Inside the Market's roundup of some of today's key analyst actions
A "recovering" oil-patch will bring revenue and growth for Secure Energy Services Inc. (SES-T), said Raymond James analyst Andrew Bradford.
In reaction to recent changes to his rig count forecast, Mr. Bradford raised his fourth-quarter 2016 earnings before interest, taxes, depreciation and amortization (EBITDA) forecast for the Calgary-based energy services company to $31-million from $30-million, while his first-quarter 2017 projection rose to $44-million from $43-million.
"Rig activity has a noticeable impact on Secure's PRD revenues [processing, recovery and disposal]," said Mr. Bradford. "We estimate that every 10 additional rigs contributes about $1-million in PRD revenues (ex-crude purchases and sales), on average. Given the strong move in the rig count so far this quarter, we would not be surprised to see PRD revenue surpass $70-million in 1Q17 (they were just under $51-million in 3Q16)."
"Onsite revenues could approach pre-downturn levels. Prior to 2016, Onsite revenues were clicking along at about $125-million annualized. In 2016, the figure declined to about $80-million as larger projects grew more scarce and smaller projects, with reduced revenue visibility, dominated the revenue mix. According to Secure, larger projects that had been deferred through the downturn are resurfacing and should drive improved revenue and greater visibility. EBITDA margins in the Onsite group have ranged from 18 per cent to 21 per cent."
Mr. Bradford said he expects the company's Drilling Services will be a "noticeable" contributor in 2017, adding: "We're not envisioning much in the way of pricing increases just yet. But we expect the combination of the lift in rig activity, increased well complexity, and a lower cost structure means that 1Q17 Drilling Services EBITDA contribution should come above $9-million for the first time since 2014. DS EBITDA was $2.6-million in 3Q16. We are also expecting a modest contribution (or absence of detraction) from Secure's chemical EOR [enhanced oil recovery] product line in 1Q17."
With the changes to his financials model, Mr. Bradford raised his target for Secure stock to $13.15 from $12. Consensus is $13.21.
He maintained a "strong buy" rating.
"Our $13.15 target price is based on 12.0 times (from 11.0 times) 2018 estimated EBITDA which is consistent with the mid-to-upper end of Secure's historical trading range," the analyst said. "As a point of reference, Secure's peak EV/EBITDA multiple averaged 13.7 times over the 2010-2014 timeframe and reached at least 11.6 times in each of those years."
Elsewhere, Industrial Alliance rated the stock a new "hold" with a target of $12.25.
He also feels the Waterloo, Ont.-based tech company requires an enterprise sales channel and further product development.
"We believe BlackBerry faces challenges and must execute on further developing an enterprise sales channel to meaningfully accelerate software sales," he said. "While we believe the senior management team is capable of executing against the market opportunity, we believe it could take several years for meaningful progress. We believe the software business could grow 10 per cent to 15 per cent in FY18 versus consensus of 19 per cent, and we anticipate 10 per cent to 15 per cent longer-term growth if management is successful in further developing sales channels and new products."
Mr. Walkley lowered his software revenue estimate for the fiscal fourth-quarter of 2017 to $181-million from $188-million (U.S.). His projections for fiscal 2018 and 2019 also declined.
"We believe Unified Endpoint Management (UEM), previously known as BES12, represents a comprehensive suite of products and add-on offerings for EMM [enterprise mobility market] from internal BlackBerry development and acquisitions including Good Technology, WatchDox and others," he said. "While EMM is the largest portion of software revenue, management is not providing a detailed software breakout and continues to evaluate if it will provide further detailed information on key software segments such as UEM, QNX and the newest IoT [Internet of Things] subscription product Radar. From a strategic perspective, we believe BlackBerry's positioning is improved following the exit of the hardware business freeing up capital for maintaining its NOC [network operating centre] for key regulated customers including the U.S. Federal Government and maintaining required investments to continue efforts in monetizing the company's IP portfolio. While we are encouraged by BlackBerry's ability to find niche opportunities in software products such as AtHoc for crisis communication or developing Radar in-house via the IoT platform, we believe these are small revenue areas currently and Blackberry must drive new channels for meaningful sales growth longer-term."
Mr. Walkley decreased his 2017, 2018 and 2019 earnings per share estimates to 1 cent, 1 cent and 10 cents, respectively, from 1 cent, 9 cents and 18 cents.
With a "hold" rating, his target price for BlackBerry stock fell to $7 from $7.50. The analyst consensus is $7.60.
"While BlackBerry has managed a difficult transition from a handset manufacturer to an enterprise software and solutions provider, we believe BlackBerry is fairly valued and offers limited upside for investors unless the company can meaningfully accelerate growth in the software business through its EMM platform and QNX," he said. "In fact, we believe BlackBerry is fairly valued given its low to mid-teens growth prospects owing to the competitive nature of BlackBerry's end markets."
Ahead of the release of its quarterly earnings on Thursday, BMO Nesbitt Burns analyst Thanos Moschopoulos raised his target price for Open Text Corp. (OTEX-Q, OTC-T) after updating his financial models to reflect its acquisition of Dell EMC's Enterprise Content Division, including Documentum.
"Recent disclosure suggests that Documentum has been more profitable than expected," said Mr. Moschopoulos. "There was some new disclosure on the financial performance of Documentum in the prospectus and filings related to the equity financing that Open Text completed last month. Assuming that we're interpreting the numbers correctly, the disclosure suggests that Documentum was already running at an adjusted EBITDA margin in the range of 34-36 per cent. We had initially thought that the business was running closer to 30 per cent, based on prior media reports."
Accordingly, Mr. Moschopoulos believes the accretion estimates for Documentum will likely prove to be overly conservative. His estimate, which falls in line with the Street, assumes margins will reach 37 per cent by fiscal 2018.
"Management has yet to provide guidance on what its target operating model might look like once all the recent acquisitions are integrated," he said. "For that matter, we don't expect much guidance on that front on the upcoming call. We expect that management will reiterate or perhaps update its FY2017 target operating model -- but of greater relevance, in our view, would be the FY2018 target model, and we don't expect that management will provide any colour on this until Q4/17 results are reported in July.
"In the absence of guidance, we believe that the Street is generally assuming that Documentum, as well as the prior acquisitions, will have margins that are roughly similar to Open Text's (or perhaps a touch better) once integrated. We're making the same assumption, as we'd rather err on the side of caution. However given the very complementary nature of the acquisitions, and given Documentum's existing margin profile, we think that a greater-than 40-per-cent adjusted EBITDA margin might be achievable once Documentum is fully integrated."
Mr. Moschopoulos expects the Waterloo, Ont.-based company to report quarterly results that fall in line with expectations. He's projecting revenue of $534-million (U.S.), adjusted EBITDA of $195-million, and adjusted earnings per share of 5 cents.
"We note that there seems to be a seasonal pattern to Open Text's quarterly beats and misses,," he said. "Over the past eleven years, Open Text has only had one revenue miss, and no EPS misses, for a December quarter."
"This will be the first full quarter of Recommind and the second tranche of the acquired HP assets. We estimate that Street estimates imply a decline of 1 per cent year-over-year organic revenue growth (although the organic math is tough to parse out, in light of the acquisitions). In our view, this doesn't seem to be a stretch in the context of what appears to be a healthy software spending environment."
With an "outperform" rating, he raised his target price for the stock to $39 from $36.50. Consensus is $35.67.
"We've had longer-term concerns regarding Open Text's slow organic growth and high mix of on-premise software, relative to cloud," said Mr. Moschopoulos. "Time will tell whether or not the recent acquisitions might eventually help to drive improvement on these fronts; we think the potential for that exists, given that Documentum, and the other recently-acquired assets, had some reasonably competitive product offerings. However in any event, we think that the cost synergy story alone should be sufficient for the stock to work over the near/medium term."
MEG Energy Corp. (MEG-T) is in position to resume investment and growth at its Christina Lake oil sands project following its recent equity financing and debt restructuring, said BMO Nesbitt Burns analyst Randy Ollenberger.
"This should translate to strong growth in underlying net asset value and significant longer-term share price appreciation," said Mr. Ollenberger. "In the near term, we expect the shares to generally track crude oil prices, which we expect to remain range-bound for much of 2017."
On Jan. 27, MEG announced the closing of its refinancing plan, which included the issuing of 66.8 million subscriptions receipts at a price of $7.75 each with total proceeds of $517.8-million. Those funds will partially fund its 2017 capital budget of $590-million.
It also revealed a revised borrowing base and credit facility. Its existing facility of $2.5-billion (U.S.) was reduced to $1.4-billion with the maturity date extended by two years. The company also announced a new private offering of senior secured notes of $750-million (U.S.) at 6.5 per cent due in 2025.
"MEG announced a $590 million capital budget for 2017, consisting of $320-million allocated to Christina Lake Phase 2B 'enhanced modified steam and gas push' (eMSAGP) growth initiatives, $200-million of sustaining capital, and $70-million for general marketing and corporate expenses," said Mr. Ollenberger. "The company also guided 2017 annual production to be in the range of 80,000 to 82,000 barrels per day, while expecting exit production to reach between 86,000 b/d and 89,000 b/d."
Mr. Ollenberger resumed coverage with a "market perform" rating and target of $8, up from $6. Consensus is $8.92.
Citi analyst Walter Pritchard upgraded Microsoft Corp. (MSFT-Q) to "neutral" from "sell" in reaction to better-than-expected second-quarter results.
"Microsoft put up strong Q2 results, with upside to all three major segments," he said. "PC strength drove MPC [more personal computing] segment (Windows) while server launches/pricing and Office365 drove some upside in IC [intelligent cloud] and PBP [productivity and business processes]. Higher Windows and other software revenue streams drove upside to gross margin and with controlled operating expenses, this upside dropped to the bottom line and resulted in EPS of 84 cents (ex-LNKD [LinkedIn]) versus our [projection of] 80 cents and street 79 cents. Much watched Azure growth and O365 seats did decelerate and cloud GMs downticked quarter over quarter."
Mr. Pritchard also called the company's "inline" guidance a "big milestone."
"We note that FY17 (current year) street operating income has been cut following earnings every quarter since September, 2014," said the analyst. "Guidance for March quarter, excluding LNKD and FX [foreign exchange] bracketed our and consensus estimates ($7.0-billion in OpInc, 72 cents EPS pre-LNKD). While our FY18/19 estimates remain modestly below the street, we see stability of estimates through June Q [the June quarter] and therefore don't see downside catalyst. We note some will question sustainability of some trends driving September and December quarterly results with 1) better PCs, 2) server product launches, 3) FX-based pricing adjustments to certain products, however this will not likely be a factor for 9-12 months."
His target price rose to $65 (U.S.) from $41. Consensus is $66.50.
"The stock has re-rated significantly over the last three years, converging to valuation levels of its large-cap peers," said Mr. Pritchard. "We expect that at 21 times forward earnings and 16 times forward EV/FCFF [enterprise value to free cash flow for the firm], it is the earnings or cash flow that must 'do the work' ... While we have expected that big cap tech would continue to trade on P/E, we hear the bull case focused on cash flow and upcoming accounting changes in software will likely make EV/FCFF likely more of a focus (as earnings across company become less comparable)."
In other analyst actions:
Perseus Mining Ltd. (PRU-T) was downgraded to "neutral" from "outperform" at Macquarie by analyst Michael Gray. His target fell to 37 cents from 39 cents. The analyst average is 51 cents, according to Bloomberg.