Thursday’s analyst upgrades and downgrades

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Inside the Market's roundup of some of today's key analyst actions

Desjardins Securities analyst Keith Howlett believes U.S. tax reforms are likely to benefit Saputo Inc. (SAP-T), which generates almost 55 per cent of its earnings south of the border.

"Its blended global tax rate in recent years has been approximately 30–31 per cent," said Mr. Howlett. "On a preliminary basis, we estimate that U.S. tax reform will reduce Saputo's blended tax rate by 400 basis points. New limitations on interest expense deductions relative to EBITDA do not appear to affect Saputo."

Accordingly, Mr. Howlett upgraded his rating for Saputo shares to "buy" from "hold."

"The reduction in the U.S. federal corporate tax rate to 21 per cent from 35 per cent as of Jan. 1, 2018 will be positive for Saputo's after-tax earnings," said Mr. Howlett. "This benefit will be partially offset by elimination of the manufacturer's tax credit. New limitations with respect to interest expense deductions (capped at 30 per cent of EBITDA) do not appear to be applicable to Saputo. New restrictions on deduction of inter-company interest payments in certain situations may, however, have some offsetting impact. We are unable to determine the net benefit of these various measures on Saputo. The company's blended global tax rate in recent years has been 30–31 per cent. Each 100 basis points variance in tax rate translates into a 3-cent change in EPS. Our interim assumption is that the benefit of US reform is 400 basis points, reducing its global tax rate to 26 per cent.

"New provisions of U.S. tax law appear to permit 100 per cent deduction of asset acquisitions completed after Sept. 27, 2017 and 100-per-cent deduction of capital expenditures in the period 2018–22."

Mr. Howlett increased his fiscal 2018 earnings per share estimate to $2.03 from $2.00 to reflect his "approximation" of the benefits from tax reform. His 2019 projection is now $2.35, up from $2.23.

He raised his target price for Saputo shares to $49 from $47, which is based on 20 times his forward-four-quarter EPS estimate plus $5 "in respect of future acquisitions (including the announced Murray Goulburn (MG) transaction)."

The analyst average price target is currently $48.56, according to Bloomberg data.

"With respect to the pending MG acquisition in Australia, there are ongoing rumblings that a competitive offer will emerge in the coming weeks," he said. "Holders of the public units of MG are also reported to be pursuing a class action in relation to the unit price decline."

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Credit Suisse analyst Nick Stogdill also raised his financial estimates for Manulife Financial Corp. (MFC-T) in reaction to the expected benefits of U.S. tax reforms.

On Dec. 22 after market close, Manulife released a business update in which it projects tax reforms to benefit annual earnings by almost $250-million, or 13 cents per share, beginning in 2018. It also expects it to result in an estimated $1.9-billion charge in the fourth quarter due to a write down of deferred tax assets.

The company also announced the decision to reduce the allocation to alternative long duration assets (ALDA) in its portfolio asset mix over the next 12-18 months.

"With new capital rules expected to be more punitive for investing in alternative asset classes, MFC has announced it will reduce its ALDA exposure (current portfolio of $34-billion or 11 per cent of invested assets)," said Mr. Stogdill. "The reduction will result in a $1-billion (51 cents per share) charge in Q4 but will release $2-billion of capital as assets are sold over the next 12-18 months. The amount of assets being sold was not disclosed, but we believe the primary constraint for the portfolio reduction is MFC's capital ratio, which we expect to decline to 220 per cent in Q4. Additionally, MFC expects earnings to decline by $50-60-milllion (3 cents per share) until the net capital is redeployed."

"The large headline charge of $2.9-billion along with the 14-per-cent reduction to MCCSR [Minimum Continuing Capital and Surplus Requirements] (to 220 per cent) and higher leverage (to 31 per cent from 29.5 per cent) are a negative in the nearterm. However, we believe this is offset by the run-rate earnings benefits, improved risk profile from reduced exposure to alternative assets and eventual release of capital (up 10 per cent to MCCSR)."

Mr. Stogdill hiked his 2018 and 2019 adjusted earnings per share estimates to $2.60 and $2.79, respectively, from $2.60 and $2.69.

He maintained an "outperform" rating and $31 target for Manulife shares. The average is $30.37.

"Our $31 target price is unchanged and is based on a 50/50 weighting to our 2018 estimate EPS/BVPS [book value per share], with the net 10 cents per share, or 4-per-cent increase to our EPS, offsetting the $1.44 per share, or 7-per-cent reduction to our book value estimate. Our 2018 return on equity (ROE) estimate increases by 130 basis points, to 12.8 per cent."

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Raymond James analyst Frederic Bastien said he remains a buyer of Brookfield Infrastructure Partners L.P. (BIP-N, BIP.UN-T) heading into 2018.

"Supporting our expectations for above-average cash flow growth over the next 18–24 months are BIP's record backlog of capital projects, its proven contrarian investment approach and its $3.6-billion in liquidity," he said.

Mr. Bastien noted Brookfield's liquidity is set to increase with the pending sale of its 27.8-per-cent interest in ETC Transmission Holdings, S.L., the parent company of Transelec S.A., to China Southern Power Grid International (HK) Co., Ltd. for $1.3-billion (U.S.).

The deal was announced Tuesday.

"This divestiture does not come as a surprise to us since: (i) management had noted back in the spring that Transelec could be sold (at the right price), and (ii) it is consistent with BIP's goal of recycling about $2-billion of capital into higher-yielding opportunities," said Mr. Bastien. "The asset has notably contributed a mid-teen IRR [internal rate of return] since its acquisition over 10 years, but based on the sale price is only poised to deliver a return of about 8 per cent for the new buyer.

"We expect the Transelec proceeds to be rapidly deployed. BIP has a growing basket of investment opportunities in India and a $2.3-billion capital backlog that includes toll road expansions in Brazil, FTTH rollout in the UK and natural gas pipeline capacity increases in the U.S. This should give management the confidence to raise BIP's distribution by 10 per cent early next year (which would put the increase at the top end of management's 5–9-per-cent annual target range)."

Mr. Bastien kept an "outperform" rating and $48 (U.S.) target for Brookfield. The average is $46.75.

"We derive our valuation using a target yield of 4 per cent on our 2018 CDPU [cash distribution per unit] forecast of $1.92," he said. "This is lower than the units' 5-year historical average of 4.2 per cent but justified in view of BIP's utility-like features, above-average growth outlook and strong management."

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In other analyst actions:

Canaccord Genuity analyst Tony Lesiak downgraded Royal Gold Inc. (RGLD-Q) to "hold" from "buy" and lowered his target to $99 (U.S.) from $109. The average on the Street is currently $93.73.