MTS outlook slashed as Allstream deal quashed

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Inside the Market's roundup of some of today's key analyst actions. This post will be updated with more analyst commentary during the trading day.

Analysts are quickly cutting their price targets on Manitoba Telecom Services Inc. and warning of a possible hit to its dividend after the federal government late Monday quashed an Egyptian billionaire's bid to buy the telecom's Allstream division for unspecified security concerns.

Canaccord Genuity downgraded its rating on MTS to "sell" from "hold" and cut its price target to $30 (Canadian) from $34. Desjardins Securities maintained a "hold" rating but cut its target to $32 (Canadian) from $36. RBC Dominion Securities downgraded its rating to "sector perform" from "outperform" while slashing its price target to $31 from $36.

Analysts believe the company's financials are going to suffer from Ottawa's decision to reject the bid by Accelero Capital Holdings, putting its dividend at risk. And they see little chance of another bid emerging - at least not for the same $520-million price-tag.

"This comes as a huge surprise," commented Canaccord Genuity analyst Dvai Ghose. While declining pension deficits at MTS may help the company sustain the dividend, he said MTS has now become "a higher risk stock."

In a research note, he outlined four implications from Ottawa's actions: "We believe 1) there are no other Allstream bidders, at least not anywhere near the $520-million EV (enterprise value) offered by Accelero; 2) dividend sustainability risk has resurfaced; 3) a bid for the incumbent division is very unlikely if Allstream is not sold; and 4) foreigners now seem even less likely to compete in Canadian telecom, even though foreign ownership rules were relaxed in June 2012 and the Government has tried to entice foreign carriers to become wireless new entrants. This would appear to benefit wireless incumbents."

Euro Canada analyst Rob Goff agreed that the decision could have ramifications far beyond MTS. "The move will send a negative message to potential foreign investors and even domestic private equity who will now have concerns about potential exit prospects with transfer of license issues and foreign buyer eligibility concerts," Mr. Goff said in a research note. He has no target or rating on the stock.

MTS was going to use the proceeds from the sale to pay down debt of $70-million and fund its pension with a $170-million payment. "At this time, these de-risking initiatives will probably be put on hold and thus revive investor concerns regarding the pension issues that plagued the company in the past," said Desjardins analyst Maher Yaghi.

"As a result of the failed sale of Allstream, we have decreased our enterprise value/EBITDA (earnings before interest, taxes, depreciation and amortization) valuation multiple on MBT to 6.0x (from 6.5x), which we view as fair given the lackluster growth prospects at Allstream and  the higher risk of the business," said Mr. Yaghi. "We do not see  immediate potential buyers for Allstream on the horizon, as these assets were heavily shopped prior to the proposed sale to Accelero."

He suggests dividend-seeking investors consider Bell Aliant instead of MTS. He rates Bell Aliant as a "buy with a $27.50 price target, and believes its attractive dividend yield of 7.4 per cent is well supported by internal free cash flow.

RBC Dominion securities analyst Drew McReynolds also suggests investors look beyond MTS. "We now consider the likelihood of a near-term Allstream sale to be low. As such, we believe the story lacks a near-term catalyst and we see better risk-adjusted returns elsewhere in the sector," he said.

MTS late Monday provided some figures that showed the immediate potential negative impact resulting from Ottawa's rejection of the deal. It said its EBITDA and free cash flow guidance has been reduced by $50-million to $60-million and earnings per share guidance by $0.60-0.70, in part due to $35-million of non-recoverable charges associated with the deal.

Target: The average analyst price target is $32.11, according to Bloomberg data.

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M Partners analyst Brendon Abrams upgraded Mainstreet Equity Corp. to "buy" from "hold," noting that the company has significantly underperformed the broader real estate sector of late.

Since July 10, the stock has fallen about 12 per cent, compared to only a 3.5 per cent decline in the BMO Equal Weight REIT index.

That has made the stock's valuation more attractive, and Mr. Abrams believes it's among the real estate companies best positioned for share price appreciation moving forward for three reasons: its ability to generate organic net operating income growth, its exposure to strong performing Western Canadian markets, and its ability to grow without issuing equity.

Target: Mr. Abrams maintained a price target of $35.50 (Canadian). The average target is $35.21.

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Raymond James analyst Alex Terentiew has come away from an analyst and investor tour of HudBay Minerals Inc.'s Constancia copper project in Peru with more confidence in the company's ability to meet its development targets.

He now has less concern about the need for additional funding and has made a slight change in his valuation methodology, resulting in a boost in his price outlook for the stock.

"The start-up schedule and CapEx have the potential to beat our estimates, which may prove to be overly conservative," said Mr. Terentiew. "However, we are leaving our two-quarter start-up delay and $150-million capital expenditure overrun in our forecasts as we await to see HudBay's success in completing the remaining negotiations with the locals regarding resettlement and land access for the power line."

"Additional funding from another gold stream and an off-take linked loan are highly likely to be secured, reducing the risk of a funding shortfall. We expect both could be announced by year end," he added.

Target: Mr. Terentiew raised his price target to $9 (Canadian) from $8.25 and maintained a "market perform" rating. The average target is $9.61.

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While Hewlett Packard Co. stock is inexpensive, there isn't any catalyst on the horizon to incite a rally, said BMO Nesbitt Burns analyst Keith Bachman.

Mr. Bachman had earlier stated that he is not in favour of HP splitting up the company, but he now thinks all strategic choices should be reviewed by the company in the months ahead given that most comparable firms are trading above HP's current multiple of about 6 times earnings.

Target: Mr. Bachman reiterated a "market perform" rating and cut his price target to $24 (U.S.) from $27. The average target is $24.61.

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Although Exchange Income Corp.'s third-quarter guidance this week was "a shocker," with EBITDA expected to come in at about half of last year's levels due to higher costs at its WesTower Communications subsidiary, the company's dividend remains sustainable, said CIBC World Markets analyst Kevin Chiang.

"While EIC's third-quarter guidance was shocking in the magnitude of the increased expenses related to WesTower, our outlook for the next 12-18 months has not changed significantly as we knew the challenges facing the division," he commented. "In addition, the abnormal expenses in the third quarter look to be ring fenced in the quarter."

He reiterated a "sector performer" rating on the stock.

Target: Mr. Chiang cut his price target to $22.50 (Canadian) from $25.25. Stonecap Securities cut its price target on the stock to $27 from $31 and reiterated an "outperform" rating. The average target is $24.75.

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In other analyst actions today:

Stonecap Securities initiated coverage on Canacol Energy with an "outperform" rating and $6.20 (Canadian) price target.

Northland Capital Markets initiated coverage on Canadian Solar with an "outperform" rating and a price target of $26 (Canadian).

Sterne Agee downgraded J.C. Penney to "neutral" from "buy" and cut its price target to $9 (U.S.) from $18.

UBS boosted its price target on MDC Partners to $32 (U.S.) from $24 and maintained a "buy" rating.

Canaccord Genuity raised its price target on EnteroMedics to $3 (U.S.) from $1.50 and reiterated a "buy" rating.

Stifel Nicolaus raised its price target on Yahoo to $41 (U.S.) from $33 and maintained a "buy" rating.

Jefferies initiated coverage on Walgreen with a "hold" rating and $62 (U.S.) price target.

Jefferies initiated coverage on Safeway with a "hold" rating and $32 price target.

Deutsche Bank downgraded Alaska Air Group to "hold from "buy" and kept its price target at $70 (U.S.)

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For more analyst actions, breaking investing news and analysis, follow Darcy Keith on Twitter at @eyeonequities