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.
Desjardins Securities analyst Doug Young expects "decent" fourth-quarter 2015 results for Canadian lifecos, however he feels investors will be more interested in management outlook commentary.
Noting it has been a "tough start" for the sector, with the group down 8.1 per cent over the first two weeks of 2016, Mr. Young said his macro view "remains constructive," but he acknowledged an "increased macro risk." Accordingly, he increased his risk discount across the group by 5-10 per cent and also dropped his target prices for stocks by an average of 3.5 per cent.
"Canadian lifecos gained 4.9 per cent as a group over the last three months of 2015, outperforming the S&P/TSX, which was down 2.2 per cent," he said. "However, over the first two trading weeks so far in 2016, the group has dropped 8.1 per cent on the back of concerns in Asia (eg. growth in China), geopolitical unrest in the Middle East, oil and gas prices hitting multi-year lows and uncertainty around economic growth. Needless to say, it has been a bumpy ride for the lifecos, and we expect this to continue near-term. That said, looking out over the next 12–24 months, we remain constructive on the lifeco space. Our macro views are based on Desjardins Economics Studies' forecasts: U.S. GDP growth of 2.5 per cent, Canadian GDP growth of 1.7 per cent, 50–75 basis point increase in the U.S. federal funds rate, flat Bank of Canada rate, steady increase in U.S. and Canadian 30-year bond yields, U.S./Canadian equity market returns of 6.2 per cent/4.9 per cent and a soft landing in the Canadian housing market."
His target changes were:
- Sun Life Financial Inc. (SLF-T, buy) to $49 from $50. Consensus: $48.50.
- Manulife Financial Corp. (MFC-T, buy) to $25 from $27. Consensus: $25.63.
- Industrial Alliance Insurance and Financial Services Inc. (IAG-T, buy) to $48 from $49. Consensus: $47.20.
- Great-West Lifeco Inc. (GWO-T, hold) to $36 from $37. Consensus: $37.36.
"Whereas capital deployment was the main theme for the lifecos in 2015, we view management execution as the focal point over the next 12–24 months," said Mr. Young. "Recall that Manulife officially began its DBS bancassurance relationship on Jan. 1, 2016, Sun Life's acquisition of Assurant's U.S. group employee benefit business should close in 1Q16 and Great-West continues to integrate three U.S. pension businesses. The aforementioned acquisitions/partnerships, combined with other actions such as expense efficiency initiatives and turnaround of certain businesses, should help drive decent core earnings growth and support ROEs and dividend increases over the next year.
"That said, we believe there are still a number of headwinds. First, uncertainty around the macro environment could weigh on rates and markets in the near term, especially in Canada, as mentioned earlier. Second, while the U.S. insurance market has been de-emphasized or exited by a few lifecos, legacy businesses could weigh on earnings and ROEs over the next few years. Third, while lifecos have comfortable regulatory capital ratios, outcomes from capital and accounting rule changes remain uncertain and the added disclosures on holding company [Minimum Continuing Capital and Surplus Requirements] may add noise. Fourth — and this is longer-term — the eventual adoption of IFRS Phase II will likely add volatility to lifeco results."
BMO Nesbitt Burns analyst Tim Casey upgraded Stingray Digital Group Inc. (RAY.A-T) to "outperform" from "market perform" in reaction to a recent share price weakness and an "improved" earnings profile.
"Shares of Stingray have declined roughly 10 per cent over the last two quarters and are now trading slightly below issue price," said Mr. Casey. "We believe the earnings profile of the company has actually increased during this period based on acquisitions to date and currency exchange trends. Moreover, management has indicated the current M&A pipeline is encouraging. Negative sentiment in global equity markets could be helpful to an asset buyer like Stingray. Based on the foregoing, we think current price levels represent an attractive entry point."
Based on a revision to his earnings projections, Mr. Casey also increased his target price for the stock to $9 from $8. The analyst consensus is $9.53.
He said the decline "implies the company had a terrible year. In fact, it was not all that bad."
"Production was flat year over year and costs were bottom quartile," said Mr. Lesiak. "The core assets (70 per cent of net asset value) of El Penon (showing age but still a great mine, strong exploration), Chapada (new discovery, expansion, optionality) and Malartic (steady, low cost) performed well. The Brio assets were not sold but were turned around operationally, which is more important, in our opinion. The balance sheet improved partly due to a well-timed minor streaming deal and dividend cut, but improved nonetheless. YRI received positive news out of Argentina where a new pro-business government could help re-rate the local portfolio. The key issue in 2015 was guidance was not conservative enough and management did not do enough to fix the perceived alignment issues. The first of these issues appears to have been solved based on recent guidance. The question of whether management has listened to its shareholders on executive comp will be answered with year-end results."
Mr. Lesiak noted Yamana's 2015 gold production reached merely the lower end of the guidance "despite initial conservatism" with production missing the mid-point by 2 per cent and by-product costs missing by 9 per cent. He pointed to grade issues at the company's flagship El Penon mine in Chile as the chief reason for the miss, while noting the Jacobina (Brazil) and Mercedes (Mexico) "also lagged expectations."
"The good news is that each of these assets has shown a strong improvement into year-end 2015 and is expected to exhibit further improvement into 2016," he said. "Fourth-quarter 2015 production was 6 per cent higher sequentially."
He added: "On a production basis, 2016/17 is expected to look a lot like 2015 … while costs decline some 10 per cent to $605/ounce (co-product) given very strong tailwinds from weaker producer currencies. While the decline in the copper prices will negatively impact (approximately $100-million) margins, we still forecast YRI to generate $140-million in free cash flow in 2016, more than sufficient to repay the $100-million in debt coming due in 2016, fund Cerro Moro and the dividend and a modest further reduction in the revolver. We believe the further reduction in annual dividend announced (6 cents to 2 cents) showed caution but may have sent the wrong message (balance sheet distress)."
Maintaining his "buy" rating for the stock, Mr. Lesiak lowered his target price to $5 from $5.25 in reaction to recent guidance revisions. The analyst consensus is $6.22.
The "unrelenting" decline in commodity prices will continue to hurt Canadian energy service companies in 2016, said Industrial Alliance Securities analyst Elias Foscolos.
In reaction to reduced capital spending across the sector and a decline in drilling rig counts, he updated his financial expectations and target prices. He also upgraded Critical Control Energy Services Corp. (CCZ-T) to "speculative buy" from "hold" after it obtained bank covenant relief and based on a weaker share price.
"Since the beginning of last year, the equity valuation of the Canadian Energy Services sector has decreased substantially, resulting in a 42-per-cent decline since the start of 2015 (20-per-cent decline in 2014) as measured by the IA Energy Services Index," said Mr. Foscolos. "The S&P Energy Equipment and Services Index, which places greater weight on drillers and pressure pumpers, declined 38 per cent in 2015. This decline was in addition to the 25-per-cent decrease recorded in 2014. With the continued decline in WTI since the start of this year, we have seen a further reduction of 13 per cent in the IA Securities Index and 11 per cent in the S&P Energy Services Index. As a result of all the declines, the current yield on the Energy Services stocks is averaging [approximately] 4.5 per cent, which to us strongly implies that further dividend reductions are forthcoming."
His target changes included:
- Canadian Energy Services & Technology Corp. (CEU-T, buy) to $4.50 from $5. Consensus: $6.63.
- Enerflex Ltd. (EFX-T, strong buy) to $15.50 from $16.50. Consensus: $16.50.
- Pason Systems Inc. (PSI-T, hold) to $16 from $19 . Consensus: $21.21.
In reducing his drilling rig count forecast, Mr. Foscolos said: "In Canada, we believe the first-quarter 2016 rig count will be below fourth-quarter 2015's activity level and for the first time in recent memory there will be "no winter drilling season." We do anticipate a relative recovery commencing in Q2/16, once again led by natural gas drilling, which is the one energy commodity that has export capacity and is palatable for most politicians and the public to produce and export by pipeline."
There is the potential for shares of Cipher Pharmaceuticals Inc. (CPH-T) to increase in price fourfold over the next five years, said GMP Securities analyst Martin Landry, citing the company's organic growth prospects.
Mr. Landry initiated coverage of the stock with a "buy" rating.
"With reasonable assumptions we are able to derive a valuation of $24 in 2020, which represents an increase of [approximately] 4 times the current share price of Cipher, an appealing return in our view," he said.
He added: "Cipher's shares decreased significantly in 2015 from their peak of [about] $19. The acquisition of Innocutis, its U.S. platform, put pressure on the near-term profitability of the company and may have disappointed short-term investors. While the purchase price was rich, and the transaction dilutive in 2015 and 2016, Cipher now has a platform and products to achieve its growth objectives. In the coming years, Cipher's growth will be dependent on strong execution to extract the full value of its already commercialized products. As such, clinical risks are not a major concern in our investment thesis given that most of the growth should come from already commercialized products."
Mr. Landry cited Cipher's "strong organic growth potential" with 10 commercial products having the ability to add $100-million (U.S.) in revenues as they matured as well as the plan to launch 10 new products in the next 12-24 months.
With "appealing long-term potential," he also called the company's balance sheet "strong."
"Historically, Cipher's management team has been very prudent in building the company from drug development to commercialization," he said. "Prior to 2015, management had not taken on any debt and had undergone only one financing (raising $12-million Canadian in a bought deal in 2006). In 2015, management raised $100-million (U.S.) in senior secured notes, of which the company drew down $40-million to complete an acquisition in April, 2015. Thus, the company's current net debt/trailing 12-month EBITDA leverage is [approximately] 0.5x. This positions the company favourably to execute on future deals. Management has indicated that, going forward, they will likely fund EBITDA-positive acquisitions with debt and research and development or EBITDA-negative acquisitions with equity. Regardless, management has demonstrated a strong appetite for new products and has the balance sheet to support obtaining them."
He set a price target of $7.50. Consensus is $13.50.
In other analyst actions:
Athabasca Oil Corp. (ATH-T) was rated new "sector perform" at RBC Capital by equity analyst Shailender Randhawa. The 12-month target price is $1.75 (Canadian) per share.
B2Gold Corp. (BTO-T) was downgraded to "market perform" from "buy" at Cormark Securities by equity analyst Richard Gray. The 12-month target price is $1.65 (Canadian) per share.
Calfrac Well Services Ltd. (CFW-T) was downgraded to "neutral" from "buy" at PI Financial by equity analyst Brian Purdy. The 12-month target price is $2 (Canadian) per share.
Redline Communications Group Inc. (RDL-T) was rated new "speculative buy" at Industrial Alliance by equity analyst Blair Abernethy. The 12-month target price is $3.25 (Canadian) per share.
With files from Bloomberg News