Labrador Iron Ore Royalty Income Fund
Inside the Market's roundup of some of today's key analyst actions. This file will be updated often during the trading day so check back for new details.
The acquisition of Teco Energy Inc. by Emera Inc. (EMA-T) provides a "fairway to growth through 2019," said BMO Nesbitt Burns analyst Ben Pham
The deal, which totals $10.4-billion (U.S.) including debt, will help support dividend growth targets while reducing commodity exposure, according to Mr. Pham
"We believe the TECO acquisition is highly strategic for EMA. Other than the obvious benefits of increased scale and geographic and regulatory diversification, the acquisition provides access to a future low-risk growing earnings stream and a new natural gas utility platform," said the analyst. "It also supports the 8-per-cent dividend growth target through 2019 and accelerates EMA's regulated earnings mix to the upper end of targeted 75-85 per cent compared with 67 per cent in 2014."
He added: "While the acquisition metrics appear rich, they are below recent transactions and more importantly do not reflect the significant future earnings potential of TECO, in our view. To that, we add that EMA is also acquiring $1.7-billion of [net operating losses]. What that means is on a [funds from operations per share] basis, the deal is significantly more accretive."
Following the deal, Mr. Pham's earnings per share estimate for 2015 was unchanged at $2.38, while his 2016 projection was lowered to $2.14 from $2.22 due to financing dilution. His 2017 EPS forecast rose to $2.62 from $2.54.
"While we're reiterating our Market Perform rating for EMA given the large financing overhang and deal risk, we see long-term upside as cash flow and dividends rise over time, creating a positive bias for long-term investors seeking an attractive, low-risk growing yield amid a 1.5 per cent bond yield environment," he said.
He raised his price target for the stock to $47 (Canadian) from $44.50. The analyst consensus price target is $47.06, according to Thomson Reuters.
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With operating costs declining and production "rapidly" rising, the risk profile for Labrador Iron Ore Royalty Corp. (LIF-T) and Iron Ore Company of Canada, which LIF holds a 15.1-per-cent-equity interest, have "diminished significantly," said Raymond James analyst Alex Terentiew.
On the heels of a Sept. 3 disclosure from Rio Tinto on IOC, which featured "impressive cost and production guidance," and boosted LIF's net asset value by 22 per cent, Mr. Terentiew upgraded his rating for the stock to "outperform" from "market perform."
"Higher production, coupled with cost reductions at IOC, increases both the cash flow from LIORC's royalty and the ability of IOC to pay a dividend to its shareholders," he said. "We expect LIORC will maintain its regular $0.25/share quarterly dividend and slowly begin rebuilding its cash reserves over the course of 2016, putting it in a position to pay a special dividend in 4Q16E (at our 2016 iron ore price of $55/tonne, and assuming a $35-per-tonne premium for pellets is maintained). Our estimates assume that LIORC aims to rebuild a cash balance closer to $50-million before recommencing paying out a special dividend."
He raised his target price for the stock to $19 (Canadian) from $15. The analyst consensus is $17.07.
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Canaccord Genuity analyst Mark Rothschild called the a management change at Granite Real Estate Investment Trust (GRT.UN-T) "surprising" in the wake of the news of the termination of chief executive officer Tom Heslip and chief financial officer Mike Forsayeth becoming interim CEO.
"In our view, Tom Heslip was a highly capable CEO with significant real estate experience," said Mr. Rothschild. "He managed Granite well through the past few years, and dealt effectively with Magna while negotiating lease extensions at many properties. Our previous criticism was related to the strategy and pace of growth. In particular considering the REIT's under-levered balance sheet, we believed that there was an opportunity to grow the REIT accretively while reducing the exposure to Magna. Though this opportunity still remains, achieving it earlier could have led to increased negotiating leverage with Magna."
The analyst said he believes the REIT's Board was "not pleased" with the strategy and execution by Mr. Heslip. Further, going forward, he said he is less optimistic that Granite will be sold.
"Specifically, we do not believe that there are many REITs that would acquire a globally diversified portfolio primarily leased to Magna," he said.
Maintaining his "hold" rating, he lowered his price target to $41 (Canadian) from $44. Consensus is $44.60.
"Our relatively conservative target price reflects our expectation that there will be no value surfacing event to come from the strategic review," he said.
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There is emerging evidence of a "rebalance" in global oil markets, said Credit Suisse analyst Edward Westlake, though he said it's slower than anticipated.
"There has been a sharp deterioration of the global economy which has depressed both the front end and back end of the WTI curve," said Mr. Westlake, who lowered his oil price forecasts and, accordingly, downgraded EOG Resources Inc. (EOG-N) to "neutral" from "outperform" and Denbury Resources Inc. (DNR-N) to "underperform" from "neutral."
He added: "At the end of last year we argued there would be a rebalance in oil markets from the December trough. The modest imbalance in global supply and demand would be rebalanced through continued growth in global oil demand, a short-term supply response in the U.S. which could act as a bridge to the main event -- a larger supply response from international non-OPEC production as mature field decline kicked in, particularly from 2017 onwards…. We are finally seeing a U.S. supply response in the recent data but global economic concerns have proved a more powerful headwind to oil markets and energy equities. International non-OPEC supply has held up slightly better than expected as companies have focused on maximizing near term production. We've been impressed with the capital productivity improvements in U.S. shales, which will likely result in a lower medium-term oil price."
Mr. Westlake dropped his Brent forecast for 2015 to $54 (U.S.) from $62.88; 2016 to $58 from $76 and 2017 to $65 from $80. His West Texas Intermediate projections dropped to $48.60 from $58.35 for 2015; $54 from $72 for 2016 and $60 from $75 for 2017.
For EOG Resources, he lowered his price target to $84 from $98, compared to a consensus of $94.89, based on the reduced price outlook.
"While EOG remains well positioned in the weak crude price environment; strong balance sheet, core Eagle Ford assets that deliver among the best returns in U.S. shale and the ability to deliver growth within cash flow in 2016, the stock has relatively outperformed the peer group (down 16 per cent year to date versus the EPX off 26 per cent) and we prefer other opportunities with more upside to [net asset value] in the group. EOG has been one of the more prudent operators in response to lower pricing, choosing to let production fall and build its backlog of uncompleted wells that will give it an ability to respond quickly when prices do firm up, but given expectations for a price recovery to take a bit longer we think there will be a better entry ahead."
For Denbury, he also lowered his price target to $1 from $6, versus a $6.23 consensus, "given concerns on how the company will be able to navigate a lower for longer crude price environment on several fronts; leverage, dividend sustainability and ability to reinvest in the business."
He added: "DNR does benefit from a more stable, lower decline production base and on the flip side, longer cycle projects (relative to shale) and lower expected capital investment will limit the company's ability to respond in terms of production growth when prices do improve. The company has been focused on reducing operating expenses and CO2 utilization in the weak price environment, but we remain concerned that there may be some sacrifice to recovery that may not be known for some time."
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Advantage Oil & Gas Ltd. (AAV-T) offers investors a "relatively clear, sound investment thesis for a mid-cap [exploration and production] stock," said CIBC World Markets analyst Dave Popowich.
He initiated coverage of the stock with a "sector outperformer" rating.
"The company is a cost leader in the Montney gas play, a distinction that should help facilitate consistent, self-funded [net asset value] growth for several years to come," said Mr. Popowich. "Recent drilling results also suggest the company's capital efficiencies continue to improve, which bodes well for both production growth objectives and NAV growth."
"In our experience, these qualities are typically supportive of premium valuation multiples over time. However, given that Advantage currently trades in line with the peer group on most key metrics, we are biased to the upside on relative valuation as the company continues to deliver on its objectives."
He set a 12- to 18-month target price of $10.50 (Canadian). Consensus is $9.21.
He added: "We are not deterred by the stock's relative outperformance over the past 12 months, and believe a continued bullish outlook is justified."
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In other analyst actions:
Aetna Inc (AET-N) was raised to "outperform" from "sector perform" at RBC Capital by equity analyst Frank Morgan. The 12-month target price is $162 (U.S.) per share.
Cinemark Holdings Inc (CNK-N) was downgraded to "neutral" from "outperform" at Macquarie by equity analyst Chad Beynon. The 12-month target price is $42 (U.S.) per share.
Canadian National Railway Co (CNR-T) was raised to "buy" from "hold" at TD Securities by equity analyst Cherilyn Radbourne. The 12-month target price is $85 (Canadian) per share.
Encana Corp (ECA-N) was raised to "buy" from "hold" at GMP by equity analyst Sameer Uplenchwar. The target price is $15 (U.S.) per share.
Marvell Technology Group Ltd (MRVL-Q) was downgraded to "neutral" from "overweight" at JPMorgan by equity analyst Harlan Sur. The target price is $12 (U.S.) per share.
Micron Technology Inc (MU-Q) was raised to "buy" from "neutral" at MKM Partners by equity analyst Ian Ing. The 12-month target price is $23 (U.S.) per share.
Office Depot Inc (ODP-Q) was raised to "buy" from "neutral" at B. Riley by equity analyst Scott Tilghman. The 12-month target price is $11 (U.S.) per share.
Charles Schwab Corp (SCHW-N) was raised to "overweight" from "neutral" at JPMorgan by equity analyst Kenneth Worthington. The 6-month target price is $39 (U.S.)per share.
SanDisk Corp (SNDK-Q) was raised to "overweight" from "neutral" at JPMorgan by equity analyst Harlan Sur. The target price is $70 (U.S.) per share.
Wells Fargo & Co (WFC-N) was raised to "buy" from "hold" at Evercore ISI by equity
RBC Capital downgraded Coca-Cola Enterprises (KO-N) to "sector perform" from "outperform."
Piper Jaffray reiterated a "neutral" rating on B&G Foods but raised the price target to $38 (U.S.) from $31 after its acquisition of Green Giant.
UBS initiated coverage on investment bank Houlihan Lokey Inc. (HLI-N) with a "buy" rating and a price target of $25 (U.S.). Keefe, Bruyette & Woods initiated coverage on the company with an "outperform rating" and a price target of $28. Goldman Sachs initiated coverage with a "neutral" rating and a price target of $25.
B. Riley initiated coverage on PayPal Holdings Inc. (PYPL-Q) at "neutral."
Credit Suisse upgraded Southwestern Energy (SWN-N) to "neutral" from "underperform" with a price target of $18 (U.S.), down from $19.
Cott Corp (COT-N) was raised to "Outperform" at RBC.
David Leeder