera’s existing assets with modest investment,” said Mr. Choy. “Directionally, we believe there is upside to this CAGR through further deployment of the company’s balance sheet capacity, including via M&A, and if the basin’s volume growth is stronger than the company anticipates.
“The trio of major projects appear likely to proceed. Keyera expects growth capex to be $300-330-million in 2025, and average $350-450-million annually in 2026 and 2027, with much of these relating to the KFS Frac II debottleneck project (potential Q1/25 sanctioning), KFS Frac III, and KAPS Zone 4. Keyera is aiming for pre-tax, unlevered returns on capital at the high end of its 10-15-per-cemt target range, adding that it will not sanction these projects without ‘sufficient’ contracting.”
The analyst said he was also “pleased” by receiving added clarity on other growth opportunities, noting: “While details of the company’s 2027+ growth projects (over and above KFS Frac III) were understandably limited for commercial reasons, we believe investors can walk away knowing that there are other initiatives beyond the afore- mentioned trio of major projects that could see Keyera extend its growth beyond the near-term guidance period. These include expanding the North region G&P capacity, debottlenecking AEF, expanding its rail and logistics capabilities, NGL extraction opportunities, and a Low-Carbon Hub initiative.”
After modest adjustments to his forecast, Mr. Choy increased his target for Keyera shares to $46 from $45, reiterating an “outperform” recommendation. The average target is currently $45.13.
Elsewhere, other analysts making target changes include:
* Raymond James analyst Michael Barth to $48 from $47 with an “outperform” rating.
“Following the call, we come away more constructive on the 2025 guidance and 2027 outlook than our first take this morning. The new 2024-2027 fee-based Adj. EBITDA guidance of 7-8 per cent per year excludes KFS Frac III (target 2028 in-service date) and only includes a partial contribution from KAPS Zone 4 (which should enter service in 2027 but ramp into 2028+),” said Mr. Barth. “As such, most of the growth expected to materialize over the next three years is coming from volume growth at existing facilities. This is latent capacity that can fill without material incremental capital (a theme we’ve touched on in the past), and the indicated volume growth exceeds our previous expectations. Our estimates move modestly higher.”
* Scotia’s Robert Hope to $50 from $48 with a “sector outperform” rating.
“Keyera announced new 2024-2027 growth targets, which we believe highlight how well its existing asset base is positioned to benefit from continued natural gas and NGL volume growth in Western Canada over the next few years. Growth in the near-term is largely driven by stronger returns from existing assets as well as some new projects. The company also outlined numerous growth projects beyond 2027, giving visibility to its long-term growth prospects. We have now included the KFS Frac II debottleneck and KAPS Zone 4 in our estimates given what we believe is a high likelihood that the projects will be sanctioned. Our 2026 EBITDA and DCFPS estimates increase slightly (though most of the new growth shows up beyond 2026), while our 2025 cash flow estimates move down to reflect higher-than-expected cash taxes,” said Mr. Hope.
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While North America’s independent renewable power market is consolidating, public market valuations are “out of step” with private markets, according to National Bank Financial analyst Rupert Merer.
“In our coverage, Altius and Atlantica (AY: NR) have been acquired, and we have seen a few other large acquisitions by private equity,” he said. “Despite this, the sector has reached all-time low valuations relative to our framework, possibly as tax-loss selling takes hold. If the sector does not trade up, more consolidation should follow. To drive growth, IPPs need access to low-cost capital, and perhaps the best path forward goes through private ownership.”
In a report released Wednesday, Mr. Merer argued visibility on growth in Canada has improved with strong power demand, however the policies of U.S. president-elect Donald Trump could drive prices higher.
“Across Canada, RFPs for new power generation and storage are being issued to supply increased electricity demand projections driven by data centres, electrification, reshoring of production and population growth,” he said. “Power demand could grow by 50-100 per cent over the next couple of decades, following a period with little investment in growth over the last 15 years. Canadian IPPs (including BEP, BLX, INE and NPI) have been dominant in recent RFPs across the country, including INE’s success with recent project selections in B.C. More calls are anticipated, including opportunities for developers to work with Hydro Quebec on larger GW scale projects and the 2 GW Ontario LT2 call.”
“Following the U.S. elections, more negative sentiment towards renewable energy has surfaced. However, growth for our coverage is largely weighted towards Canada, as we illustrated ahead of the election, although they will find growth in the U.S. too. Also, growth is not a significant driver of the valuation of the IPPs (it drives less than 20 per cent of our targets) as most of the value is derived from assets in operation. Power demand is also growing in the U.S., so power prices could rise if construction on new renewable power infrastructure slows. With that, companies with some spot exposure in the U.S. could benefit. Generally, IPPs work under long-term contracts, although INE and BEP have less than 10 per cent of production tied to U.S. spot prices in the near-term (all have more in the long-term).”
Mr. Merer reset his valuations for the stocks in his coverage universe, warning rising rates are “a headwind, again.” While he “tweaked” his target discount rates to track our 12 month forecast for the 10-year bond yield, he said the impact was minimal.
“The sector is trading at record lows relative to the market, with an average implied discount rate of 13.2 per cent including PIF (and 10.8 per cent not including PIF),” he said. “Our top picks on return to target are INE, NPI, PIF, and BLX.”
Maintaining “outperform” recommendations for his top picks, Mr. Merer’s targets are:
- Innergex Renewable Energy Inc. (INE-T) with a $17 target (Street high). The average is $11.82.
- Northland Power Inc. (NPI-T) with a $35 target (Street high). Average: $29.31
- Polaris Renewable Energy Inc. (PIF-T) with a $23 target. Average: $23.42.
- Boralex Inc. (BLX-T) with a $46 target (Street high). Average: $42.
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Desjardins Securities analyst Chris MacCulloch remains “extremely cautious on the prospect of tariffs on Canadian energy products being imposed by the incoming Trump administration,” however he’s “otherwise constructive” on the broader sector moving into 2025.
“After finally catching a break on egress with TMX and the upcoming commissioning of the LNG Canada project, Canadian oil & gas producers are facing a unique threat from the potential imposition of tariffs by the incoming Trump administration,” he adde. “Whether they are a serious policy consideration or a convenient negotiating tactic remains a mystery. As is the question of whether they would apply to Canadian energy products. We are tempted to wax poetic about the deep integration of the North American petroleum sector, highlighting U.S. Midwest and Rocky Mountain refiners’ dependence on Canadian heavy oil feedstock (and the lack of domestic substitutes), which would presumably result in US motorists sharing in at least some of the pain of cross-border tariffs. Even a casual observer of US politics would note that voters in those regions were one of the key electoral blocks propelling Trump’s return to the White House. If there is one thing we have learned during his political career, it is to take his threats seriously (but not literally), particularly as his commentary has recently shifted from border security to the scale of the U.S. trade deficit with Canada. Even if he is merely bluffing with his threat to place a bomb under a U.S.$150-bilion cross-border trading relationship in energy products, investors need to at least contemplate the possibility, ridiculous as it may seem.”
In a 2025 outlook released Wednesday titled “You ain’t seen nothing yet”, Mr. MacCulloch emphasized the year ahead will “bring another significant milestone for industry with first LNG export capacity from the LNG Canada project, fresh on the heels of this year’s commissioning of the TMX pipeline, which has helped tighten WCS differentials.”
He said that access to global markets “comes not a moment too soon in light of renewed geopolitical uncertainty stemming from our neighbour and closest trading partner.”
From an investing perspective, Mr. MacCulloch sees the sector “attractively valued, both in absolute terms and relative to U.S. peers, particularly in view of record capital returns supported by robust balance sheets.”
“With heightened geopolitical and commodity price uncertainty, we believe investors should exercise extreme discretion with respect to stock selection,” he said. “We remain biased toward producers with modest sustaining capex requirements, strong balance sheets and shareholder-friendly capital allocations. We also expect sector consolidation to remain highly topical and are predisposed toward companies that are better able to capitalize on opportunities to counter-cyclically expand their asset portfolio in a more challenging environment. These factors tend to favour larger-cap producers, which offer sufficient asset diversification to craft a reasonably balanced Canadian oil & gas portfolio. Simply put, we don’t see much incentive for investors to move down-cap, where risk levels are heightened and trading liquidity is frequently limited, but without meaningful diversification. That said, the SMID-caps remain attractively valued within the historical context and there are select opportunities in what we increasingly view as special situations offering exposure to material operational catalysts and additional torque to commodity prices.”
He named a pair of top picks for 2025:
* ARC Resources Ltd. (ARX-T) with a “buy” rating and $35 target. The average is currently $31.75.
Analyst: “We reiterate ARX as our overall top pick in the Canadian energy sector. Despite strong performance in 2024 whereby the stock advanced by 24 per cent year-to-date (prior to factoring in dividends), we believe the company is primed for another strong showing in 2025. Last year’s bullish thesis primarily centred on the financial impact of Attachie Phase I—a statement which still holds true, with the project expected to deliver a massive boost to corporate FCF in 2025 following its recent commissioning earlier this fall. In the absence of material capital spending associated with Attachie Phase II, which is not expected to commence until 2026, incremental FCF will be allocated toward shareholder pockets through the recently enhanced base dividend (3.1-per-cent yield) and share repurchases, the latter of which are expected to land above the $1.0-billion level next year based on current strip prices. For context, this pace of buybacks could retire more than 7% of total outstanding shares on a fully diluted basis. ARX thus continues to offer one of the most compelling value propositions within the Desjardins E&P coverage universe, currently sporting a 4.7 times strip EV/DACF multiple (2025E)—a nearly two-turn discount vs the large-cap peer group (6.5 times)—along with the second-highest capital return yield (9.7 per cent) and the top total shareholder return (21.7 per cent) under coverage.”
* Cenovus Energy Inc. (CVE-T) with a “buy” rating and $30 target. The average is $31.69.
Analyst: “To say that CVE disappointed our expectations as a top pick in 2024 would be a severe understatement. The company delivered a series of lacklustre results from its downstream manufacturing segment, which propelled a wave of negative sentiment which continues to weigh upon the stock. The results were particularly galling within the context of consistently strong operational and financial performance by the company’s three largest Canadian competitors (CNQ, IMO and SU), which drove funds flow out of the stock. That said, we continue to believe the core upstream business remains fundamentally sound, underpinned by best-in-class thermal oil sands assets and an offshore segment poised to deliver robust organic production growth moving into the back half of the decade. Admittedly, we expect the manufacturing segment to continue underperforming in 2025 and have tried to factor that into our model through conservative assumptions. Downstream pressures would be amplified if the incoming Trump administration carries through with its tariff threats on Canadian energy products, which could force the company to pay tariffs on its own heavy oil feedstock after crossing the 49th parallel for refining in the US. However, we also note that CVE offers some protection from tariffs as the largest contracted supplier on the TMX pipeline, which provides an opportunity for the company’s marketing team to offset potential losses in the downstream manufacturing segment. Although negative market sentiment toward refining will likely persist, we are optimistic that progress is being made on reliability and maintenance optimizations, which should support gradual improvements in margin capture and more consistent cash flow contribution, all else remaining equal. Finally, we should also caution investors of the potential threat looming over the Liwan gas project if China eventually carries out its long-anticipated invasion of Taiwan.”
Mr. MacCulloch named the following companies “worthy of honourable mention”: Canadian Natural Resources Ltd. (CNQ-T, “buy” and $57.50 target), Suncor Energy Inc. (SU-T, “buy” and $66 target), Tourmaline Oil Corp. (TOU-T, “buy” and $77 target), Advantage Energy Ltd. (AAV-T, “buy” and $12.50 target) and Spartan Delta Corp. (SDE-T, “buy” and $5 target).
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Desjardins Securities analysts Kyle Stanley, Lorne Kalmar and Alexander Leon said they are taking a more cautious stance on the real estate sector heading into 2025, acknowledging a “shifting political landscape, both in Canada and south of the border, will continue to affect sentiment in the coming year.”
It is often said, ‘expectation is the root of all heartache’,” they said. “Heading into 2024, we were optimistic that REITs would rebound on the back of more accommodative rate policy. However, the S&P/TSX Capped REIT Index has generated a total return of just 2.3 per cent year-to-date, representing a third consecutive year of underperformance vs the S&P/TSX (26 per cent).
“As we look to 2025, we are taking a more conservative approach to setting our expectations and calling for 5–10-per-cent total returns. We believe that valuations across the sector are attractive and there is a blue-sky scenario where REITs could outperform. However, our 2025 outlook does not incorporate much in the way of favourable movements in the 10-year yield, nor the impact of other potential sector catalysts. Instead, it largely reflects REIT distribution yields and forecast FFOPU [funds from operations per unit] growth. We believe our 2025 total return outlook is representative of what to expect on a consistent basis from the REIT sector moving forward in this rate environment—and absent the material cap rate compression observed prior to 2022. That said, we still see opportunities to generate outsized returns on catalyst-rich names and sectors where fundamentals are robust.”
In a report released Tuesday titled Make REITs Great Again, the analysts argued 10-year bond yields will “impact broader REIT sector performance in 2025.”
“The Canadian and US 10-year yields have fluctuated widely in 2024, resulting in a volatile year for the SPRTRE index, which has moved in a near-perfect negative correlation,” they said. Heading into 2025, we expect Canadian REIT sector valuations to continue to be closely linked with movements in the 10-year yields.
“Looking beyond the 10-year. Fund flows should be a catalyst for outperformance, as should a pickup in private market transactions and M&A. If the Canadian economy weakens materially, asset prices come in lower than expected, or we see negative headline-grabbing commentary ahead of next year’s federal and provincial elections, REITs could come under pressure again in 2025.”
The group said senior housing sits atop their sector pecking order following by retail, industrial, multi-family, self-storage and office.
“In the year to date, the relationship between unit price performance and the strength of the fundamentals within an asset class has been clear; conversely, there have been numerous examples of REITs offering historically attractive valuations, albeit with uncertain near- to medium-term fundamental outlooks keeping investors on the sidelines,” they explained. “For example, the seniors housing fundamentals have been exceptionally robust in 2024 and, as a result, all three Canadian seniors names have ranked as top performers, notwithstanding increasingly lofty valuations. Conversely, office REITs—which have suffered from the softest backdrop of any of the major asset classes and are trading well below historical averages—have found themselves at the bottom end of the total return range once again.
“The most important consideration when ranking our preferred sectors this year is the trajectory of the rate of change on rent growth, occupancy gains, etc. Sectors with positive momentum rank ahead of those where the outlook has weakened. A key consideration in this regard is identifying where there is an inflection point—industrial, for example, is the sector with the nearest-term positive inflection, in our view, which supports the move higher for 2025. Conversely, after several years of tight market conditions, softening market rents and a more subdued population growth outlook support moving the multifamily sector lower.”
They also named three “best ideas” for 2025:
* Chartwell Retirement Residences (CSH.UN-T) with a “buy” rating and $18 target. The average on the Street is $18.18.
Analysts: “CSH is poised to deliver sector-leading FFOPU growth on the back of the aging baby boomer demographic and limited new supply. We see further upside through its portfolio-optimization program and believe a valuation reset is appropriate.
* Dream Industrial REIT (DIR.UN-T) with a “buy” rating and $16.50 target. The average is $16.13.
Analysts: “A double-digit earnings growth profile, with minimal execution risk, coupled with an attractive growth-adjusted valuation, should position DIR to outperform in 2025 as the asset class begins to positively inflect.”
* RioCan REIT (REI.UN-T) with a “buy” rating and $23 target. The average is $22.08.
Analysts: “With exposure to strong retail fundamentals and a shift to refocus on its core portfolio, we see meaningful upside in the stock as earnings growth resumes and management executes on its strategy.”
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TD Cowen analyst Derek Lessard thinks Aurora Cannabis Inc. (ACB-T) has “turned over a proverbial new leaf following the reset in the cannabis industry, now with a focus on responsible growth.”
Expecting both improved earnings and valuation to push the share price towards his target of $9 per share over the next 12 months, he initiated coverage with a “buy” recommendation on Wednesday.
“ACB’s current valuation presents compelling risk-reward trade-off, in our view, despite lingering risks in the emerging cannabis industry including rampant illicit markets, limited insurance coverage, and unpredictable path to further de-regulation,” he said.
“[We see a] substantial disconnect between price and fundamentals. ACB remains largely a retail stock. It is trading at an 7 times EV/EBITDA discount to Tilray, and in line with peers on price/sales (ex-Cronos) despite its above-average margins and stronger financial position. We expect continued execution strength and financial discipline over the next 12-18 months, supported by new market growth, increased penetration and share gains, to renew institutional investor interest and lift valuation up off the bottom.”
Mr. Lessard also touted Aurora’s “unique and dominant position in the global medical cannabis industry” and called it “a craft grower at scale.”
“Given its scale and medical focus, ACB has one of the best EBITDA and FCF margin profiles among Canadian Licensed Producers (LPs), and one of the healthiest balance sheets ($80-million in cash; zero debt within its cannabis operation),” he added.
“Longer-term, the big opportunity remains around global legalization (six key potential markets could add $3 to our target), particularly in the U.S. While the U.S. is not a focused market for ACB to re-enter, a federal re-scheduling should provide a number of benefits including increased research, lower stigma, improve access to capital, and unlock the world’s biggest addressable cannabis market.”
His target of $9 is 25 cents less than the current average on the Street.
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In other analyst actions:
* Jefferies’ David Hove downgraded Lundin Gold Inc. (LUG-T) to “hold” from “buy” with a $36 target, down from $37. The average on the Street is $35.65.
* Canaccord Genuity’s Paul Howard initiated coverage of Robex Resources Inc. (RBX-X) with a “speculative buy” rating and $3.75 target. The average is $4.
* CIBC’s Nik Priebe raised his Alaris Equity Partners Income Trust (AD.UN-T) target to $27, exceeding the $24.25 average, from $24 with an “outperformer” rating.
“Third-quarter results were characterized by a substantial beat driven by an unexpectedly large common dividend from Fleet. The magnitude of the payout made it clear that this common equity investment may have significant upside that is not priced into the stock,” said Mr. Priebe.
* Scotia’s Orest Wowkodaw lowered his Ero Copper Corp. (ERO-T) target to $30 from $34 with a “sector outperform” rating “to reflect lower multiples related to recent operational challenges at Cariaba and Tacuma.” The average is $32.76.
* After “strong” second-quarter results, Canaccord Genuity’s Robert Young raised his Evertz Technologies Ltd. (ET-T) target to $15.50, matching the average, from $15.25 with a “buy” rating.
* Scotia’s Konark Gupta increased his MDA Space Ltd. (MDA-T) target to $33 from $29 with a “sector outperform” rating. The average is $30.88.
“We maintain our SO rating while raising our target ... to reflect MDA’s solid long-term prospects, aided by its growing footprint,” he said. “We attended MDA’s analyst day in Montreal, which included a tour of its world-class satellite design, manufacturing and testing facility (center of excellence; currently under expansion) and presentations from key executives: Mike Greenley (CEO), Guillaume Lavoie (new CFO), Luigi Pozzebon (VP Satellite Systems), Sylvain Riendeau (VP Operations, Satellite Systems), Giovanni D’Aliesio (Director Business Development, Satellite Systems), and Shereen Zahawi (Head of Investor Relations). We came away with better appreciation of MDA’s growth opportunities across all segments, capacity expansion plans, efficient operations, and strong bench / highly-motivated employees. While the stock has significantly outperformed over the past two years, which could drive some volatility, we expect further upside as space renaissance continues, MDA remains well-positioned to win its fair share, management is executing well, and forward EV/EBITDA valuation at 13.3 times/10.8 times on 2025/2026 estimates doesn’t look demanding vs. comps at 13.5 times/13.0 times.”