Inside the Market's roundup of some of today's key analyst actions
Believing the peak deflationary period for grocery stocks has passed, BMO Nesbitt Burns analyst Peter Sklar upgraded Loblaw Companies Ltd. (L-T) following its "strong" first-quarter" performance.
On Wednesday, the Brampton-based company reported quarterly fully diluted earnings per share of 90 cents, exceeding the 87-cent projection of both the analyst and the Street. Same-store sales declined by 2.1 per cent, though Mr. Sklar pointed out it was actually flat year over year on an adjusted basis after factoring in the timing of both New Year's Day and Easter. He called it a "good" result.
"Overall, we would describe Loblaw's Q1/17 as positive, as it was moderately better than expected. We attribute the better-than-expected results to stronger grocery performance, with slightly better-than-expected deflation (i.e. less) and tonnage (i.e. more)," he said. "In addition, retail gross margin and SG&A [selling, general and administrative] margin improved modestly year over year (excluding the accounting impact of franchise consolidation). Fundamentally, the stronger performance likely reflects a successful promotional calendar and Loblaw's growing effectiveness at utilizing data analytics (captured through its PC Plus and Optimum Loyalty programs) with respect to its promotional offerings and optimizing category assortment."
Moving his rating for the stock to "outperform" from "market perform," Mr. Sklar raised his second-quarter EPS projection by a cent to $1.09. His full-year 2017 and 2018 estimates increased to $4.31 and $4.72, respectively, from $4.28 and $4.55.
"Our reservation for the Canadian grocery stocks has been the high deflationary environment, a backdrop which has traditionally resulted in a challenging setting for the sector," he said. "However, as a result of execution, to some degree, Loblaw appears to have mitigated this headwind as evidenced by the slightly stronger tonnage and deflation results for the quarter versus our expectation.
"We also highlight that Loblaw's Q1/17 will likely be the peak deflation quarter. On a month-over month basis, the StatsCan food from stores CPI index held its value for March, increasing by 0.1 per cent, and marked the third consecutive month of sequential improvement, suggesting that deflation is beginning to run its course. A flat to slightly increasing sequential trend for the index through the rest of this year should result in a notably decelerating deflation trend as the index comparables become significantly easier (i.e., last year's comparable index values are lower as the year progresses). … For 2017, we are projecting decelerating deflation in Q2 and Q3 for Loblaw, and then flat inflation/deflation in Q4."
Mr. Sklar increased his target price for Loblaw stock to $85 from $71. The analyst average target price is currently $83.83, according to Bloomberg data.
"Loblaw is not an inexpensive stock relative to its history, as it is currently valued at 8.3 times our 2017 EBITDAR [earnings before interest, taxes, depreciation, amortization and restructuring or rent costs] estimate," he said. "However, this compares favourably to Metro's valuation of 10.1 times on the same calendar basis. Arguably, Metro warrants a valuation premium due to its long history of consistent and superior execution, stock buyback, Adonis, etc., however on the other hand, roughly one-third of Loblaw's EBITDA is represented by the Shoppers Drug Mart business, which was attributed a higher multiple than the grocers when it was a public company. Our target price for Loblaw is revised to $85 (from $71), which is based on a projected enterprise value that is 8.5 times (from 7.6 times) our revised 2018 EBITDAR estimate plus Loblaw's interest in Choice Properties REIT. As we are now past the peak deflationary period for the sector, and after considering Loblaw's good quarterly result, we are upgrading Loblaw."
Elsewhere, Raymond James analyst Kenric Tyghe raised his target by a loonie to $81 with an "outperform" rating (unchanged).
Mr. Tyghe said: "While Loblaw delivered a solid beat on EPS of 90 cents versus consensus of 87 cents, SSS performance in the quarter was modestly disappointing, and the caution on the inflation outlook was intriguing."
=====
Citing its current valuation, TD Securities analyst Linda Ezergailis downgraded TransAlta Renewables Inc. (RNW-T) to "hold" from "buy."
"Due to the lack of visibility of future asset acquisitions from TransAlta Corp. (TA-T) or third parties, and the lack of clarity on future growth projects post South Hedland, we believe that RNW's shares are fully valued at current levels," she said. "Given the implied returns to our target price, we are compelled to downgrade the shares."
Ms. Ezergailis's move came on the heels of the release of the company's first-quarter 2017 financial results, which failed to meet her expectations.
On Wednesday, the Calgary-based company reported adjusted funds from operations per share of 37 cents, in line with the result from the previous quarter but below the projection of both Ms. Ezergailis (39 cents) and the consensus (38 cents). The miss was due largely to lower-than-anticipated contributions from its Australian assets.
Based on the result, she dropped her full-year 2017 AFFO [adjusted funds from operations] per share projection by 2 cents to $1.37 in reaction to the lower Australian contributions as well as revised renewable generation assumptions.
Her target price for the stock rose by 50 cents to $16 "to reflect continued progress on debt-refinancing initiatives, as well as de-risking of South Hedland, which is approaching its mid-year in-service date." The analyst average price target is $15.36, according to Thomson Reuters data.
"We like RNW based on our view of its sizeable, diversified, and well-contracted asset base, management capability, dividend yield, and potential for future accretive acquisitions," said Ms. Ezergailis. "However, at current levels, we view RNW's shares as largely reflecting the value of its previous asset investments, along with the South Hedland project. Should TA articulate a plan for future asset drop-downs into RNW, we believe that RNW's share price could re-rate higher to reflect the potential value of these investments.
"We still view the company's relative risk-adjusted valuation as attractive when compared with other renewable power IPPs [independent power producers], especially the current 5.5-per-cent dividend yield. That being said, we are downgrading RNW shares to hold as the implied returns to our target price no longer justify a buy rating."
=====
Following "weak" first-quarter results, Desjardins Securities analyst Benoit Poirier downgraded Uni-Select Inc. (UNS-T), citing "weaker" short-term growth prospects and "minimal" upside to his target.
Though he believes its long-term fundamentals remain intact, Mr. Poirier moved his rating to "hold" from "buy."
On Wednesday, Uni-Select reported quarterly revenue of $297-million (U.S.), up 13 per cent year over year but below Mr. Poirier's expectation ($309-million) and the consensus ($310-million). Adjusted earnings per share of 26 cents also missed estimates (30 cents and 33 cents, respectively).
"Organic sales also contracted much more than expected due to a product line changeover in the U.S. and an unexpected loss of an independent member in Canada, which will materially affect 2017 organic sales prospects," he said.
Mr. Poirier maintained his $38 target price for the stock. The average is $37.71.
"Although long-term fundamentals remain intact as the strong balance sheet should fuel both organic growth and M&A [mergers and acquisitions], we are taking a cautious stance in the short term given the recent share price performance (up 31 per cent from 52-week low), fair valuation and diminishing growth prospects for 2017 following the loss of an independent member in 1Q17."
=====
Touting its new management team and a revised approach to its San Francisco mine in Mexico, Raymond James analyst Tara Hassan initiated coverage of Timmins Gold Corp. (TMM-T) with an "outperform" rating.
"Timmins is in the midst of numerous corporate changes which include an overhaul of the management team, a proposed name change to Alio Gold, and a revised approach to operating and advancing its core assets," she said. "After more than 18 months of questions surrounding the direction of the company's projects and who would be at the helm, we believe the recent changes will be critical to driving share price gains in the near-term."
Ms. Hassan said the company's San Francisco mine, an open pit heap leach operation with an estimated mineral reserve of 574,000 ounces of gold in Sonora, has "seen its fair share of ups and downs" since it recommenced operations in 2009.
"The sustained downturn in precious metal prices in 2015, coupled with operating challenges, led the former management team to make a shutdown decision at San Francisco," the analyst said. "Although gold prices and currencies have moved in favour of San Francisco, more importantly reassessment of the potential at the project and operational enhancements have led to a revived operational plan through 2022. While this plan generates a positive return, we expect a revitalized mine plan due in 2Q17 could enhance the project economics further with increased annual production over a similar mine life. We estimate this could drive up to a 50-per-cent increase to our San Francisco project NAV [net asset value]."
Ms. Hassan also touted its Ana Paula advanced stage project in the Guerrero Gold Belt in southern Mexico as a potential catalyst moving forward, calling it a "compelling growth opportunity" in the near term.
"A PFS [preliminary feasibility study] is set to be released for Ana Paula in 2Q17 that we expect will confirm the strong economics outlined in the 2016 PEA [preliminary economic assessment]," said Ms. Hassan. "We look for initial capital costs to increase, but see opportunities to offset this from updates to the resource model and enhanced metallurgical recoveries in the FS, which is due in 1H18. We see extensive upside from the regional land position at Ana Paula which is the biggest in the region, and remains largely undrilled, but contains a number of interesting early stage targets."
Ms. Hassan set a price target of 90 cents for the stock. Consensus is 92 cents.
"Even with recent share price gains, Timmins' current trading multiples are reflective of a company with a challenged history (0.50 times price/NAV and 6.21 times 2017 P/cash flow versus global junior-intermediate producing peers trading at 0.77 times P/NAV and 8.06 times 2017 P/CF), but we expect that potential catalysts on the horizon will help lessen this discount and provide a better understanding of the underlying value of the assets," she said.
=====
Shares of Polaris Infrastructure Inc. (PIF-T) have "had a good run but there is still plenty of potential upside," said Raymond James analyst David Quezada.
He initiated coverage of the Toronto-based renewable energy company with an "outperform" rating.
"Our constructive view of Polaris Infrastructure is predicated on an attractive set of growth opportunities at its San Jacinto Tizate (SJT) geothermal plant driving rising EBITDA and CAFD [cash available for distribution], which we expect could facilitate significant dividend growth," said Mr. Quezada. "We also see longer-term opportunities for Polaris to expand and diversify the company's footprint in Central America."
Mr. Quezada said rising generation at the company's San Jacinto plan in Nicaragua is likely to drive rising earnings and free cash flow as well as dividends.
"Fueled by a recently completed drill program, debottlenecking, an expected 1-2 additional production wells and the addition of a binary unit, we expect SJT's net generation to increase at a 12-per-cent CAGR [compound annual growth rate] over 2016-2018, driving EBITDA and CAFD growth CAGRs of 16 per cent and 31 per cent, respectively over this period," he said. "Accordingly, even at a payout ratio toward the low end of PIF's 40 per cent to 60-per-cent target range, we see the company's dividend rising in increments over the next two years from the current 12 (U.S.) per share quarterly payment to 16 cents per share by the end of 2017 (up 33 per cent year over year), and a further 25 per cent by 2018 year-end to 20 cents per share.
Adding opportunities for high return projects in Central America will likely provide potential future upside, he added: "Unlike North America and Europe where IPPs face stiff competition for new developments generating returns of approximately 8-12 per cent, we believe returns on renewable development in Central America can range between 15-17 per cent. We see this as a function of the fact that large IPPs and infrastructure funds do not yet operate in the region, resulting in significantly less competition."
Noting its "bargain-basement valuation," Mr. Quezada said its discount to its peers is "excessive."
"While we acknowledge PIF's one-asset footprint and operations in Nicaragua merit some degree of valuation discount, we believe the current level (PIF trades at 4.9 times 2018 enterprise value/EBITDA versus the peer group average of 10.8 times), is excessive," he said. "Accordingly, we believe shares of PIF are undervalued and will likely benefit from an expanded trading multiple as the company delivers stable operations and meets growth objectives."
He set a price target of $25. Consensus is $24.52.
=====
Desjardins Securities analyst Bill Cabel upgraded Innergex Renewable Energy Inc. (INE-T) in response to his acquisition of three wind farm projects in France.
On Wednesday, the Longueuil, Que.-based company announced an agreement with Velocita Energy Developments Ltd. to purchase three facilities with a total capacity of 119.5 megawatts. Innergex will have a 69.55-per-cent interest in the farms with Desjardins Group Pension Plan owning the remaining stake.
"The purchase price and EBITDA guidance for the assets imply an enterprise value-to-EBITDA acquisition multiple of 12.5 times, which is higher than the 10.6 times it paid for its previous tuck-in acquisition in France," said Mr. Cabel. "However, we estimate INE is acquiring the assets at a reasonable IRR [internal rate of return] of 9–10 per cent, which is solid for contracted, almost derisked wind assets."
"The assets are expected to generate consolidated revenues and EBITDA of $34.8-million and $26.9-million, respectively, and free cash flow to INE of $4.4-million based on its 70-per-cent interest. We estimate the projects will add 3 per cent and 6 per cent to our prior 2017 and 2018 adjusted EBITDA estimates, respectively, and add 2 per cent and 4 per cent to our 2017 and 2018 adjusted FCF/share estimates."
Mr. Cabel moved the stock to "buy" from "hold" and raised his target to $16 from $15.50. Consensus is $16.39.
"INE has quality assets and a strong management team and should deliver solid growth in 2017," he said. "With its recent accretive acquisitions, it continues to show an ability to source growth. As a result of the modest increase in our valuation, we see a solid total return on the stock and are upgrading the name."
Meanwhile, Raymond James analyst David Quezada bumped his target up by a loonie to $18.50 with an "outperform" rating (unchanged).
"We take a positive view of this transaction as it provides further clarity on the company's growth outlook and evidence of management's ability to add capacity by M&A," he said.
=====
Sysco Corp. (SYY-N) may become the consumer staples stock to own, said BMO Nesbitt Burns analyst Kelly Bania.
Ahead of the release of its third-quarter fiscal 2017 financial results on May 8, Ms. Bania upgraded the Houston-based company to "outperform" from "market perform."
"Given volume challenges for many large-cap consumer staples/CPG [consumer packaged goods] stocks and Amazon risk (we believe large brands have less clout with Amazon), a highly competitive discount space and potential margin risk, we believe SYY may benefit from a rotation into the shares given its similar financial profile to consumer staple stocks (high-ROIC [return on invested capital], solid dividend, strong FCF [free cash flow], solid balance sheet) but lower-risk profile in the current environment," she said. "We see opportunity for SYY valuation to expand as food service industry volumes appear to remain steady. We also believe SYY is more insulated from Amazon risk (in fact, we believe Amazon PrimeNow delivery service - now offered in only 30 major cities - supports take-out/delivery trends particularly with independent restaurants). In addition, we expect SYY to continue benefiting from company initiatives such as category management & revenue management which we believe supports the margin outlook and provides visibility into earnings growth."
Expecting the stock to "move up the ranks" of valuation among consumer staples, Ms. Bania raised her target price to $60 (U.S.) from $56. Consensus is $54.15.
"We expect that SYY's valuation could shift up the ranks in comparison with other consumer staples stocks given the different industry fundamentals and risks outlined. SYY shares are currently trading in the 3rd quartile of our group of 64 consumer staples stocks," she said. "We see opportunity for SYY's valuation to expand and shift up into the 2nd quartile which averages 20-21 times calendar 2018 estimated EPS. On a calendar basis (note: SYY's fiscal year ends June), SYY shares are currently trading at 18 times calendar 2018E EPS and 20 times calendar 2017E EPS."
Ms. Bania added: "SYY's performance has been strong in recent years despite the unexpected gross profit dollar headwind from significant food deflation. We believe SYY's gross profit dollar growth could accelerate as deflation abates (we estimate by June). We believe investors remain concerned about the ability of food service distributors (including SYY) to pass on pricing to customers. However, we believe food inflation will not result in meaningful pressure to gross profit as long as the food inflation levels remain benign, as we expect. We see a favourable risk/reward for SYY with respect to the deflation/inflation outlook."
=====
In other analyst actions:
Alta Corp Capital Inc. analyst Aaron MacNeil upgraded Trican Well Service Ltd. (TCW-T) to "outperform" from "sector perform" with a target of $5.25, up from $5. The analyst average is $6.31.
BRP Inc. (DOO-T) was downgraded to "sector perform" from "outperform" at National Bank by analyst Cameron Doerksen with a target of $35, up from $33. The average is $34.67.
Source Energy Services Ltd. (SHLE-T) was rated a new "outperform" at BMO Nesbitt Burns by analyst Michael Mazar with a $14 target. The average is $15.67.
Falco Resources Ltd. (FPC-X) was rated a new "buy" at Desjardins Securities by analyst Michael Parkin with a target of $1.75.
Macquarie analyst Brian Kristjansen upgraded ARC Resources Ltd. (ARX-T) to "outperform" from "neutral" and raised his target to $24.50 from $23. The consensus average is $25.05.
David Leeder