Inside the Market's roundup of some of today's key analyst actions
Despite sustained volatility in commodity prices, Desjardins Securities Chris MacCulloch sees a good opportunity for investors to add exposure at current levels.
In a research note released Monday in which he initiated coverage of five junior and intermediate oil and gas producers, Mr. MacCulloch noted the "strong" performance lag between Canadian large cap oil and gas stocks and the rest of the sector thus far in 2017.
"Investor sentiment toward the Canadian energy sector remains extremely cautious at this point, with most of the stocks within the Desjardins coverage universe poised to wrap up 2017 on a losing note, the third annual decline in the past four years," he said. "For the most part, large caps have been the only real source of shelter within the sector this year, as investors appear to have defensively trimmed positions in the intermediate and junior space to fund overweight positions in the large caps. In addition, we have also seen sector rotation out of energy following a sustained lag versus the broader equity market as funds flow often winds up chasing winners. We believe this pullback in stock valuations has created an opportunity for investors to add exposure to the sector at an attractive entry point, as the smaller–market cap energy names should eventually begin gaining traction with increased confidence in commodity prices. Within the space, we believe that producers with sustainable business models and disciplined balance sheet management will continue to be favoured.
"We see growing signs of strengthening oil market fundamentals following this year's OPEC supply cuts, which have helped clear the inventory overhang, particularly in the high-frequency U.S. market. Among our new coverage names, we highlight TVE as the best way to play the strengthening oil market fundamentals, although FRU and NVA also provide material exposure."
Mr. MacCulloch initiated coverage of Tamarack Valley Energy Ltd. (TVE-T) with a "buy" rating, believing it offers one of the most compelling profiles in the firm's coverage universe both from a relative value and balance sheet perspective.
"The company has been steadily increasing its footprint throughout the basin in recent years following a series of asset acquisitions, including the transformative Spur Resources acquisition which moved it into the '20,000 boe/d club'," said the analyst. "We see opportunity for multiple expansion as the company gains better market recognition for its recent operational success, particularly in the Viking, which could help begin closing its significant valuation gap versus peers."
He set a price target of $4 for Tamarack Valley shares. The analyst average target price on the Street is currently $3.92, according to Bloomberg data.
Mr. MacCulloch also gave a "buy" rating to Freehold Royalties Ltd. (FRU-T) with a target price of $17.50, which is 6 cents higher than the current consensus.
"We believe the stock provides an attractive opportunity for investors to add exposure to the sector and we highlight the lower risk profile of the royalty structure in particular," he said. "The stock trades at a material premium to the broader Desjardins E&P coverage universe, reflecting the unique structure of its business model; however, it still trades at a 15-times discount to PrairieSky. One of the key headwinds in closing at least some of the valuation gap could be the working interest component of the portfolio, which Freehold has been shifting out of in recent years, which should help reduce the risk profile and potentially reposition the stock. In the meantime, investors receive an attractive 4.3 per cent dividend yield, which appears poised to grow in 2018."
Mr. MacCulloch pegged NuVista Energy Ltd. (NVA-T) a "buy" with a $10.50 target. The average is $10.06.
He said: "The company offers one of the highest condensate exposures in the Desjardins E&P coverage universe, which is particularly attractive as condensate is the only premium-priced commodity produced within the basin. And we see the relative attractiveness of condensate continuing in 2018, which should help keep investors engaged in the stock. NuVista has outlined an extensive five-year growth plan which results in best-in-class 2018 organic growth within the Desjardins E&P coverage universe of 29 per cent."
Though he expressed caution over short-term natural gas fundamentals, which he noted are largely at the mercy of winter weather conditions, Mr. MacCulloch believes the North American market is "beginning to structurally tighten following years of relentless supply growth from the Appalachian basins in particular."
"However, AECO prices remain depressed, which has put many western Canadian gas producers in a precarious position that could be difficult to navigate in 2018," he said. "From that perspective, we remain biased toward producers with diversified physical transportation exposure and active hedge books; in particular, we highlight NVA within our new coverage as the least exposed producer to AECO prices, while AAV also provides good protection given its cost structure and hedge book. Conversely, PNE is the most AECO-exposed company on our new coverage list as it is effectively a pure-play natural gas producer that is completely unhedged in 2018, with limited physical sales diversification."
Mr. MacCulloch initiated coverage of Advantage Oil & Gas Ltd. (AAV-T) with a "buy" rating and $8 target, which is 4 cents lower than the current analyst average.
"Although the AECO price environment is challenging for even the nimblest of Canadian natural gas producers, we believe the company is well-positioned to ride out the current storm," he said. "We highlight the significant protection provided by its status as one of the lowest-cost gas producers in the basin. Its strong balance sheet and active hedging program provide an additional layer of defence; we note that Advantage has effectively reduced its 2018 spot AECO exposure to 40 per cent despite limited egress diversification. We also believe that low gas prices have been fundamentally priced into the stock at current levels, noting that it trades at 5.6 times 2018 DACF [debt-adjusted cash flow] at strip."
He gave Pine Cliff Energy Ltd. (PNE-T) a "hold" rating and 60-cent target price. The average on the Street is 78 cents.
"The company has pursued a contrarian strategy of growth through acquisitions, specifically targeting conventional dry gas assets that other producers have been shedding in recent years," said Mr. MacCulloch. "We believe this strategy has legs and we like the differentiated exposure provided by the asset base, which could drive opportunities for significant free cash flow generation in a stronger gas price environment that would be returned to shareholders through dividends and/or share buybacks. However, we see better opportunities to add lower-risk gas exposure elsewhere within the context of current AECO strip gas prices, which are particularly challenging for the company given its unhedged exposure and limited physical sales diversification."
Industrial Alliance Securities analyst Elias Foscolos lowered his financial estimates and target price for shares of Keyera Corp. (KEY-T) in response to a two-week span in which it was "hard at work."
On Nov. 30, Keyera Corp. increased its 2018 capital expenditure budget to $800-900-million, a rise of 14 per cent from the estimate provided with its third-quarter financial results ($700-800-million) and a 22-per-cent increase from its 2017 guidance ($500-600-million).
"Based on Keyera's guidance numbers, we have decided to project $825-million in capex spending for 2018," said Mr. Foscolos. "In our capex forecast, we have allocated a certain amount to a Simonette expansion, as Keyera alluded to this project being sanctioned when it increased its capex budget. Additionally, we have allocated a small amount to Wapiti phase two, which we suspect will be sanctioned in 2018 as well."
"It is important to note that our $825-million forecast is only comprised of growth and maintenance capex, and does not include additional acquisitions. Given that Enbridge (ENB-T) recently announced that it will monetize around $10-billion of its non-core assets from its Spectra Energy merger, we believe there could be a couple of acquisitions for Keyera on the horizon. Since Enbridge plans to sell around $3-billion of its unregulated gas midstream and onshore renewables business in 2018, we believe there could be potential for KEY to pick up some of those assets."
At the same time, the Calgary-based energy company announced that it has entered into 10-year gas handling agreements with Athabasca Oil Corp. and Murphy Oil Company Ltd. to process natural gas production from their Montney and Duvernay operations west of Fox Creek, Alta. To support those agreements, Keyera said it plans to enhance its Simonette gas plant operations with improved inlet liquids handling facilities and acid gas injection facilities at a cost of $85-100-million.
On Dec. 8, the company closed a 14 million common share bought deal at $35.20 per share for total proceeds of $494-million.
"With the recent announced 2018 capex budget, including the additional capex for KEY's Simonette gas plant, and the recent common share offering, we have updated our model," the analyst said. "Upon sharpening our pencil, which required altering our segmented revenue and margins, we have slightly reduced our target price to $42.00 per share."
Mr. Foscolos's target was previously $43, while the consensus on the Street is $43.04.
He kept a "buy" rating for the stock.
Desjardins Securities analyst Benoit Poirier said he's encouraged by the management of Bombardier Inc.'s (BBD.B-T) ability to meet and even exceed its stated turnaround targets, believing it's on the "right track" to continue its successful recovery.
"We continue to like the name as we believe there remain many opportunities to unlock value (Q400, CRJ, aerostructures division, BT consolidation)," said Mr. Poirier in a research note Monday after attending the company's 2017 Investor Day in New York last week.
Mr. Poirier called Bombardier's guidance for 2018, released on Thursday, a "turning point," despite the fact it introduced lower-than-projected aircraft delivery expectations of 135 units (versus the analyst's expectation of 143). The company said the market for both business jets and regional aircrafts remains challenging.
"While revenues are softer than expected ($17.0–17.5-billion U.S. versus our initial forecast of $18.3-billion for 2018), we are pleased by the expectations for stronger margins across all segments as well as FCF expectations that surpassed our forecast of negative $58-million and consensus of negative $95-million," he said. "
"Business jet segment [was] softer than expected; management remains disciplined. Management is adopting a prudent approach as it moves into the new year by targeting similar production and delivery volumes as in 2017. Consequently, it also reduced its 2020 revenue objective to $8.5-billion from $10.0-billion last year as it intends to grow the business without putting too much supply in the market and jeopardizing pricing. It expects to reach the $10-billion level a year or two after that."
Mr. Poirier also noted that the company's regional aircraft segment is "becoming less significant" though the replacement cycle remains, adding: "In 2018, management expects total deliveries of 35 aircraft for the CRJ and Q400. Going forward, BBD sees deliveries for those programs remaining stable until 2020. However, management remains confident in its ability to secure new orders for the CRJ program following the introduction of the 'new atmosphere' interior and the upcoming replacement cycle."
Though he slightly lowered his 2018 revenue expectation for the company, Mr. Poirier's FCF estimate rose.
He kept a "buy" rating for the stock and raised his target to $4 (Canadian) from $3.75. The analyst average target is $3.43.
"The improvement and consistency demonstrated by the new management team over the last two years support our confidence in its ability to achieve its 2020 plan," he said. "We continue to believe that the stock could reach the $5 level by 2020 and see further opportunities that could further unlock shareholder value."
Elsewhere, CIBC World Markets analyst Kevin Chiang moved his target to $3.50 from $3.25 keeping a "neutral" rating.
Mr. Chiang said: "While Bombardier's management team has done a good job, our Neutral rating reflects the lack of revenue growth in Bombardier's legacy aerospace portfolio (excluding the C Series and Global 7000 deliveries, aircraft sales will be lower year over year in 2018) and elevated debt levels, which creates a higher risk story, especially since we are in the late stages of the commercial aerospace cycle (though it remains healthy) and a growing acknowledgment that the business jet cycle may never return to prerecession levels."
Cantor Fitzgerald analyst Rob Chang upgraded Uranium Participation Corp. (U-T), citing additions to its inventory as well as revised uranium price forecast.
"With the Nov. addition of 120,000 U3O8 pounds, (600,000 pounds added in October) we are updating our valuation to reflect the addition to inventory," said Mr. Chang. "We are also using an upgraded uranium price deck to reflect the impact of the announced production cuts from Cameco (CCO-T, "buy", target $15.55) and Kazatomprom."
He moved the stock to "buy" from "hold" with a target of $5.15, up from $3.80. The average target is $4.80.
InPlay Oil Corp. (IPO-T) sits in an "enviable position in two of the hottest light oil plays in western Canada," according to Beacon Securities analyst Kurt Wilson.
Believing the Calgary-based company has "sufficient" acreage and infrastructure for "cost-effective growth in production and reserves for several years at least," Mr. Wilson initiated coverage of the stock with a "buy" rating.
"InPlay's Pembina and Willesden Green areas in west central Alberta have upwards of 170 net horizontal drilling locations targeting a 'newer' section of the Cardium fm," he said. "This will be the main driver of growth in 2018 as we expect 8-11 wells to be drilled. IPO brought a 3-well pad of 1.0-mile wells on-stream at WG in late November that should deliver the 4,300-4,500 boe/d 2017 exit target. Initial results from these wells should be available in early 2018 – a potential catalyst."
"An expanded land base at Huxley could be the exploration home run. IPO's first East Basin Duvernay horizontal well was drilled in November and is to be completed after spring break-up. This is a relatively new play that may become highly economic if/when completion and production methods are refined. Industry results are limited at this time, but initial production rates appears to be improving. IPO's land here could alone be worth $35-million (52 cents per basic share)."
Mr. Wilson set a price target for its shares of $2.50, which is 2 cents lower than the consensus.
"Exposure to the Cardium and East Duvernay should prove very fortuitous for IPO as relative economics and market valuations between oil-weighted and gas-weighted companies in western Canada will likely be vastly different as the OPEC/Russia quota extension should support global oil prices whereas AECO gas prices are below break-even for almost all gas plays. Investors need to focus on oil companies for now. We note that 68 per cent of InPlay's 4,087 barels of oil equivalent per day in Q3/17 was weighted towards liquids and we expect that figure to climb to 71 per cent in 2018 as IPO focuses on the 'oilier' part of the Cardium for its 2018 drilling. All of IPO's forecasted growth next year is to come from liquids.
"The company is somewhat unique in its ability to offer investors a focus on two of the hottest light oil plays in western Canada. There are plenty of companies that offer exposure to the Cardium, but few (mainly privates) offer the exposure to the East Basin Duvernay that InPlay does, and no others that are focused exclusively on both. This focus on premium assets makes InPlay a possible acquisition target."
Calling it one of his top small- to mid-cap picks for 2018, J.P. Morgan analyst Douglas Anmuth upgraded Twitter Inc. (TWTR-N) to "overweight" from "neutral."
"We believe both the TWTR story and financial results will strengthen over the next year as the company continues to build on its differentiated value proposition for users & returns to revenue growth," said Mr. Anmuth.
He raised his target to $27 (U.S.) from $20. The average is $18.85.
"We recognize that TWTR shares are up 30 per cent since 3Q earnings in late October and are not cheap at 11.8 times 2019 estimated EBITDA on our revised numbers," the analyst said. "But we believe increasing traction with both users and advertisers will drive upside to 2018 consensus (we are 4 percent above on revenue & 15 percent on EBITDA) and investor sentiment around TWTR remains mixed."
Emphasizing its "superior" growth outlook for North America, Desjardins Securities analyst Frederic Tremblay raised his estimates for Savaria Corp. (SIS-T) after a meeting with the chief executive officer of one of its main competitors.
Mr. Tremblay recently spoke to Asbjørn Eskild, president and CEO of Handicare Group AB, a Swedish-based company which manufactures and markets products to assist disabled and elderly people.
"Given its operations in Europe and North America, Handicare is in a good position to compare the growth potential in both markets," the analyst said. "The company expects growth of the North American accessibility and patient-handling market to remain strong at approximately 6 per cent annually and easily outpace Europe's 2 per cent. North America's compelling outlook is driven in part by lower market maturity, which contributes to stronger demand and enables consistently higher price points than in Europe. Eager to capitalize on growth prospects, Handicare significantly increased its North American presence in 2016 through the acquisition of Prism Medical, a patient-handling products company. Nonetheless, we estimate that Handicare generates a relatively modest 14 per cent of its total revenue from North America. Meanwhile, Savaria derives more than 90 per cent of its revenue from North America, which undoubtedly contributes to the firm's solid organic revenue growth outlook."
Mr. Tremblay said he came away from the discussion with a greater appreciation for the cross-selling opportunities for Savaria's new product line, which he called "significant."
"Mr Eskild indicated that Handicare's recent double-digit sales growth for stairlifts in the U.S. (up 19 per cent year over year in 3Q17) was driven in part by cross-selling stairlifts with patient-handling products in the home care channel (eg mobile lifts and transfer products)," he said. "While patient-handling products remain essential to hospitals and long-term care facilities, Handicare is seeing increased demand for this product category in private dwellings. We believe this trend should continue as the aging population wants to maintain independence, and governmental budget constraints increase the attractiveness of home care.
"Savaria is currently introducing its own line of patient-handling products (ie mobile and ceiling lifts), which it has been developing internally over the past two years. The comments from Handicare reinforce our positive view on the strong potential of patient-handling products for Savaria. Recall that we see cross-selling opportunities with medical beds and therapeutic surfaces in the hospital and long-term care channel following Savaria's acquisition of Span in mid-2017. In addition, given Handicare's positive experience, we may have underestimated the potential for Savaria to cross-sell its mobile patient lifts and stairlifts in the home care channel."
In reaction to the $3-million acquisition of Master Lifts Australia Pty Ltd, announced on Dec. 14, Mr. Tremblay raised his adjusted EBITDA projections for 2018 and 2019 by 3 per cent to ($44.1-million and $53.2-million, respectively). His earnings per share estimates rose to 65 cents and 82 cents, respectively, from 64 cents and 80 cents.
"Following its acquisition of Prism Medical in 2016, Handicare is ready for other acquisitions in North America where the fragmented state of the market provides a deep pipeline of opportunities at 6–11x EBITDA for consolidators like Handicare and Savaria. A few days ago, Savaria entered the Australian market through the acquisition of Master Lifts at a very compelling 3x EBITDA. With its strong financial position, Savaria remains on the lookout for acquisitions in North America and new territories."
He maintained a "buy" rating for Savaria shares and hiked his target to $20 from $18.50. The average is $19.04.
In other analyst actions:
Veritas Investment Research Co analyst Dan Fong upgraded Linamar Corp. (LNR-T) to "buy" from "sell" and raised his target to $75 from $69. The average is $82.33.
TD Securities analyst Cherilyn Radbourne downgraded CSX Corp. (CSX-Q) to "hold" from "buy" and lowered her target to $54 (U.S.) from $64. The average target is $59.20.
GMP analyst Cody Kwong downgraded Painted Pony Energy Ltd. (PONY-T) to "hold" from "buy" with a target of $3.25, down from $4. The average is $4.42.
Wells Fargo Securities analyst John Baumgartner upgraded General Mills Inc. (GIS-N) to "outperform" from "market perform." Mr. Baumgartner hiked his target to $63 (U.S.) from $53. The average is $54.79.
BMO Nesbitt Burns analyst Kelly Bania upgraded Costco Wholesale Corp. (COST-Q) to "outperform" from "market perform" with a target of $215 (U.S.), up from $160. The average is $196.61.
Piper Jaffray analyst Kevin J Barker upgraded Capital One Financial Corp. (COF-N) to "neutral" from "underweight" with a target of $95 (U.S.), rising from $86. The consensus is $99.24.