Skip to main content

At Suncor Energy, the refining business earned $498-million in the fourth quarter, offsetting a $230-million operating loss at its main oil-sands division.JASON FRANSON/The Canadian Press

Inside the Market's roundup of some of today's key analyst actions. This file will be updated often during the trading day so check back for new details.

Investors should expect volatility from Telus Corp. (T-T, TU-N) through 2016 due to uncertainty surrounding share buybacks and dividends, said Canaccord Genuity analyst Aravinda Galappatthige.

He downgraded his rating for the stock to "hold" from "buy."

On Thursday, Telus reported fourth-quarter 2015 earnings which Mr. Galappatthige summarized as "mixed," noting "softer" revenue results were offset by "solid" cost containment."

"While the company issued better than expected 2016 adjusted EBITDA guidance of 3-6-per-cent year-over-year growth driven largely by cost reductions, free cash flow (FCF) guidance was well below our forecast due to rising capex and cash taxes," he said. "Wireline has held up well with steady revenue and EBITDA growth of 4 per cent, with particular resilience in internet protocol television (IPTV) and broadband subscriber growth. This is in spite of economic pressures in the west. However, wireless under-performed in terms of subs and average revenue per user (ARPU), we suspect in large part due to weakness on the business side due to soft conditions in Alberta."

Despite 10-per-cent dividend per share growth and a 2016 normal-course issuer bid (NCIB) target of $500-million, Mr. Galappatthige said the central question for investors going forward relates to returns past 2016.

"While there appears to be a consensus view that maintaining 10-per-cent DPS growth is difficult, we found that some investors still carry expectations of 6-8-per-cent growth and the sustainability of the $500-million annual NCIB," the analyst said. "In our view, looking at the numbers, this is very unlikely. We believe that the dividend growth rate will be cut to 5 per cent and that share buybacks may be curtailed to around $250-million or even lower. Even with our assumption of 5-per-cent dividend growth, the payout ratio remains close to 90 per cent through to 2018. One can even argue that our estimates suggest 5-per-cent growth may not be sustainable for the next full three years. In addition, with the likelihood of the 600MHz spectrum auction in 2017/2018, this could lift TELUS' leverage ratio by 0.2-0.3 times. All of this would make it very difficult for TELUS to rein in its net debt/adj. LTM EBITDA to within its 2.0-2.5x target over the next several years if the buyback programme is maintained."

He raised his target to $42 from $41. The analyst average, according to Bloomberg, is $42.44.

In justifying the rating, he added: "This mainly relates to the uncertainty around DPS growth and NCIB, along with mixed expectations on the Street, which can drive some stock price volatility during this period. Moreover, given that nearly 2/3 of EBITDA and all of TELUS' FCF is generated from wireless, we want to be cautious given the pressure we are seeing on this front, mainly due to the soft conditions in Alberta. As we have highlighted in past, the absence of ARPU expansion can meaningfully moderate EBITDA growth prospects in wireless. Finally, while we do not expect any material impact from Shaw-WIND in 2016 itself, market focus could turn to the issue of heightened wireless competition in the west as the year progresses."

=====

CIBC World Markets analyst David Haughton downgraded his rating for Goldcorp Inc. (GG-N, G-T) in reaction to share price appreciation in the midst of an uncertain near-term outlook.

Goldcorp shares are up 30 per cent in the year to date and 59 per cent since mid-January. Accordingly, Mr. Haughton moved his rating to "sector performer" from "sector outperformer."

"Goldcorp currently lies in the fourth quadrant of the CIBC Gold Matrix, which indicates the stock can present some challenges for investors due to the combination of weaker quality and above-average valuation," he said. "Execution (specifically delivery of the new projects), balance sheet, and medium-term growth detract from the quality metrics for Goldcorp."

Mr. Haughton said the company is facing a series of near-term headwinds.

"The current reserves and resources are calculated at higher gold prices ($1,300/ounce and $1,500/oz respectively), so the adoption of a lower gold price assumption (say $1,100/ounces) to reflect market conditions may result in a meaningful reduction in reserves," he said. "Second, as of the end of Q3/15, Goldcorp has $17-billion in shareholders' equity, which is well above current market capitalization of approximately $13-billion. This large gap could result in material write-downs (possibly $3- 5-billion) in the coming year-end reporting (as part of annual accounting impairment review) expected after market on Feb. 25. Third, the recent change in leadership has put the market in a wait-and-see mood towards the company. CIBC does not expect a major shift in the company's current strategy, but uncertainties could continue to dampen sentiment until the new CEO assumes control at the April 2016 AGM and articulates a new plan."

He raised his price target for the stock to $16.50 (U.S.) from $15.25 in reaction to higher spot gold prices. The consensus is $18.54.

=====

The current risk-reward for CAE Inc. (CAE-T, CAE-N) is "attractive" and does not give full credit for the its defensive portfolio, according to BMO Nesbitt Burns analyst Fadi Chamoun.

Noting the stock has declined 7 per cent in price since the company reported earnings on Wednesday and down 15 per cent in the last month, he upgraded his rating to "outperform" from "market perform."

"While third-quarter 2016 results missed expectations, they were not indicative of weaker fundamentals but rather unfavourable mix of products and a slower pace of manufacturing throughput in the civil segment as the company worked to transition to a new generation of simulators," he said. "On the positive side, free cash flow was robust and utilization in Civil training services rose 500 basis points year over year, driving 120 bps improvement in margins y/y. Meanwhile, industry fundamentals remain robust with traffic growth increased 6.5 per cent y/y in 2015 versus historical average of 5.1 per cent y/y and the global installed base of aircraft fleet operating at record utilization rates supporting growth in deliveries."

He added: "While the cycle is showing signs of aging with the book-to-bill ratio decelerating, which could ultimately present a risk to medium-term valuations, on a short-term basis the risk/reward has become attractive, in our view. CAE's earnings are levered to traffic growth and aircraft deliveries, which remain at healthy levels. Moreover, the company's focus on maximizing the utilization of assets following several years of above-average investment levels should prove to be positive for earnings growth and improving free cash flow. We also believe that some of the pricing pressure incurred in simulator order campaigns in recent years will ease. With an estimated 20 per cent of CAE's revenues exposed to deep-cyclical markets (e.g., civil products), the company's defensive portfolio (approximately 55 per cent of recurring services revenues; another 25 per cent military equipment) should withstand cyclical pressures better than its peers, warranting a less punitive impact on valuation."

Noting the "stock is likely to trade with relatively high correlation to the aerospace cycle, which we believe has peaked and shows signs of aging," Mr. Chamoun maintained a $16 target for it. The analyst consensus is $16.69, according to Thomson Reuters.

=====

Following the release of "typical" quarterly results from Great-West Lifeco Inc. (GWO-T), CIBC World Markets analyst Robert Sedran said he is no longer convinced of his earlier prediction that the company's shares will underperform in a choppier market and economic environment.

Mr. Sedran upgraded his rating to "sector performer" from "sector underperformer."

He said the company's fourth-quarter 2015 financials "landed somewhere closer to expectations," adding: "This time, experience losses were offset by an abnormally low tax rate and larger-than-modelled reserve releases. Ho hum, in a challenging period, GWO delivered on its lower-risk brand promise."

Great-West reported quarterly earnings per share of 69 cents, a cent below Mr. Sedran's projection and two cents below the consensus. He lowered his 2016 EPS estimate by a penny to $2.89 while maintaining his 2017 projection of $3.07.

"We have had a negative relative rating here for a few reasons," he said. "First, we did not (and do not) believe that GWO carries the same growth profile as other Canadian lifecos. It grew earnings at 8 per cent in 2015, which was slower than adjusted earnings elsewhere, though mercifully the phrase "core earnings" is not in the GWO dictionary. Second, we figured the valuation was stretched. That one is still true, but we obviously undervalued the lower-risk profile as well. We thought that all of the lifecos had strong balance sheets and still do, but this one is now sitting with the strongest balance sheet in the group, which gave it the ability this quarter to increase its normal course issuer bid to 20 million shares from the original 8 million."

He maintained a $35 target for the stock. Consensus is $36.64.

=====

Smart REIT's (SRU.UN-T) valuation relative to its peers and operating headwinds going forward caused BMO Nesbitt Burns analyst Heather Kirk to downgrade her rating to "market perform" from "market outperform."

On Thursday, it reported funds from operation per unit of 52 cents, an increase of 8.4 per cent year over year but below the consensus forecast of 54 cents. Ms. Kirk noted the result came off lower-than-expected capitalized interest and quarterly volatility in expenses "charged back to Penguin and third parties."

"2015 was a big year for the REIT, punctuated by the acquisition of the SmartCentres platform, which has provided the REIT with greater scale, an internalized platform and significant development expertise," the analyst said. "Q4 results were once again stable (same property net operating income increased 1.3 per cent) with the REIT's portfolio of Walmart anchored shopping centres performing well in a challenging retail environment.  However, 2016 occupancy is expected to decline [approximately] 40 basis points on generalized tenant attrition. "

Ms. Kirk lowered her target price to $32.50 from $34 "based on relative return expectations." The consensus is $33.69.

=====

Citibank analyst Fernando Valle said the risk-reward for Suncor Energy Inc. (SU-T, SU-N) "looks to be an outsized, low-beta, play on oil prices, which we expect to rebound in [the second half of 2016]."

He upgraded the energy company to "buy" from "hold."

"SU is the only company within Canadian O&G that can generate positive free cash flow at strip prices, without further adjustments to capex," said Mr. Valle. "The [Canadian Oil Sands] acquisition increases SU's leverage to a crude price rebound, without increasing the company's exposure to widening WTI-WCS spreads, a key bottleneck to short term growth in Canada. SU also has the lowest exposure of the group to AECO gas sales, where the path to recovery is challenged by multi-year delays of greenfield Canadian LNG projects. Suncor's performance relative to Imperial Oil, sees a widening valuation gap between the two low-beta players in Canadian O&G. Both companies can deliver real shareholder distribution growth at long term oil prices, but SU's valuation creates a more interesting, lower risk entry point, in our view."

He maintained a $38 price target. Consensus is $38.56.

=====

Though the valuation for Manulife Financial Corp. (MFC-T) seems "irresistible," Canacccord Genuity analyst Gabriel Dechaine is concerned there are too many moving parts and the company's growth outlook is hard to decipher.

Accordingly, despite a 7.7-times forward price-to-earnings multiple he hasn't seen since mid-2002, he downgraded his rating to "hold" from "buy."

"Where we come up short, though, is in terms of MFC's earnings power," the analyst said. "Aside from this quarter's EPS shortfall, the company's outlook is challenged by low rates, weak equity markets and a continuously declining oil price that severely hampers MFC's investment gain potential. As a result, the company has guided to a shortfall vis-à-vis its $4-billion 2016 earnings objective. Our estimates had already contemplated this outcome (i.e. our previous estimate was for $3.8-billion of earnings). However, we believe that the past few weeks have made the situation even worse, especially in terms of achievability of investment gains, higher hedging costs and policyholder behaviour (i.e. negative claims experience)."

Mr. Dechaine lowered his 2016 earnings per share estimate to $1.81 from $1.92. His 2017 projection fell to $1.95 from $2.18.

"Aside from the earnings, we were disappointed by MFC's capital messaging this quarter," he said. "Granted, a 9-per-cent dividend increase was a positive surprise. However, with the stock trading at such weak levels, we had hoped to see the company deploy capital opportunistically via an aggressive share buyback program, especially with the stock at depressed valuation levels. With a 223-per-cent minimum continuing capital and surplus requirements (MCCSR) ratio and a low 24-per-cent leverage ratio, MFC's capital strength/ flexibility is much greater than it has been in past periods of severe market downturns. However, management is prioritizing capital retention during a volatile market period, rather than 'playing offense'. While this approach is reasonable, if MFC cannot take advantage of its balance sheet position during such periods, we have difficulty ascribing any additional value to this particular attribute."

He lowered his target to $17 from $22. The analyst average is $22.35.

Elsewhere, Cormark Securities analyst Meny Grauman downgraded the stock to "buy" from "top pick" with a target drop to $22 from $26.

=====

In other analyst actions:

Bunge Ltd (BG -N) was raised to "overweight" from "neutral" at JPMorgan by equity analyst Ann Duignan. The target price is $57 (U.S.) per share.

CSX Corp (CSX-N) was downgraded to "market underperform" from "market perform" at Avondale Partners by equity analyst Donald Broughton. The target price is $18 (U.S.) per share.

Cenovus Energy Inc (CVE-T) was downgraded to "neutral" from "outperform" at Macquarie by equity analyst Chris Feltin. The 12-month target price is $19 (Canadian) per share. It was raised to "outperform" from "sector perform" at National Bank by equity analyst Kyle Preston with a 12-month target price of $19 per share.

Home Capital Group Inc (HCG-T) was raised to "buy" from "market perform" at Cormark Securities by equity analyst Jeff Fenwick. The 12-month target price is $33 (Canadian) per share.

Netflix Inc (NFLX-Q) was downgraded to "market perform" from "outperform" at FBR Capital Markets by equity analyst Barton Crockett. The 12- month target price is $100 (U.S.) per share.

Pandora Media Inc (P-N) was raised to "outperform" from "market perform" at FBR Capital Markets by equity analyst Barton Crockett. The 12-month target price is $16 (U.S.) per share.

Redknee Solutions Inc (RKN-T) was downgraded to "hold" from "buy" at Canaccord Genuity by equity analyst Robert Young. The 12-month target price is $2 (Canadian) per share.

Time Inc (TIME-N) was raised to "buy" from "hold" at Gabelli & Co. by equity analyst Barry Lucas.

Uni-Select Inc (UNS-T) was raised to "buy" from "hold" at Desjardins Securities by equity analyst Benoit Poirier. The 12-month target price is $67 (Canadian) per share.

Americas Silver Corp (USA-T) was raised to "hold" from "sell" at Mackie Research Capital by equity analyst Barry Allan. The 12-month target price is 17 cents (Canadian) per share.

With files from Bloomberg News

Follow related authors and topics

Authors and topics you follow will be added to your personal news feed in Following.

Interact with The Globe