Inside the Market's roundup of some of today's key analyst actions
Desjardins Capital Markets has reduced its expectations for stock performance in the year ahead for the entire Canadian power and utilities sector to reflect rising interest rates. The sector in general has seen share prices move down this year in response to the upward trend in rates, and Desjardins is revising its cost of equity assumptions as a result.
"We maintain our neutral outlook for the sector and believe investors should focus on companies under coverage that have the strongest growth outlook and potential catalysts," Desjardins analyst Bill Cabel writes.
Independent power producers' stocks are down by 8.1 per cent year to date on average, largely as a result of rising rates, which are generally seen as a negative for valuations in high-dividend sectors.
"While accounting for this expectation ahead of the market would have been ideal, we had not done so and are now forced to play a bit of catch-up," Mr. Cabel said.
Since last adjusting cost of equity assumptions in mid-2016, Canadian rates have risen by more than 100 basis points, while the market is expecting up to four rate hikes this year. "At this point, we are incorporating a 50-basis-point increase in our cost of capital assumption across our coverage," the analyst said.
Stock target prices have declined by about 4 per cent as a result. For Innergex Renewable Energy Inc., in particular, the new implied one-year return called for a reduced stock rating, from "buy" to "hold," Mr. Cabel said.
The full list of target cuts is below:
Algonquin Power and Utilities Corp. (AQN-T): Buy rating, target to $15.50 from $16
Northland Power Inc. (NPI-T): Buy rating, target to $27 from $28
Boralex Inc. (BLX-T): Buy rating, target to $25.50 from $26
Pattern Energy Group Inc. (PEGI-T): Buy rating, target to $23 from $24
Innergex Renewable Energy Inc. (INE-T): Buy rating, target to $15.25 from $16
Brookfield Renewable Partners LP (BEP-UN-T): Hold rating, target to $43.50 from $45
Transalta Renewables Inc. (RNW-T): Hold rating, target to $13.25 from $14.50
Crius Energy Trust (KWH-UN-T): Buy rating, target to $11 from $11.25
Valener Inc. (VNR-T): Hold rating, target to $22.50 from $23
Altacorp Research analyst Chris Murray downgraded his rating on Aecon Group Inc. (ARE-T) to "underperform" from "tender" while cutting his price target to $16.75 from $20.37.
The proposed $1.5 billion takeover of Aecon by China's CCCC International Holding Ltd. has raised security concerns, prompting the federal government in February to order a full national security review of the deal.
Mr. Murray now believes there is "very low probability" of the transaction being approved as is, given the security concerns expressed by Ottawa and other allies around telecom infrastructure.
"We would note in the Federal Government's most recent budget it called out a specific requirement to protect Canada's telecommunications infrastructure with additional funding, highlighting it is an area of national concern and commentary among a number of allies and former Canadian security officials have suggested concerns in exposing new networks to Chinese contractors and equipment suppliers. If we were to equally weight the probability of a failed transaction either by having the transaction blocked at a fair value of $13.10 or completed over time at $20.37, we arrive at a fair value of approximately $16.75 after rounding. We believe the risk-return profile of the transaction given the current share price $18.71 and a potential negative return to target has us move to an Underperform rating from a Tender rating," the analyst said in a note.
Gibson Energy Inc.'s (GEI-T) disposition of its U.S. environmental services business segment for $125-million is a "good start" to the company's restructuring plans, Desjardins Capital Markets' analyst Justin Bouchard said. "We had previously noted a sales price midpoint of about $137.5-million so the disposition comes in a little below our number – but it is still a decent price."
CIBC also saw the deal as a positive, and upgraded Gibson's stock to "neutral" from "underperform," citing also the recent decline in share price. The stock is down by about 10 per cent year to date.
Gibson is planning on $275-million to $375-million in dispositions by 2019 – part of "a landmark restructuring of its business model," Mr. Bouchard said. "Overall, the deal … provides the company with some breathing room from a capital budget and dividend perspective."
Mr. Bouchard lowered his estimates for Gibson's 2018 and 2019 earnings to reflect the sale. He maintained a $21 price target and a "buy" rating. The average analyst price target on the stock is $19.50.
Oracle Corp. (ORCL-N) may have missed the Street's expectations when it released third-quarter financial results after the closing bell on Monday, but the company is still well-positioned in cloud computing technologies, Credit Suisse analyst Brad Zelnick said.
"Against a healthy IT spending backdrop, third-quarter results generally underwhelmed on most relevant metrics. Fourth-quarter guidance was similarly disappointing," Mr. Zelnick said. But the company has "underappreciated durability," he added.
The company's stock was down by about 9 per cent in early-morning trading as a result of the earnings miss, "presumably reflecting the reality that despite some segments that are growing 50-per-cent-plus, overall revenue is growing 5 per cent this year," said Canaccord Genuity analyst Richard Davis. "We will let the dust settle on this name rather than making a potentially rash decision. For now at least, Oracle is cheap enough to keep a 'buy.' Mr. Davis held his target price on the stock at US$53.
Mr. Zelnick reduced his target price to US$60 from US$62, while maintaining an "outperform" rating. The average target on the stock is US$57.42.
Klondex Mines Ltd. (KDX-T) received a "premium acquisition offer," when Hecla Mining Co. (HL-N) put a bid on the table worth $462-million in a mix of cash of shares, said BMO Nesbitt Burns analyst Brian Quast. The offer represents a 59-per-cent premium to Klondex's 30-day volume-weighted average share price, and a 72-per-cent premium to last Friday's closing price.
While the deal is still subject to approval from at least two-thirds of Klondex shareholders, it has the blessing of both company's boards, as well as two key shareholders representing almost 25 per cent of outstanding Klondex shares, Mr. Quast said.
The deal has a high probability of going through, said Laurentian Bank Securities' analyst Barry Allan. "We also doubt there will a competing bid for Klondex. The list of potential acquirers is short, and the offer made by Hecla is a good one."
Mr. Quast raised his target price on the stock to $3 from $2.50 and maintained a "market perform" rating.
Raymond James analyst Tara Hassan had a negative initial impression of Alio Gold Inc.'s (ALO-T) deal to acquire Rye Patch Gold Corp. (RPM-X). "While we welcome the geographical diversification … it comes at the cost of substantial share dilution and the addition of debt to the balance sheet," Ms. Hassan said.
On Monday, Alio announced an agreement to acquire Rye Patch in an all-equity deal worth about $128-million. The merger would add Rye Patch's Florida Canyon mine in Nevada to Alio's asset base, though the mine underperformed significantly last year. "There will be questions around asset quality that may present an overhang until more operating data is presented through 2018," Ms. Hassan said.
She maintained an "underperform" rating on Alio's stock, with an unchanged $7.25 target price. "We will evaluate the proposed transaction to determine the impact to our estimates," she said.
Meanwhile, BMO Nesbitt Burns analyst Brian Quast cut his target on Alio to $4 from $5.25 to reflect "volatility in the share prices of smaller gold producers." He rates the stock "market perform."