Inside the Market’s roundup of some of today’s key analyst actions
Though they think there are reasons for optimism in the Canadian energy sector in 2019, equity analysts at CIBC World Markets are expecting it to be a “tale of two halves."
”In a lot of ways, the current set-up in the energy market looks uninspiring," the firm said in a research report released Friday. "Given the macro backdrop at strip or flat pricing, few companies are in a position to deliver outsized profits or advance a lot of their longer-term growth initiatives. The environment also isn’t overly conducive to increasing near-term returns of capital to shareholders through increased dividends or heightened buyback programs. In addition, a lot of the key challenges that sit at the forefront of the industry today are the same things we have been talking about for the past couple years (i.e., trying to calibrate U.S. shale growth, the need for more capital discipline across the sector, the acute and embarrassing Canadian pipeline shortages, OPEC+ compliance/resolve, rising concerns of economic stability/sturdiness of global oil demand, etc.).
"Specific to the Canadian market, we have the added complication of the mandatory Alberta curtailments. And while the cuts have obviously been very supportive of near-term price realizations for most Canadian upstream companies, they have also created a mix of relative winners and losers. The curtailments also bring forward a number of longer-term risks that can’t be discounted, including reservoir/operational challenges depending on how long they are kept in place, external capital markets perception, and concerns about the ultimate duration under which government intervention will continue. As such, there needs to be a clear duration under which they can exist to avoid some of these longer-term challenges."
The analysts admitted their playbook for the sector is a “bit of rinse and repeat from past years,” believing the safety trade is “alive and well” in the first half of the year. They say they are leaning toward “overweight larger, more stable and less-capital intensive platforms with strong margins of safety.”
"This naturally includes bigger weightings in the Large-cap E&P and Integrateds and select Energy Infrastructure stocks," they said. "Meanwhile, we believe holdings in the SMID-cap E&P and Oilfield Services subsectors need to be more selectively chosen. More specifically, we believe beta is something that investors should be spending a good amount of time monitoring and thinking about, but not necessarily chasing hard in the coming months. To be clear, though, we are relatively constructive on global crude markets in H2/19 and believe there are a number of reasons to be more positive as we look into 2020. As such, depending on what unfolds in the coming months, the H2/19 playbook might look quite a bit different than H1/19.
"Our top ideas for H1/19 might seem a bit mundane, but we view them as being logical and the right place to have capital allocated, including strong weightings in SU and CNQ within the Large-cap E&P & Integrateds, PXT, ERF, and KEL in the SMID-cap producers, and EFX and PD in the Oilfield Services subsector. In the Energy Infrastructure space, our top picks are ENB and PPL, while AQN and BLX are two utility stocks that also screen attractively and could be used for some safe energy exposure, depending on individual investment mandates."
In the note, the analysts made several changes to their ratings for individual stocks in their coverage universe.
Encana Corp. (ECA-N, ECA-T) to “neutral” from “underperformer” with a target of US$10.50, down from US$12. The average on the Street is US$11.71, according to Thomson Reuters Eikon data.
Analyst Jon Morrison: “We are upgrading Encana .... based on our view that negative sentiment has largely played out and there is less downside in the stock given that it is now bouncing off the bottom on deep value metrics. Although we continue to have a negative view of the Newfield transaction and view the deal to be a strategic misstep and misread on the market, it is hard to argue that the stock remains a short at these levels given the current valuation.”
Cenovus Energy Inc. (CVE-T, CVE-N) to “neutral” from “outperformer” with a $12.50 target, down from $14.50. Average: $13.59.
Mr. Morrison: “We are also downgrading Cenovus ... based on our view that the current macro backdrop the company is facing (i.e., widening differentials in the upstream, narrowing crack spreads in the downstream) significantly reduces its margin of safety. And while the upside and commodity torque is high for a company its size and we still view its long-life, low-decline asset base as enduring qualities, its leverage ratios remain high compared to peers and it is much more exposed to the current macro backdrop.”
Advantage Oil & Gas Ltd. (AAV-T) to “neutral” from “outperformer” with a $3.50 target. Average: $4.21.
Analyst Jamie Kubik: “We are not fans of downgrading stocks in what could be a market trough for commodities. We have long been fans of Advantage’s cost structure, its Montney resource and management’s disciplined approach towards capital allocation. By and large, we continue to view this company as one of the best positioned natural gas producers to weather the ensuing price weakness on a pound for pound basis. Management has put in place meaningful hedge protection on its gas volumes through 2019, along with added market diversification to Chicago. That said, the prospect of a cold winter in the WCSB has nearly completely faded, and incremental demand for natural gas is likely to be below normal. We also expect WCSB gas price weakness remaining throughout 2019 and into 2020 with limited demand additions, despite robust supply. While AAV is more diversified than it has been in the past, it still sells the bulk of its gas volumes at AECO. Until the company’s liquids volumes begin to meaningfully alter the revenue profile of the business, which in our view becomes more of a 2020 event versus in H1/19, we expect the stock to likely remain range bound in the interim. As such, we expect AAV will trade at a multiple that is more discounted to its peers than it has been in the past.”
Pason Systems Inc. (PSI-T) to “outperformer” from “neutral” with a $25 target, rising from $24. Average: $25.17.
Mr. Morrison: “Concurrent with doing so, we are upgrading Pason ... based on our view that, while industry drilling activity levels will largely stagnate for the next 12 months, the company should continue to witness strong new product adoption while the relative stability of the business and strong balance sheet provide a strong margin of safety that should support the stock price.”
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Following a “challenging” 2018 for the Canadian Consumer and Industrial Products sector, Industrial Alliance Securities analyst Neil Linsdell said he’s favouring “underappreciated” names this year, selecting four stocks as his top picks for the year in a research report released Friday.
“Compared to the calm market conditions witnessed in 2017, rising interest rates and dampened growth expectations in 2018, along with global economic and geopolitical uncertainty, resulted in increased volatility in the markets over the past year,” said Mr. Linsdell. “As we look to 2019, we expect some of this volatility to persist although not as pronounced as we saw in 2018. That being said, given concerns that we are in the later stages of the longest bull market in history (following the Great Recession of 2008), we believe that most investors will turn to defensive names with strong organic growth profiles and compressed valuation multiples, which bodes well for our diversified industries coverage universe.
“In 2018, most of our coverage list outperformed the broader market (S&P/TSX Composite Index: down 11.6 per cent), recording an average return of negative 6.9 per cent. Our top three performers in 2018 were EnWave (up 31.0 per cent), Medical Facilities (up 13.6 per cent), and GDI (up 11.3 per cent). Contrarily, the worst performers were Supremex (down 39.9 per cent), Dollarama (down 38.0 per cent), and Premium Brands ( down 25.6 per cent; not covered in 2018).”
Mr. Linsdell selected four stocks as his favourites for the year, believing they are currently undervalued and “present the best risk/reward” among companies in his coverage universe.
They are:
Aecon Group Inc. (ARE-T) with a “strong buy” rating and $23 target. The average on the Street is $22.32.
“We believe that the outlook for 2019 is extremely positive, with areas of strength in Aecon’s Infrastructure segment and higher margin nuclear business expected to outweigh the impact of a weaker environment for new large commodity and oil related projects (in the Industrial segment),” said the analyst. “All segments continue to bid on opportunities that should grow the record backlog of $7.0-billion, with the goal of improving profitability, with submissions for RFPs and RFQs for projects worth $8-billion and $20-billion, respectively. This is supported by a strong Canadian economy and the gradual rollout of the federal government’s $186-billion infrastructure spending program over the next 12 years. We also believe the recent appointment of industry veteran Jean-Louis Servranckx as President and CEO should enhance Aecon’s partnerships with international partners. As such, Aecon is the only Strong Buy rated stock in our coverage universe.”
GDI Integrated Facility Services Inc. (GDI-T) with a “buy” rating and $23 target. Average: $22.83.
“2018 marked a positive year for GDI, as strong organic growth was complemented by strategic acquisitions,” said Mr. Linsdell. “Going forward, we expect that as GDI expands its penetration and customer base, the Company will look to add additional U.S. services as it has done in Canada (Ainsworth [acquired Nov. 2015] and Airtron Canada [acquired Nov. 2016], likely through the acquisition of one or more established U.S. businesses. Thus, as GDI continues to grow and expand its service offerings, it is able to be more competitive on pricing when needed and offer more specialized services that enable it to generate better profit margins. Overall, GDI generates an annuity-like cash flow stream, supported by recurring revenue and long-term customer relationships, and potential for additional M&A, making it one of our top picks for 2019. We see solid performance narrowing the valuation gap with the industry average in 2019.”
Intertape Polymer Group Inc. (ITP-T) with a “buy” rating and $26 target. Average: $22.75.
“As the second largest tape manufacturer in North America, the market seems to be ignoring the Company’s strong organic growth profile and profitability improvements,” he said. “Also, this stock has been generally overlooked and penalized over several years after its operations were disrupted by floods in South Carolina from a hurricane in 2015. Lost sales and inefficiencies as it moved to new facilities impacted results, but over the last couple of years, ITP has posted solid revenue growth and has invested in automation and low-cost manufacturing facilities to support profitability improvements while also completing seven acquisitions, which are all going to start paying off in 2019, resulting in margin expansion.
Enwave Corp. (ENW-X) with a “buy” rating and $2.35 target. Average: $1.98.
“EnWave’s current value is derived from both the rapid and near-term growth in Moon Cheese sales, the ongoing sale of REV equipment, and the increasing royalty stream being generated on a long-term basis from the growing installed base of REV units,” said Mr. Linsdell. “As such, we see tremendous growth for ENW in 2019, which is why this undervalued stock is a new addition to our top picks list.”
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Seeing a “rare value-based entry point,” Raymond James analyst Andrew Bradford upgraded his rating for Mullen Group Ltd. (MTL-T) ahead of the release of its fourth-quarter financial results and despite expecting a “muted” outlook for early 2019.
"From early 2018 to late October, Mullen's share price had been trading in a $14.50 to $16.00 range before selling off and establishing a new range between $12.50 and $13.00," said Mr. Bradford. "To the extent the market is pricing a difficult start to 2019, we agree. However, the market's reaction to these lower interim estimates is likely overdone.
"Mullen is currently priced to yield 10.1 per cent of 2019 estimated free cash ($127-million by our estimates) and 11.6 per cent of 2020 free cash ($146-million). But Mullen has historically traded between 6.5 per cent to 7.0-per-cent FCF yields (during non-downturn years). In our view, this represents an exploitable mispricing in Mullen's stock."
Mr. Bradford expects Mullen's outlook for its Oilfield Services (OFS) segment to "fairly somber, if not downright pessimistic."
“The rig count in Canada has likely already topped-out for the first quarter with the only outstanding question being how long it can run along at 210-220 before declining into breakup,” he said. "This is in sharp contrast to the relatively positive outlook from Mullen last summer, when Mullen was poised to benefit from demand related to LNG pipeline work. This outlook hasn’t changed - the exact magnitude and timing is unknown but we still expect LNG related pipeline stringing alone to lift 2020 EBITDA by 7 per cent to 8 per cent.
“Mullen’s trucking outlook will likely be more positive, but still hit by a slowing economy. The broader Canadian and global economy growth rates slowed as trade disputes and tightening monetary policy have sapped consumer and business confidence resulting in a series of lower GDP growth estimates. Trucking demand is directly tied to overall activity and a slower outlook will naturally impact MTL’s results.”
Moving Mullen shares to "outperform" from "market perform," Mr. Bradford maintained a target price of $15.60, which falls 14 cents below the current consensus.
“In our experience, attractive, value-predicated entry points into Mullen’s stock are relatively rare,” he said. “We are maintaining our $15.60 target, which with the 5-per-cent dividend yield implies a 35-per-cent return to target. Based on our metrics, the market has historically priced Mullen very efficiently - as such we have found that 30-per-cent returns to our targets are not common occurrences, certainly warranting a higher Outperform rating.”
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Celestica Inc. (CLS-N, CLS-T) is likely to face a slowdown through 2019, said RBC Dominion Securities analyst Paul Treiber after its first-quarter guidance fell “well below expectations on a sharp step down in semi-cap equipment demand.”
On Thursday, the Toronto-based electronics manufacturing services company reported revenue for the first-quarter of US$1.73-billion, a rise of 10 per cent year-over-year but below the projections of both Mr. Treiber (US$1.75-billion) and the Street (US$1.74-billion). A “sharp slowdown” in semi-cap equipment orders led to adjusted earnings per share of 29 US cents, missing both expectations (30 US cents and 31 US cents, respectively).
With those results, Celestica released first-quarter guidance that disappointed the Street. Revenue of US$1.45-$1.55-billion and EPS of 12-18 US cents both fell below Mr. Treiber's expectations (US$1.525-$1.625-billio n and 24-28 US cents).
“Management is restructuring its semi-cap business under the assumption that the slowdown persists through 2019,” he said. “Restructuring is expected to bring semi-cap to breakeven by mid 2019 and enable operating leverage when demand improves. Celestica reiterated its long-term outlook to achieve 3.75-4.50-per-cent adjusted EBIT margins. We are adjusting our adj. EPS estimates to $0.89 FY19 and $1.25 FY20e from $1.27 and $1.40 previously.
Maintaining a "sector perform" rating, Mr. Treiber dropped his target to US$10 from US$12. The average on the Street is US$11.34.
“Celestica is transforming its business away from traditional end markets (enterprise, communications) towards non-traditional markets like industrial, aerospace & defense, healthcare, and semiconductor,” the analyst said. “The move should to lead to higher organic growth and margins over time.
“Our Sector Perform thesis reflects: 1) capital allocation uncertainty; 2) transition away from legacy end markets expected to weigh on growth; and 3) valuation discount may persist. We believe other stocks in our coverage universe compound capital at faster rates.”
Elsewhere, Citi analyst Jim Suva also lowered his target to US$10 from US$12 with a “neutral” rating.
Mr. Suva said: “Thursday night Celestica announced Q4 results and with its conference call which can both be described as containing lots of moving parts with the conclusion that consensus estimates will move lower as the company is disengaging from $500-million of business it deems as not meeting its economic returns rates. While this is the correct actions in our view we believe it will create near-term margin and absorption challenges as well as risk as the company moves its headquarters.”
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Ahead of the release of its fourth-quarter financial results on Feb. 14, Canaccord Genuity analyst Rahul Paul is “taking a conservative stance on grades” for Pretium Resources Inc. (PVG-T) “pending further clarity.”
“While 2018 was an overall good year for Pretium, continued grade variability and the inherent difficulty in predicting near-term grades remain a source of concern for most investors,” said Mr. Pauk. "Pending the release of additional grade reconciliation data (expected along with FY18 financials/FY19 guidance on Feb 14, 2019) and updated reserves (expected April 2019), we have elected to take a more conservative stance on reserve grade.
“That said, even with lower assumed grades, we consider Brucejack a very attractive asset capable of generating $274-million in annual FCF at steady state (2021E) based on annual production of 533,000 ounces at $680/oz AISC [all-in sustaining costs]. In addition, we believe the greater than 10 year reserve life at Brucejack and location in Canada continue to render Pretium an attractive target for a larger producer.”
Mr. Paul is projecting adjusted earnings per share of 6 cents for the quarter, which sits 2 cents lower than the consensus and represents a drop of 8 cents from the same period a year ago.
For fiscal 2019, he is estimating production of 389,000 ounces with an AISC of $857 per ounces, which would be increases of 3 per cent and 8 per cent, respectively.
Maintaining a "speculative buy" rating, Mr. Paul lowered his target to $13.50 from $16. The average is $15.24.
"Pretium trades at 0.65 times price-to-NAV, a premium to the junior producer average of 0.56 times but we believe the scale, margins and long reserve life at Brucejack should warrant a larger premium over time," he said.
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A “challenging” market continues to offset continued market share gains for Real Matters Inc. (REAL-T), said Canaccord Genuity analyst Robert Young, who lowered his target for shares of the Markham, Ont.-based technology company.
"Real Matters reported better-than-expected Q1 results with net revenue and EBITDA ahead of consensus, although this is in the context of declining revenue driven by mortgage volume declines," he said. "Real Matters had a positive view on 2019 and indicated that January volumes were off to a good start amid lowered U.S. mortgage rates. Appraisal share gains from two wins in the quarter and an expected imminent ramp with a fifth Tier 1 customer (we believe BoA) are further strong elements of the outlook. All of that said, we expect the less mature T&C business and its higher exposure to refi to partially offset more positive appraisal trends. On balance we remain modestly positive."
Mr. Paul lowered his financial expectations for both the second quarter and the entire fiscal 2019 year "to reflect continued market headwinds in a seasonally weak period." His 2019 and 2020 revenue projections fell to $81.2-million and $104.9-million, respectively, from $89.8-million and $117.9-million. His adjusted EBITDA estimates dropped to $7.5-million and $17.1-million from $16.8-million and $28.8-million.
Keeping a "buy" rating, his target for Real Matters shares dipped to $6 from $7.50. The average is $5.56.
"We have increased our discount rate to 15.5 per cent from 13.5 per cent to reflect high forecast uncertainty alongside reduced estimates to reflect expected Q2/F19 seasonality and reduced estimates for growth in F2019 and F2020," he said. "We have kept our BUY rating as we believe the stock is at or near trough levels with support from the company’s buyback heading into the spring mortgage season. We remain confident that the core appraisal business, now broadly built out nationwide, will continue to gain share while delivering operating leverage."
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Believing financing concerns will linger for Eldorado Gold Corp. (EGO-N, ELD-T), CIBC World Markets analyst Cosmos Chiu downgraded his rating for the stock to “underperformer” from “neutral” following the
“Eldorado Gold has announced the decision to suspend the advancement of the Kisladag mill,” he said. “We believe this decision was made, at least in part, due to the lack of availability of acceptable financing for this $500-million project and the debt level that would have resulted from its execution. With EGO’s decision to continue heap-leaching Kisladag, we see heightened risk in the company’s ability to deliver on recovery levels, given past issues and the maturity of the leach pads.”
Mr. Chiu lowered his target to US$3 from US$4. The average is currently $5.62 (Canadian).
Meanwhile, a several analysts upgraded their ratings for Eldorado.
BMO Nesbitt Burns' Andrew Kaip hiked the stock to “outperform” from “market perform” with a $6.50 target.
Mr. Kaip said: “The reaction was justified given the move has, in our view, financially de-leveraged the company, allowing it to generate sufficient free cash flow to retire the $600-million in debt due at the end of 2020. .... We are of the view that there is another 30 per cent in a rebound trade before shares of ELD begin imputing increased exposure to Greece - as such, we are upgrading ELD.”
National Bank Financial’s Michael Parkin raised it to “outperform” from “sector perform” with an $8 target.
Cormark Securities' Richard Gray moved it to “buy” from “market perform” with an $8 target, rising from $5.40.
David Leeder