Inside the Market's roundup of some of today's key analyst actions
Despite its fourth-quarter earnings beating the Street, the outlook for Absolute Software Corp. (ABT-T) points to a slower-than-anticipated acceleration in growth, said Canaccord Genuity analyst Doug Taylor.
Accordingly, he downgraded his rating for the Vancouver-based company's stock to "hold" from "buy."
"Absolute operates in an attractive end-market; investment in cybersecurity is growing," he said. "The company is exiting a year of re-investment. This is expected to translate into accelerating revenue growth and operating leverage. While that showed up in the new fiscal 2018 guidance, the projected growth at 6 – 9 per cent year over year (versus 6 per cent in fiscal 2017) is lower than was anticipated. We have trimmed our estimates. Shares have rebounded and now trade at over 20 times our revised NTM [next 12 months] expectations. We do see upside to the shares as the company builds its fundamentals towards the medium-term goal of 20-per-cent revenue growth with 20-per-cent EBITDA margin. However, until we have better visibility as to when we will see that type of growth and profitability, we find the current valuation full."
On Thursday, the company reported fourth-quarter revenue of $23.2-million, missing both the projections of Mr. Taylor ($24-million) and the Street ($23.9-million). Earnings before interest, taxes, depreciation of amortization of $2-million, exceeding estimates ($1.6-million and $1.7-million, respectively), due largely to lower expenses.
Though he said the company's fiscal 2018 guidance "directionally improved," they fell short of his expectations. He had projected 10-per-cent revenue growth, versus its new 6 to 9-per-cent estimate. His EBITDA margins estimate of 12 per cent was also higher than the company's (9 to 11 per cent).
With those changes, Mr. Taylor's lowered his EBITDA estimate to $9.9-million, in line with the consensus, from $12.1-million. His revenue projection fell to $98.1-million from $101.6-million (consensus is $100.1-million).
However, he said Absolute is "poised to better participate in the strong cybersecurity end-market," adding:
"We maintain a positive view of Absolute's product and market positioning, given: 1) The level of investment in cybersecurity solutions is steadily rising; 2) Absolute's persistent endpoint agent technology is largely without a functional competitor or peer; 3) There continues to be opportunity to leverage this unique technology into a platform for better monitoring and management of third-party software agents."
Mr. Taylor's target price for the stock fell by a loonie to $8. The analyst consensus price target is $8.66, according to Thomson Reuters data.
Elsewhere, Industrial Alliance Securities analyst Blair Abernethy maintained a "buy" rating and $11 target.
"At this point, we expect to continue to value Absolute on a multiple of revenue for another year or so until we see more stable quarterly EPS results," said Mr. Abernethy. "Management believes that it has positioned the business to be on a 20-per-cent annual revenue growth at 20-per-cent margins within the next few years. Were these aspirational targets to be realized, we would expect to see significant multiple expansion in the stock. Absolute is currently trading at 2.1 times EV/Sales (on fiscal 2018 estimates), which we view as attractive relative to its near-term growth potential, recurring revenue base, and comparable SaaS multiples."
Citing its attractive valuation following a "solid" second-quarter financial report and "positive" reserve update to its Sabodala mine in Senegal, RBC Dominion Securities analyst Stephen Walker upgraded Teranga Gold Corp. (TGZ-T) to "outperform" from "sector perform."
On July 19, Toronto-based Teranga announced its proven and probable reserves at its Sabodala gold operation increased to 2.7 million ounces of gold, a rise of more than 400,000 ounces over the previous estimate.
Mr. Walker said the company's growth profile is "anchored" by "stable" five-year production at the mine.
"The reserve update is expected to improve the 5-year open pit production profile to an average of 212k ounces per year at mine-site AISC [all-in sustaining cost] of $850 per ounce from 2018-2022, versus our previous forecast of 180k ounces per year at $865 per ounce," he said. "We expect cash costs and all-in sustaining costs to decline over the 2018 to 2020 period before increasing in 2021 due to the assumed timing of waste stripping. We note that Franco-Nevada (FNV-T) holds a gold stream entitling it to 22.5k ounces per year of Sabodala gold production from 2014-2019 and a 6-per-cent gold stream thereafter, with ongoing payments to Teranga of 20 per cent of the spot gold price."
He added: "Teranga is also progressing development of the Banfora gold project in Burkina Faso. This project is expected to increase Teranga's annual gold production by over 50 per cent beginning in mid-2019. Teranga intends to file an updated Feasibility Study for Banfora in August 2017 and project construction is expected to begin by year-end. We estimate initial capital to be in the $200-million range."
With the upgrade, Mr. Walker lowered his target price for the stock to $5 from $5.50 to reflect "more conservative resource upside value on an enterprise value per ounce basis, increased Sabodala capex and Banfora operating cost estimates, as well as the impact of a stronger Canadian dollar on our USD to CAD valuation conversion." The analyst consensus price target is $6.01.
"Teranga's shares currently trade at 0.61 times our NAV [net asset value] and 6.9 times 2017-2019 estimated enterprise value /adjusted cash flow, versus the Tier III gold producer averages of 0.69 times and 7.8 times, respectively," he said. "Our $5.00 price target implies a 74-per-cent return, above the 57-per-cent average for other Tier III gold producers under coverage, which supports our upgraded rating of Outperform. We expect Teranga's valuation discount to narrow as the company should consistently deliver on operational guidance at Sabodala, de-risk the Banfora project (beginning with a feasibility study expected this month) and provide positive exploration updates."
Desjardins Securities analyst Michael Markidis raised his target price for units of Allied Properties Real Estate Investment Trust (AP.UN-T) upon resuming coverage of the stock following its $300-million equity financing.
On Thursday, the Toronto-based REIT announced the closing of the offering of 7,695,000 units at a price of $39.00 per unit for gross proceeds of $300,105,000. The offering price represented a 5-per-cent premium to its second-quarter book value per unit (BVPU).
"An immediate use of proceeds was not identified in conjunction with this raise," said Mr. Markidis. "That being said, the capital required to support AP's development program is substantial and management recently commented that the acquisition environment had become more favourable (vs the 1H of the year)."
With an unchanged "buy" rating, his target rose to $43 from $40. Consensus is $41.34.
"Taking into account strong office fundamentals in downtown Toronto (and the potential impact on rent growth 2–4 years out), we have compressed the cap rate utilized in our NAV assumption by 25 basis points to 5.50 per cent," the analyst said. "This is the key driver of the increase in our NAV to $37.20 (vs $34.90 previously). Holding our valuation basis for AP constant at a 15-per-cent premium to NAV, our target price expands to $43 (was $40), which equates to a 19 times multiple on our estimated FFO [funds from operations] in 2019."
Laurentian Bank Securities analyst Marc Charbin downgraded Dealnet Capital Corp. (DLS-X) to "hold" from "buy," expressing concerns over organic growth and loan quality.
"Originations were down by 54 per cent in Q2/17," said Mr. Charbin. "This is especially concerning given that comparable companies increased originations or revenue between 14 per cent and 16 per cent, unemployment is decreasing across Canada, housing prices have made households flush with equity to make home improvements and DLS has added dealer partners. Past due loans remain elevated and are inconsistent with a prime loan book (past due loans decreased to 4.9 per cent from 5.1 per cent quarter over quarter)."
His target for the stock fell to 20 cents from 50 cents. Consensus is 57 cents.
"We have revised our forecast to reflect the origination volume in Q2/17 persisting for the remainder of this year and throughout 2018," he said. "We believe the Company's previous reliance on door-to-door sales which are now banned in Ontario has impacted originations and will continue to do so. The development of online direct-to-consumer sales channels may not add to 2017E volume and we cannot currently formulate a reasonable estimate for 2018E. We have also increased overhead costs to reflect Q2/17 performance and the expectation that elevated costs will need to be incurred to develop new sales channels. Currently, a consolidated profit from DLS is not in sight."
Profit growth remains elusive for Wal-Mart Stores Inc. (WMT-N) despite "solid" sales trends boosted by e-commerce, said RBC Dominion Securities analyst Scot Ciccarelli.
"Through store improvements and e-commerce growth, Walmart has maintained solid traffic and comp trends despite a difficult retail environment," he said. "E-commerce growth has been impressive (up 60 per cent), but boosted by [stock keeping unit] additions, which will moderate at some point. Finally, profit growth remains elusive due to investment spending and competitive pressures, which will likely limit further upside in WMT shares."
On Thursday, the U.S. retail giant reported second-quarter financial results that were largely in line with expectations. Earnings per share of $1.08 equaled Mr. Ciccarelli's projection and beat the Street by a penny. Comparable same-store sales growth of 1.8 per cent in the U.S. also met estimates.
"Walmart U.S. has now posted positive comps for 12 straight quarters and comps (ex-fuel) accelerated on a 2-year basis to 3.4 per cent from 2.4 per cent and on a 3-year basis to 4.9 per cent from 3.5 per cent," the analyst said. "Stacked traffic faded a bit from 1Q coming in at 2.5 per cent on a 2-year basis (from 3.0 per cent in 1Q), which is about where it was for most of 2016. Traffic trends remain encouraging (11 consecutive quarters) considering the difficult retail environment. Comps and traffic patterns continue to be augmented by the acceleration in e-commerce growth (Sales up 60 per cent year over year; GMV [gross merchandise volume] up 67 per cent year over year), which added 70 bps overall to the comp. All three major categories posted positive LSD comps, with food generating its strongest quarterly performance in five years, boosted by 30 bps of inflation (e.g., meat and produce), excluding price investments. Comp guidance remains consistent at 1.5-2.0 per cent and the inclusion of Jet.com in 4Q (one month in 3Q) should provide additional support."
With an "underperform" rating, Mr. Ciccarelli's target rose by a dollar to $77 (U.S.). Consensus is $81.94.
"Walmart's productivity loop— operate for less, buy for less, sell for less, and grow sales — has been a very successful and powerful tool for the company, helping to create the biggest retailer on the planet," he said. "However, we believe that due to its already immense market share and the likelihood that everyone who was going to shop at Walmart already shops at Walmart, the company's productivity loop has entered the phase of diminishing returns. Furthermore, we believe that material, incremental share gains within the all-important grocery category (56 per cent of Walmart U.S. sales) are likely to become more difficult to achieve given intensifying competition from legacy grocery competitors, deep discounters, and the growing importance of Fresh and Organic products, which don't play as well to its strengths.
"Finally, we expect e-commerce to continue gaining channel share versus brick-and-mortar retailing given its consumer advantages. While Walmart is a leader on the omni-channel front, growing its e-commerce business is unlikely to move the needle in the near future, and we expect it to be margin-dilutive over time. The company has undergone a two-year, 15–20-per-cent downward reset to earnings from competitive pressures and accelerated investments in technology and labor. While management has "lowered the bar," we believe future sales and earnings growth will continue to be challenged, and given this less certain earnings growth outlook, multiple expansion in the near/medium term seems unlikely."
Elsewhere, BMO Nesbitt Burns analyst Wayne Hood did not change his "market perform" rating or $80 target.
"While we see challenges ahead, including emerging competition from hard discounters and an adverse margin mix from growth in e-commerce, we believe there is a path to better relative sales and transaction growth over the next 12 months," said Mr. Hood.
In other analyst actions:
RBC Dominion Securities analyst Insoo Kim downgraded PNM Resources Inc. (PNM-N) to "sector perform" from "outperform" with an unchanged $40 target. Consensus is $37.47.
"We believe the stock now fully incorporates a constructive New Mexico rate case decision as well as a healthy premium for a potential takeout," said Mr. Kim. "While we continue to like the company's above-average earnings and dividend growth profile with potential sustainability beyond 2019, we move to the sidelines for now."
Stifel analyst Steve DeVill downgraded Blue Apron Holdings Inc. (APRN-N) to "hold" from "buy" and lowered his target to $6 (U.S.) from $8. Consensus is $7.09.