Inside the Market's roundup of some of today's key analyst actions
Birchcliff Energy Ltd. (BIR-T) presents a "compelling" risk-reward profile for investors who anticipate a rebound in natural gas prices, said Macquarie analyst Brian Bagnell.
He upgraded his rating for the Calgary-based intermediate oil and natural gas company to "outperform" from "neutral."
"In our view, Birchcliff is well-positioned to deliver relative outperformance in the gas-weighted space over the next six to 12 months," said Mr. Bagnell. "Our commodities team sees a clear path to higher natural gas prices by year-end, while the strip is also implying material improvement. Birchcliff offers unhedged exposure to that recovery, which should lead to solid performance relative to hedged peers with more expensive 2017 valuations. We see many parallels to the 2012 season, when Birchcliff had fallen to a four-year low in June and subsequently rallied by greater than 50 per cent entering the traditional draw season. We note the company has reduced its costs and improved its average well performance since that time."
Mr. Bagnell emphasized the company's ability to achieve consistent improves in controllable cash costs in recent years, pointing to growth in production volumes at its Pouce Coupe South (PCS) gas plant in northeastern British Columbia. He also is not concerned by debt levels.
"The most common investor criticism we hear about Birchcliff is its relatively high debt load compared to many of its gas-weighted peers," he said. "While this is true, the debt is not as concerning as it might appear. As of year-end 2015, Birchcliff had $643-million in net debt (including working capital) compared to its credit facility limit of $800-million. On strip pricing and on our forecasted capex, we estimate that net debt would max out at $700-million in mid-2017. This suggests a 2017 estimate debt/cash flow on strip pricing of 3.6 times, which is in line with its small/mid-cap peers."
Mr. Bagnell raised his price target for the stock to $8.25 from $5.50. The analyst consensus price target is $6.91, according to Thomson Reuters.
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Following on the heels of fourth-quarter 2015 financial results which exceeded expectations, BMO Nesbitt Burns analyst Bert Powell upgraded his rating for New Flyer Industries Inc. (NFI-T).
Moving the Winnipeg-based company to "outperform" from "market perform," Mr. Powell suggested the recently acquired Motor Coach Industries International will be the "next leg" for the stock.
On March 23, New Flyer reported adjusted quarterly earnings per share of 38 cents, ahead of the analyst's projection and the consensus of 27 cents. Excluding MCI, acquired for $455-million (U.S.) in a deal which closed in mid-December, total revenue fell 5 per cent year over year to $400-million, in line with estimates, while an adjusted EBITDA margin of 10.6 per cent (up 2.3 per cent year over year) topped Mr. Powell's 9.4-per-cent projection.
"We have been on the sidelines with NFI believing the EBITDA per EU [equivalent unit] was more limited than has turned out to be the case and we needed more details around the MCI acquisition," he said. "In the Q4/15 results there appears to be more growth than we thought in EUs and better margins or EBITDA per EU.
"It is still early days with the MCI acquisition, and while we still need more details, we are taking a leap of faith that management underwrote the MCI acquisition on more conservative assumptions than have been articulated. Management has proven itself with the NABI [North American Bus Industries Inc.] and Orion acquisitions, and our experience is that their proclivity is to under promise and over deliver."
Mr. Powell raised his price target for the stock to $38 from $28.50. Consensus is $33.88."
He said: "The obvious question is why now after the stock has run? We missed the first leg, which demonstrated NFI's ability to leverage acquisitions to drive profit and overcome a meaningful headwind of expiring investment tax credits [ITCs] in the transit bus business. We believe that MCI is likely to present the same cost opportunity, but we are at a loss to point to specific drivers beyond management's initial synergies. We believe that MCI would be better able to leverage the Marcopolo relationship, NFI's operational improvement initiatives, and there is likely a parts and service story."
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Inovalis Real Estate Investment Trust (INO.UN-T) provides investors a "unique" vehicle to invest in a growing European real estate business, according to Desjardins Securities analyst Michael Markidis.
However, based on a "more tempered" total return potential of 17 per cent on his target price of $10.50, he downgraded his rating for the Toronto-based REIT to "hold" from "buy."
On March 22, Inovalis reported fourth-quarter funds from operations (FFO) per unit of 22 cents, an increase of 5 per cent year over year but missing Mr. Markidis's projection of 25 cents. In reaction to "favourable" currency movements and cap rate compression, he raised his net asset value estimate to $10.60 per unit from $10.50.
Mr. Markidis also said Inovalis' balance sheet appears to be "nearly fully deployed" following the closing of its Metropolitan acquisition. The 79,000-square-foot property in Paris was purchased for €47-million, which the analyst said represents a 4.8-per-cent stabilized cap rate and a 12-per-cent discount to a recent third-party appraisal by Jones Lang LaSalle.
"Post closing of the Metropolitan, we see a cash balance of [approximately] $5-million (Canadian)," he said. "Pro forma leverage of 56 per cent (versus 53 per cent at fourth quarter 2015) is at the upper end of the range for our coverage universe, but below the 60-per-cent limit within the REIT's declaration of trust."
He added: "At IPO in early 2013, INO's portfolio was composed of four properties totalling 500,000 square feet. Through acquisition, the asset base has grown to include ownership interests in 11 properties totalling 1.5-million square feet (1.1-msf owned interest). Five of the seven assets acquired over the past two years are located in primary markets (four in Paris and one in Cologne). Capital flows into primary markets across Europe have been robust and cap rates have compressed significantly. As a result, management commentary suggests that a greater emphasis on sourcing opportunities in secondary markets, such as Toulouse and Lyon, France, will be a priority going forward. We believe that high-quality properties (recently constructed or refurbished, long lease terms) can be acquired in these markets at unlevered yields that are 100–200 basis points wider than what could be achieved in Paris or a primary German market, such as Berlin, Frankfurt or Hamburg."
Mr. Markidis lowered his FFO per unit projection for 2016 to 99 cents from $1.05. He also introduced his 2017 estimate of $1.01.
He did raise his target price to $10.50 from $10.25. The analyst consensus price target is $10.55.
"The stock offers an attractive and sustainable 8.5-per-cent distribution yield," he said. "However, leverage is now at the upper end of our universe and the balance sheet is nearing full deployment. Based on relative risk-adjusted returns to our target, we've revised our rating."
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BMO Nesbitt Burns analyst Charles Sebaski said he sees a lack of drivers to stimulate an improved return on equity (ROE) for Allied World Assurance Co Holdings AG (AWH-N).
Seeing "limited near-term levers" to improve its ROE profile, he downgraded his rating for the stock to "underperform" from "market perform."
Mr. Sebaski said: "We see three structural challenges to Allied's business that will impede improving its ROE in the near-term: 1) Reinsurance division earnings are likely to contract due to a lower capital contribution to Aelous, continued pricing pressure, and a sliding amount of favourable prior-period development; 2) Global Markets division underwriting improvement is likely to take longer than initially expected, with hypercompetitive London market dynamics and slower attainment of scale in the RSA [RSA Insurance Group PLC] business; 3) Lower 'non-core' investment is likely to lead to reduced contributions of net realized gains as future sources of capital generation and hence capital management.
The analyst dropped his 2016 earnings per share projection to $2 (U.S.) from $2.65. He also lowered his 2016 and 2017 book value per share estimates to $38.78 and $39.91, respectively, from $39.10 and $40.11.
His target price for the stock fell to $32 from $34. Consensus is $38.71.
"These factors, coupled with the continued decline of favourable prior-period development, result in our expected 6.1-per-cent operating return on tangible equity," he said. "We believe a return profile in the mid-single digits should have a valuation cap at tangible book value excluding accumulated other comprehensive income (AOCI), which is what we are using to generate our target price for AWH."
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U.S. headwinds are picking up for Concordia Healthcare Corp. (CXRX-Q, CXR-T), according to Canaccord Genuity analyst Neil Maruoka.
"Concordia reported Q4 and full-year 2015 financial results that, on the surface, were in line with our forecasts; however, we believe a closer look suggests some potential headwinds picking up for the company's North America (NA) division," he said. "The Q3/15 genericization of Dibenzyline was an expected hurdle (partially offset by the observed growth of Donnatal), but supply issues for Plaquenil were not anticipated. While the manufacturing problem has apparently been solved, we are concerned that any lost market share might be difficult to recapture. In the first quarter since the acquisition of AMCo, the European business was a strong contributor to the top line with steady margins in line with our forecasts; and, while all indications are that double-digit growth for this business remains intact (greater than 60 product launches over the next three years), limited data and visibility makes it harder for us to gain full comfort with these assumptions."
Based on the quarterly results, Mr. Maruoka lowered his forecasts for the Oakville, Ont.-based company's U.S. business but raised his estimates for Europe. He noted: "the shift in revenue mix does result in a small drag on overall margins."
Overall, both his sales and adjusted EBITDA projections declined for 2016 and 2017. Accordingly, his adjusted and diluted earnings per share estimates fell to $6.69 (U.S.) and $8.03 from $6.71 and $8.23, respectively.
He maintained his "buy" rating and $55 (U.S.) target, compared to a consensus of $57.47.
"We believe a major factor contributing to Concordia's share price decline is its highly levered balance sheet and credit spreads that have increased by greater than 50 per cent over the last six months," the analyst said. "Nonetheless, we continue to believe the stock likely has upside from current levels based on the company's strong cash flow potential."
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In other analyst actions:
CF Industries Holdings Inc (CF-N) was downgraded to "neutral" from "overweight" at Piper Jaffray by equity analyst Brett Wong. The 12-month target price is $34 (U.S.) per share.
CIT Group Inc (CIT-N) was downgraded to "neutral" from "buy" at Sterne Agee CRT by equity analyst Henry Coffey. The 12-month target price is $37 (U.S.) per share.
Ensco PLC (ESV-N) was downgraded to "underweight" from "equal-weight" at Barclays by equity analyst J David Anderson. The target price is $7 (U.S.) per share. It was downgraded to "negative" from "neutral" at Susquehanna by equity analyst Charles Minervino with a 12-month target price of $8.
Excellon Resources Inc (EXN-T) was downgraded to "speculative buy" from "buy" at Cormark Securities by equity analyst Graeme Jennings. The 12-month target price is 70 cents (Canadian) per share.
Finish Line Inc (FINL-Q) was raised to "buy" from "hold" at BB&T Capital by equity analyst Corinna Freedman. The 12-month target price is $24 (U.S.) per share.
HB Fuller Co (FUL-N) was raised to "overweight" from "neutral" at JPMorgan by equity analyst Jeffrey Zekauskas. The target price is $46 (U.S.) per share.
Paramount Group Inc (PGRE-N) was rated new "market perform" at Cowen by equity analyst Tom Catherwood. The 12-month target price is $17.00 per share.
Phillips 66 (PSX-N) was rated new "market perform" at Cowen by equity analyst Sam Margolin. The 12-month target price is $92 (U.S.) per share.
Hanover Insurance Group Inc (THG-N) was raised to "outperform" from "market perform" at BMO Capital Markets by equity analyst Charles Sebaski. The 12-month target price is $98 (U.S.) per share.
With files from Bloomberg News
David Leeder