Raymond James analyst Brad Sturges expects units of Slate Office REIT (SOT.UN-T) to face further near-term selling pressure as it “experiences a churn in its investor base” following the decision to suspend its monthly distribution.
Last Tuesday, the Toronto-based REIT announced the move, which is projected to save $10.2-million in cash annually with the goal of reducing debt and funding of ongoing business operations. It came alongside the introduction of a “Portfolio Realignment Plan” that involves the divestment of “non-core” assets consisting of approximately 40 per cent of gross leasable area, which is meant to “reposition the REIT’s portfolio for long-term stability and performance and raise liquidity.”
“Once completed, SOT intends to have repositioned its global office portfolio towards long duration, less capital intensive newer build office assets that are similar in terms of quality, occupancy, tenant profile with in-place leases with credit-quality office users, and generate higher unlevered yields,” said Mr. Sturges.
“Given the volatility in the interest rate market, and due to the lack of transaction activity and pricing discovery in the Canadian office real estate market, for now, we have not assumed any executed non-core dispositions in our 2024E and 2025E FD FFO/unit and AFFO/unit estimates.”
After lowered his 2023 and 2024 adjusted funds from operations projections to 15 cents and 17 cents, respectively, from 19 cents and 23 cents and introducing a 2025 projection of 17 cents, Mr. Sturges trimmed his target for Slate Office units by 10 cents to $1, keeping a “market perform” rating. The average is $1.20.
Elsewhere, others making target changes include:
* RBC’s Tom Callaghan to $1 from $1.75 with a “sector perform” rating.
* Cormark Securities’ Sairam Srinivas to 80 cents from $1.20 with a “reduce” recommendation.
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After “another weak quarter,” Scotia Capital analyst Orest Wowkodaw sees near-term uncertainty lingering in the copper market.
“The Q3/23 reporting season was largely overshadowed by several material corporate updates from our largest miners, including TECK’s disappointing late stage QB2 capex increase but new all cash plan to fully divest its HCC business, FM’s heightened Cobre Panama operating and fiscal uncertainty, and the closing of CCO’s WEC acquisition after more than a year of regulatory scrutiny,” he said. “With these major events and Q3 results behind us, we revisit the Cu equities in the context of current spot prices under several key relative metrics: (1) value, (2) growth, (3) leverage, and (4) capital return potential. Given the challenge in building new large-scale Cu capacity, we anticipate a heightened M&A environment, supporting elevated multiples.”
In a research report released Monday, Mr. Wowkodaw emphasizing three key takeaways from the quarter, pointing to “(1) The current operating environment remains challenging (FM, NEXA, and TECK cut 2023 production guidance); (2) Cost pressures are not materially easing as expected (ERO, FCX, and FM increased 2023 cost guidance); moreover, we believe consensus cost expectations for 2024 are likely to move higher; (3) Growth execution appears challenged, with most miners (excluding IVN) experiencing schedule and/or cost pressures (notably CS, ERO, NEXA, and TECK). Since our Q3 preview note, our 2023-2025 EBITDA estimates for the mid-and large cap miners decreased by an average of 0 per cent, 2 per cent, and 4 per cent, while our 8-per-cent NAVPS’s decreased by 4 per cent. ... We forecast elevated average 2023 all-in sustaining costs of $2.46 per pound copper for our coverage, up 6 per cent from $2.33 per pound in 2022 and up 31 per cent from $1.88 per pound in 2021. However, cash margins remain positive for most miners given a $3.70 per pound spot price.”
Mr. Wowkodaw also said he expects the copper market to be “essentially in balance” through 2025 “before the emergence of large structural deficits.”
“We note that despite demand weakness, total global visible Cu inventories remain at a critically low approximately 4 days, in our view, largely due to ongoing supply side underperformance,” he said. “While demand uncertainty in both China and ex-China markets continues to overhang the near-term outlook for copper, a potential end (and possible future reversal) to the current global (ex-China) interest rate hiking cycle could positively impact sentiment for growth and by extension, most commodity prices.”
Revisiting his valuations for copper equities, he made these target price adjustments:
- Altius Minerals Corp. (ALS-T, “sector perform”) to $20 from $21. The average is $23.88.
- Champion Iron Ltd. (CIA-T, “sector outperform”) to $7 from $6.50. Average: $7.46.
- Ero Copper Corp. (ERO-T, “sector perform”) to $22 from $24. Average: $24.82.
- Ivanhoe Electric Inc. (IE-N/IE-T, “sector outperform”) to US$16 from US$18. Average: US$17.50.
“All copper equities are likely to move higher if Cu prices improve, or lower if Cu prices weaken,” he said. “While more modest than last quarter, valuation multiples remain somewhat elevated in the context of current spot prices; however, this is likely supported by the very constructive medium to long term fundamental picture, the energy transition thematic, and by ongoing M&A speculation. We note that margins for most producers remain solid (spot Cu of $3.70 per pound vs. average AISC of $2.46 per pound) although FCF generation appears muted.”
“Overall, TECK and CCO remain our top picks, while CS and FCX are our other preferred picks for Cu exposure; we also recommend CIA, HBM, and IVN. Among the developers (within our coverage), we recommend IE. Among the royalties, we prefer ECOR. Our Sector Outperform-rated equities currently have an attractive 12-month average implied return of 44 per cent.”
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In other analyst actions:
* Canaccord Genuity’s Yuri Lynk raised his target for AtkinsRalis (ATRL-T) to $51 from $50, keeping a “buy” recommendation. The average target on the Street is $50.25.
* Jefferies’ Lloyd Byrne cut his Cenovus Energy Inc. (CVE-T) target to $34 from $36 with a “buy” rating. The average is $32.91.
* In a report titled Why We Expect Chemtrade to Remain Rangebound, Scotia Capital’s Ben Isaacson trimmed his target for Chemtrade Logistics Income Fund (CHE.UN-T) to $9.50 from $10 with a “sector perform” rating. The average is $11.86.
“We struggle to build a convincing case for CHE outperformance near-term ... ‘24 EBITDA is expected to fall 15 per cent to 20 per cent year-over-year, on weaker merchant acid and sodium chlorate demand, water solutions margin compression, and while caustic prices could remain weak (we’re cautiously optimistic improved housing in ‘24 can pull up PVC demand, such that chlorine production outpaces caustic demand),” he said. “None of this is a huge deal for a commodity chem enjoying record-high EBITDA. Of course, stocks rarely work when commodity prices/margins are weakening, but that’s also not the issue. The pre-issue, is how this will impact leverage. Based on ‘24 Street EBITDA of $410-million, and assuming no change to net debt, leverage should deteriorate to 2.2x – but even that alone isn’t a concern. If we extrapolate, CHE could get caught in its ability to fund its growth narrative vs. avoiding the impact of rising leverage on the value of its equity. As a reminder, the Casa Grande JV is on hold until returns improve (via CHIPS Act?). Beyond the Q1 start of the ultra-pure expansion in Cairo, as well as some initiatives in water solutions, we don’t see what catalysts in ‘24 that will propel the stock forward.”
* Barclays’ Dave Anderson raised its Computer Modelling Group Ltd. (CMG-T) target by $1 to $8 with an “underweight” rating. The average is $10.80.
* RBC’s Pammi Bir reduced his target for Crombie REIT (CRR.UN-T) to $15, below the $15.11 average, from $17 with a “sector perform” rating.
* To reflect the non-binding proposal from its majority shareholder Fairfax Financial Holdings Ltd. (FFH-T) to acquire the common shares it doesn’t already own, National Bank’s Richard Tse moved his target for Farmers Edge Inc. (FDGE-T) to 25 cents from 10 cents, keeping a “sector perform” rating. The average is 18 cents.
* Scotia’s Mario Saric reduced his H&R REIT (HR.UN-T) target to $11.75 from $13.25 with a “sector perform” rating. The average is $10.96.
“We maintain our SP rating following an in-line recurring FFOPU [funds from operations per unit] quarter,” he said. “Our key estimates are 2 per cent – down 11 per cent vs. down 0-9 per cent sector avg.. Bottom-line, no meaningful change in our neutral investment thesis, which should improve meaningfully in 2H/24 as two unit price catalysts draw near. In the near-term (i.e., next 3-6 months), we think there is no urgency to build positions, despite the cheap valuation. We think the primary unit price catalysts = improved U.S. Sun-Belt sentiment and fundamentals on peak supply absorption (we suspect Lantower sentiment likely not better until late 2024 or early 2025) and disposition of Office properties re-zoned with residential intensification (again, a year out; see below). Improved U.S. Sun-Belt sentiment is particularly crucial in our view given H&R’s strategic plan is largely driven by making Lantower (Residential) a much bigger part of the H&R story (Office and Retail ... less) ... we think investors need to want U.S. Sun-Belt multi-family exposure for H&R unit price to move materially higher.”
* TD Securities’ Aaron MacNeil, currently the lone analyst covering Next Hydrogen Solutions Inc. (NXH-X), cut his target to 80 cents from $1.05 with a “hold” rating.
* Canaccord Genuity’s Carey MacRury moved his Osisko Gold Royalties Ltd. (OR-T) target to $24.50 from $25 with a “buy” rating. The average is $24.21.
* Mr. Bir cut his Plaza Retail REIT (PLZ.UN-T) target to $4.25 from $4.50 with a “sector perform” rating. The average is $4.33.
* Mr. Bir lowered his Sienna Senior Living Inc. (SIA-T) target to $13 from $14 with a “sector perform” rating. The average is $13.17.