Painted Pony.Larry MacDougal/The Canadian Press
Inside the Market's roundup of some of today's key analyst actions
Canaccord Genuity analyst Yuri Lynk was impressed by Badger Daylight Ltd.'s (BAD-T) recent four-day, non-deal roadshow featuring new president and chief executive offer Paul Vandenberg.
Mr. Lynk cited the company's plan to maintain its corporate strategy, adding "the Badger story continues to be de-risked, in our view, with hydrovac demand appearing to bottom and new management saying all the right things."
"Investors should not expect a wild departure from the strategy that has made Badger so successful over the years," the analyst said. "Mr. Vanderberg expects to continue to leverage the company's numerous competitive advantages including its people, culture, proprietary hydrovac technology, and extensive customer list.
"Where we see him adding value is in improving Badger's operational effectiveness. After a huge ramp in growth, employee turnover has been too high of late. Management will focus on bolstering its human resources function and pay special attention to improving the recruiting, training, and on-boarding of area managers and operators. In short, Mr. Vanderberg plans to put the systems and processes in place to support Badger's next phase of growth."
Mr. Lynk said the company continues to see strong growth outside of oil and gas markets in the United States, reiterating its goal to double its hydrovac fleet in the U.S. within the next five years.
"The removal of hydrovacs from O&G regions en masse is largely behind the company," he said. "Therefore, we believe growth in non-O&G markets, which was 26 per cent in 2015, should help drive good financial performance in 2H/2016 and beyond."
He added: "Badger sports a net debt-to-trailing EBITDA ratio of just 0.6 times and is generating good FCF [free cash flow], making capital allocation a hot topic. Management is comfortable building cash until average monthly revenue per truck improves towards $30,000. Given the attractiveness of hydrovac unit economics, we view this as a sensible strategy."
Mr. Lynk maintained his "buy" rating for the stock and raised his price target to $30 from $28. The analyst consensus price target is $28.96, according to Thomson Reuters.
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TD Securities analyst Juan Jarrah removed Painted Pony Petroleum Ltd. (PPY-T) from his action list in reaction to a doubling of share price since he upgraded the stock in November of 2015.
Moving his rating to "buy," he said: "On Nov. 11, 2015, we upgraded Painted Pony to an Action List Buy on the basis of our view that the market did not fully appreciate the company's capacity to efficiently grow the business and manufacture gas from the Montney. Since then, Painted Pony's share price has increased by 100 per cent, compared with the XEG [iShares S&P/TSX Capped Energy Index ETF] (up 8 per cent) and the Montney peer group (up 28 per cent).
"At that time, the market was fixated on Painted Pony's 2016 capital program in light of its 2016 cash flow and processing commitments with AltaGas' Townsend gas plant. What the market was missing, in our view, was the tremendous growth that would be achievable by year-end 2016 and into 2017."
Citing the fact that AltaGas' plant is now on stream and Painted Pony's wells are ready to be tied in, Mr. Jarrah said "naysayers have capitulated." He said all the elements are in place for the company to achieve its target of 40,000 barrels of oil equivalent per day. He said that result would make it "a dominant B.C. Montney producer set to benefit from access to infrastructure, access to capital, and economies of scale."
"In addition to production growth, we look for another year of reserves growth and positive revisions, underscored by a meaningful improvement in PDP reserves due to drilling activity and the construction," he said.
Mr. Jarrah maintained a price target of $12.50. Consensus is $10.93.
"As we have discussed in great depth in the past, we like Painted Pony's asset quality, strategy, and management team," he said. "This has not changed, but our view is that the market has come to believe that the company's countercyclical strategy has paid off."
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There is "significant upside" in High Arctic Energy Services Inc. (HWO-T), according to Acumen Capital analyst Brian Pow.
Following the $42.8-million acquisition of Tervita Corp.'s production services division and recent changes to the company's upper management, Mr. Pow initiated coverage of the company with a "buy" rating
"We have been following HWO for some time, but have resisted initiating coverage on the premise of: uncertainty surrounding contract negotiations in PNG [Papua New Guinea]; subdued outlook for the Canadian O&G industry; growing cash position with no clear capital allocation strategy," said Mr. Pow. "With the recent acquisition and senior management change, we have more conviction as the company's strategy becomes clearer. By acquiring Tervita's production services division, HWO has achieved immediate critical mass in the Canadian well servicing industry, and have significantly expanded their service offering to better serve their customers. Moreover, the appointing of current Director, Tom Alford as the interim President and CEO adds an experienced leader with the ability to assist in the integration of the Tervita assets. We also see the appointment as a likely catalyst to grow HWO's service division both organically and through M&A."
Already the "dominant" provider of drilling and work force services in Papua New Guinea and Canada's largest provider of snubbing services, Mr. Pow said the deal makes High Arctic the third largest provider of well servicing in Canada.
"On a retrospective basis, HWO is trading at 2.6 times 2015 EV/EBITDA [enterprise value to earnings before interest, taxes, depreciation and amortization] (2.1 times trailing 12-month EV/EBITDA) despite industry leading margins, high levels of return on invested capital ("ROIC"), and balance sheet strength," he said. "The discount to its peers is likely a result of concerns over customer concentration and the delay of contract renewals in PNG. The market is still waiting on the news of contract extensions for heli-portable rigs 103 & 104. HWO was operating these rigs under a three-year contract which originally expired on June 30th with extensions signed into Q4/16. As we dig into this side of the business, we are of the view that investors are over reacting to the potential risks, given the limited options available to its top-tier customers."
Mr. Pow set a 12-month target price of $5.95 for the stock. Consensus is $5.63.
"While we acknowledge that risk remains due to the importance of PNG contract extensions, we are attracted to HWO's margin stability, ROIC, and cash flow generation which contrasts with most of their peers," he said. "We also expect new senior management to capitalize on their extensive industry experience and opportunistically grow their Canadian energy services presence both organically and through M&A. We expect the Canadian energy services industry to remain sluggish over the near term, however, if they are able to transact at attractive multiples during trough levels, as seen with the Tervita acquisition, we see significant upside for HWO as the industry rolls over and utilization increases."
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Canaccord Genuity analyst Yuri Lynk lowered his target for CanWel Building Materials Group Ltd. (CWX-T) following the recent closing of its $60-million bought deal and the acquisition of Total Forest Industries.
With the offering, CanWel issued 9 million shares at $6.60 each and, at the same time, announced the redemption of its convertible debentures, set to mature on April 30, 2017, on Sept. 30 at face value plus accrued and unpaid interest. The move reduces CanWel's debt by $44-million and saves $2.6-million annually in interest.
The acquisition expands the company's lumber pressure-treating capabilities and, according to Mr. Lynk, complements its existing facilities. He said it should bolster the company's exposure to the lucrative Greater Toronto Area market given Total's facility is located there.
The purchase price was not disclosed.
"We see a significant improvement in the balance sheet post the equity raise and TFI acquisition," Mr. Lynk said. "Including the new equity and TFI into our model results in a 1.0-times decline in CanWel's Q2/2016 net debt-to-pro forma EBITDA ratio to 3.6 times. Thus, the company has much improved financial flexibility and no near-term debt maturities."
However, based on the dilution, he lowered his EPS estimates for 2016, 2017 and 2018 to 44 cents, 47 cents and 53 cents, respectively, from 46 cents, 53 cents and 60 cents. The higher share count also led to the analyst increasing his payout ratio forecast to 86 per cent next year from 76 per cent.
"We continue to expect an improvement in the dividend payout ratio from 119 per cent at the end of 2015 to 86 per cent by year-end on the back of accretive acquisitions completed to date, good growth in the business, and continued margin improvement," said Mr. Lynk. "Thus, the 8.0-per-cent dividend yield appears highly compelling and we would position ourselves accordingly."
He kept his "speculative buy" rating for the stock and lowered his target to $7.75 from $8. Consensus is $7.83.
The decrease in our price target denotes the dilution associated with the deal, which was somewhat offset by an increase in our valuation multiple to reflect CanWel's improved balance sheet.
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Credit Suisse analyst Seth Sigman upgraded Michaels Companies Inc. (MIK-Q) to "outperform" from "neutral."
In justifying the move, he said: "We believe MIK offers a favorable risk/reward following the recent pull back in the stock,
based on: 1) lower second-half bar, with potential for comps/ margins to improve after a somewhat disappointing Q2, supported by a number of merchandising and sourcing initiatives; 2) other EPS drivers - de-levering, tax benefits, FX; 3) unique model characteristics in an uncertain consumer environment: relative defensiveness/ less e-commerce risk/ continued positive traffic growth, which compares favorably to most other retailers; 4) consolidation optionality, which has been a big positive for leaders in other sectors; 5) attractive valuation."
Despite an "uncertain" retail environment and aggressive discounting from competitors, Mr. Sigman said he is confident the retailer can achieve its third-quarter comparable same-store sales growth goal of 1 per cent (the mid-point of its guidance) and fourth-quarter goal of 2 per cent.
"We view MIK as a steady cash flow story, at a reasonable valuation that has numerous productivity and margin drivers," he said. "Strategically, this team continues to elevate the product, infusing more newness and proprietary product and adding new categories, while also improving the shopping experience, positioning it for share gains in a lower growth category. We see additional growth opportunities through the recent Lamrite acquisition, including B2B [business-to-business] growth through Darice, and retail growth through Pat Catan stores in smaller, untapped markets. There is also an evolving vertical aspect, with potential benefits from sourcing efforts and integration/ extension of Lamrite international operations, should support modest annual margin expansion while staying competitive on price, investing in the business for the long-term."
He maintained a price target of $29 (U.S.) for the stock. Consensus is $30.69.
"MIK trades with low embedded expectations and is cheap relative to history," he said. "We showed last week in a separate note the wide divergence in stock performance between 'undisrupted' retailers and everyone else, with MIK stock falling into the second bucket perhaps due to lower top line growth. We explained that gap by also showing the divergence in CFROI [cash flow return on investment] trends, as other categories trailed due to disruption and investments. MIK has better navigated that, and in our view, it offers one of the best opportunities in that second bucket to emerge if it can hit back half numbers after a difficult first half."
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Citing the quality of Kelt Exploration Ltd.'s (KEL-T) growth prospects in the Inga region of British Columbia, TD Securities analyst Juan Jarrah upgraded the stock to "action list buy" from "buy."
"At 180 net sections, we believe that the Montney at Inga has the potential to be a world-class, condensate-rich asset, much like the Kakwa area in Alberta that has generated some of the largest growth rates in the basin," the analyst said. "Kelt has now successfully drilled and completed six wells in the Upper Montney at Inga using slickwater, resulting in superior production and condensate rates, further derisked through the strategic delineation across virtually all 180 sections on the play."
Mr. Jarrah noted the stock was part of the "downside" experienced by peers from mid-2014 through the end of 2015, but it has not been a part of the upside thus far in 2016. Accordingly, he said it was "gone from trading at a justifiable premium to an unjustifiable discount, in our opinion."
He raised his target price for the stock to $8.50 from $7.50. Consensus is $6.45.
"We do not believe that the market fully appreciates Kelt's asset quality and ability to ramp up capital spending and growth in the coming years, especially from the Upper Montney at Inga, which we believe is now delineated and has the potential for up to 900 extremely economic condensate-rich wells," the analyst said.
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In other analyst actions:
Precision Drilling Corp. (PDS-N, PD-T) was upgraded to "hold" from "underperform" by Jefferies analyst Brad Handler with a target of $4.50 (U.S.), from $4. Consensus is $7.80.
D.A. Davidson analyst Andrew Burns downgraded VF Corp. (VFC-N) to "neutral" from "buy" and reduced his target to $64 (U.S.) from $78. Consensus is $69.71.
Jefferies analyst Brian Abrahams downgraded Biogen Inc. (BIIB-Q) to "hold" from "buy" while raising his target to $323 (U.S.). Consensus is $340.33.
Mr. Abrahams upgraded Gilead Sciences Inc. (GILD-Q) to "buy" from "hold" and maintained a target of $91 (U.S.). Consensus is $106.89.
David Leeder