Inside the Market's roundup of some of today's key analyst actions
Following the release of lower-than-anticipated first-quarter financial results, Desjardins Securities analyst Maher Yaghi downgraded Corus Entertainment Inc. (CJR.B-T), noting: "as advertising revenue goes, so does our view on the stock."
"The company is witnessing renewed pressure on TV advertising, leading to consolidated revenue declines. We are now forecasting continued revenue pressure for the remainder of FY18, pushing deleveraging further into the future. While the dividend continues to be significant and supported by current FCF [free cash flow], in the longer term without improvements in underlying growth, we see potential for the company to review this in order to use more of the FCF to delever faster."
On Wednesday, the Toronto-based media company reported television advertising revenue for the quarter of $415-million, missing the consensus projection of $425-million. Adjusted TV EBITDA of $168.6-million also fell below the Street's expectation of $185.5-million.
"In our view, advertising revenue was the main reason behind the miss," said Mr. Yaghi. "In fact, advertising revenue in TV decreased 4 per cent year over year, marking a significant downturn versus the last two quarters where flat growth was reported, as indicated in the graph below. Subscriber revenue was flat year-over-year, but we highlight that the trend that was reported in the last five quarters was downward. Management did mention that Corus gained market share in advertising in the quarter, suggesting that the market decreased more than 4 per cent. We are still bearish on the general TV industry in Canada and we also believe that the absence of sports content weighs on the company's ability to grow its TV revenue. Speaking of sports, the Olympic Games this winter and the soccer World Cup later in the year could hurt viewership and advertising revenue. First quarter FY18 TV revenue was disappointing and the path to growth is unclear, which has resulted in our decreasing our 2018 growth forecast for TV revenue from flat to negative 3 per cent year over year."
Believing a timeline for the growth remains "unclear," Mr. Yaghi also emphasized the impact of the advertising decline on Corus's debt reduction.
"While we had been anticipating that leverage could decline to close to three times by the end of FY18, we now expect this to occur only by the end of FY19," he said. "The postponement in leverage reduction is likely to lead to delays in potential growth initiatives that the company can undertake to boost long-term growth trends."
Lowering the stock to "hold" from "buy," Mr. Yaghi also dropped his target for the stock to $11.50 from $15. The average target on the Street is currently $10.10, according to Bloomberg data.
"While we have not materially reduced our FCF forecast as management has some levers it can pull and while the dividend is still safe, we do not see the dividend as being large enough to compensate for the potential steady decline in revenue we foresee in the next two years," the analyst said.
Elsewhere, TD Securities analyst Vince Valentini downgraded Corus to "hold" from "buy" with a target price of $11, falling from $16.
Cormark Securities analyst David McFadgen lowered his rating to "market perform" from "buy" and dropped his target to $10 from $14.40.
Eight Capital analyst Phil Skolnick initiated coverage of a series of Canadian energy companies on Thursday.
Mr. Skolnick gave the following stocks "buy" ratings:
- Canadian Natural Resources Ltd. (CNQ-T) with a $60 target. Consensus: $52.19.
- Encana Corp. (ECA-T) with a $17 target. Consensus: $18.67.
- MEG Energy Corp. (MEG-T) with an $8 target. Consensus: $6.41.
- Athabasca Oil Corp. (ATH-T) with a $2.30 target. Consensus: $1.66.
He gave "neutral" ratings to
- Suncor Energy Inc. (SU-T) with a $56 target. Consensus: $50.47.
- Husky Energy Inc. (HSE-T) with a $21 target. Consensus: $19.
- Baytex Energy Inc. (BTE-T) with a $5.30 target. Consensus: $4.17.
- Cenovus Energy Inc. (CVE-T) with a $15 target. Consensus: $14.65.
Imperial Oil Ltd. (IMO-T) was the lone equity to receive a "sell" rating and $39 target. The consensus target is $40.67.
Though he predicts the first quarter to be "soft" for Canadian Real Estate Investment Trust (REF.UN-T), Raymond James analyst Johann Rodrigues believes its current valuation warrants an upgrade.
With the Toronto-based REIT now trading at a 52-week low, he raised his rating to "outperform" from "market perform.
"Admittedly, the operating fundamentals are not yet on an upswing," said Mr. Rodrigues. "We believe near-term results may be soft, with Alberta/Atlantic Canada still showing weakness in the Industrial/Office segments. CREIT should be able to replace the bulk of the impending vacancies (the largest being the 200,000 square foot Suncor expiry in 4Q18), but there will likely be at least four to six months of downtime after leases mature. Also, we suspect the REIT will have a tough time finding new mezzanine loan opportunities to put the repaid One Bloor loan into. All this means that 2018 should see FFO [funds from operations] decline."
Despite those concerns, Mr. Rodrigues thinks the market is now pricing those issues in, emphasizing the REIT is now trading at "rare and sizeable" to its historical average.
"We had originally planned to wait for 4Q17 results before evaluating our rating," he said. "However, with a weak start to 2018, after underperforming the broader TSX REIT Index by 500 basis points in 2017, the REIT now trades at its 52-week low."
"The REIT is trading at a 8-per-cent discount to NAV [net asset value], a steep discount to its three-year average of 1 per cent. In fact, CREIT has only traded at a larger discount twice before (1Q09/3Q15)."
Mr. Rodrigues said CREIT's value-creation focused portfolio is likely to drive "solid" net asset value (NAV) growth going forward.
"While headline FFO may have its hiccups, this does not change the track record and trajectory of CREIT's NAV growth," he said. "The REIT has grown NAV 7 per cent over the past two years (almost doubling the Canadian REIT group average of 4 per cent) despite writing down their Calgary office portfolio by 40 per cent since the oil crash. With some SPNOI [same property net operating income] growth and cap rate compression still occurring in other segments and a steady pipeline of development deliveries ($200-million to come on-stream through 2019E), we believe the REIT's NAV growth should continue to be near the top of the pack."
He set a price target of $48 for units of the REIT. The average target on the Street is now $50.06.
"CREIT is trading at 17.2 times and 16.7 times our respective 2018 and 2019 AFFO estimates, compared to the index of Canadian diversified REITs/REOCs, which trade at 14.0 times and 13.4 times," the analyst said.
Expecting the "bomb cyclone" winter storm that battered the East Coast to "chill" results through its first quarter, Raymond James analyst Ken Avalos dropped his rating for Killam Apartment Real Estate Investment Trust (KMP.UN-T) following an "impressive" run in share price.
"Canada has suffered through a particularly cold winter thus far, with Atlantic Canada experiencing the worst of it. Forecasts point to this continuing through 1Q18," he said.
"Killam's markets have just now come out of a three-week period that brought multiple storms, with a bomb cyclone, regular snow squalls, winds up to 130 kilometre per hour, and temperatures that plunged below minus 30 degrees Celsius. Last week, almost 300,000 were left without power in New Brunswick and Nova Scotia. It's been so cold that sharks are being found frozen to death off the coast. The reality is that forecasts have this winter being the coldest since 2014/2015, when the REIT's margin was 200 basis points lower than today. While we wouldn't expect a return to those levels, even meeting in the middle would reduce FFO [funds from operations] by 2 cents in 2018. Killam is perhaps the most impacted by weather of all the multi-family REITs and the stock drifted sideways for most of 2014-2015. Again, we wouldn't expect such a severe impact but we would be remiss if we didn't adjust estimates and expectations to account for a likely spike in utility cost."
After a "strong" performance in 2017 from the REIT, Mr. Avalos lowered the Halifax-based REIT to "market perform" from "outperform."
"In part because of their strong operational results, but also because of the general strength of the multi-family sector, Killam posted a 22-per-cent total return in 2017 (versus 10 per cent for the TSX Capped REIT Index)," he said. This was good enough for Top 15 performance out of the 45-plus companies in the space. The stock is just off its 52-week high.
"The REIT has enjoyed NOI [net operating income] growth and cap rate compression that have combined to drive NAV [net asset value] 5 per cent year over year. As a result, Killam now trades at a 7-per-cent premium to our NAV, a steep 14 percentage points above its 7-per-cent average discount over the last three years. On a multiple basis, the REIT trades at 19.8 times 2018 estimated AFFO, or a 2.7-times premium to its three-year average."
Mr. Avalos did not specify a target price for the REIT. His previous target was $15, while the consensus is now $14.82.
BMO Capital Markets analyst Joe Levesque upgraded NuVista Energy Ltd. (NVA-T) to "outperform" from "market perform" and raised his target to $9.50 from $9. The average target is $10.24.
"We believe the company is set to differentially outperform peers due to a lack of exposure to anticipated weak gas prices, improving valuations, and a resumption of growth within our target price horizon," the analyst said. "The company trades at a 2019 estimated EV/EBITDA [enterprise value to earnings before interest, taxes, depreciation and amortization] of 6.8 times, a small premium to the peer group that we believe is warranted based on its strong financial position and insulation from domestic gas markets."
Mr. Levesque also upgraded Paramount Resources Ltd. (POU-T) to "outperform" from "market perform." He lowered his target to $24.50 from $26. The average target is $26.80.
"Recently demonstrated conservative guidance and a 2018 focus on operational efficiency leads us to believe that Paramount is likely to exceed consensus expectations in 2018," he said. "We also believe that the stock's dependence on AECO gas prices has been overestimated by the market. With a resumption of aggressive growth in 2019 now within our valuation horizon, we see the shares as undervalued and expect the stock to differentially outperform peers. "
He downgraded Birchcliff Energy Ltd. (BIR-T) to "market perform" from "outperform," dropping his target to $4 from $7.50. The average is $7.37.
"The recent slide in AECO gas futures appears to have left the company unable to meet its target of hedging 50 per cent of production," he said. "Additionally, the company has not yet announced an expansion of egress for remaining natural gas production, leaving it heavily exposed to anticipated weak AECO natural gas prices. Despite the recent slide in company valuations, we no longer see the shares as under priced."
Mr. Levesque also initiated coverage of Bellatrix Exploration Ltd. (BXE-T) with an "underperform" rating and $1.90 target, which is below the consensus of $2.37.
"We believe the company's shares are overvalued primarily due to excessively high debt levels and AECO exposure in the face of a challenged commodity outlook," he said. "The company currently sports bottom-tier leverage ratios and netbacks. We see current valuation on an EV/EBITDA basis as not fully reflecting the risks inherent."
PetroShale Inc. (PSH-X) provides investors with "unique" pure-play exposure for a Canadian-listed investment vehicle to the Bakken formation in North Dakota, according to Canaccord Genuity analyst Sam Roach.
He initiated coverage of the Calgary-based junior oil and natural gas company with a "buy" rating.
"PetroShale's assets are in the sweet spot of the Bakken near some of the best well results in the play," said Mr. Roach. "The company's leases are surrounded by strong well results in three of four stacked zones, including the 'pacesetter' that produced greater-than 3,600 barrels of oil equivalent per day in the first month on production.
"PetroShale recently drilled four operated wells in the ND Bakken, and participated in eight non-operated wells with various working interests. Our type curve generates average production of 830 boe/d (77-per-cent liquids) in the first year, which is very impactful to a 2,000 boe/d producer."
He set a target of $2.30. Consensus is $2.88.
"In our view, PetroShale offers a unique and attractive mix of asset quality and strong management, combined with fully funded, above-average growth potential," the analyst said.
Though he raised his target price for shares of Aphria Inc. (APH-T) following Wednesday's release of in-line second-quarter financial results, Canaccord Genuity analyst Matt Bottomley cautioned investors to "potentially look for lower buying opportunities in the near term," citing the recent "significant" rise in the sector's valuations over the past few weeks.
"However, due to Aphria's high quality operations and lower relative valuation versus its peers, we are reiterating our 'speculative buy' recommendation for the company at this time," he said.
The company reported quarterly revenue of $8.5-million, up 39 per cent sequentially but below the analyst's projection of $9.2-million estimate. He attributed the miss to wholesale revenue.
Adjusted EBITDA was $1.6-million, also missing Mr. Bottomley's estimate ($3-million), due to increased production costs and expenses.
"Although FQ2 was generally in line, perhaps more relevant was Aphria's announcement on Monday regarding its strategic initiative with Double Diamond Farms to secure an additional 120,000 kilograms of cultivation capacity," he said. "Combined with Aphria's existing planned capacity of 100,000 kg (Part IV expansion), the company believes it is on pace to achieve the largest production run rate in the industry by 2019 at 220,000 kg. Although we believe the amount of 'potential capacity' to service the overall Canadian market is becoming increasingly saturated, management provided additional colour during the earnings call on its plans to potentially earmark a sizable chunk of its capacity for international exports down the road."
Increasing his assumed total Canadian market share estimate for the company to 14 per cent from 11 per cent, he also raised his 2019 and 2020 earnings per share projections to 37 cents and 71 cents, respectively, from 29 cents and 47 cents.
He hiked his target for the stock to $23 from $14. The average target is now $21.78.
"We believe Aphria is set to capture a sizable market position in the industry between its sizable Part IV greenhouse expansion and its recently announced strategic relationship with Double Diamond," Mr. Bottomley said.
Elsewhere, Cormark Securities Inc. analyst Jesse Pytlak upgraded Aphria to "speculative buy" from "market perform" with a target of $27, rising from $18.
In other analyst actions:
Morgan Stanley analyst Tom Abrams upgraded TransCanada Corp. (TRP-T) to "overweight" from "equal-weight."
RBC Dominion Securities analyst Geoffrey Kwan upgraded Onex Corp. (ONEX-T) to "outperform" from "sector perform" and dropped his target to $102 from $106. The average is $101.90.
BMO Nesbitt Burns analyst Andrew Breichmanas upgraded Teranga Gold Corp. (TGZ-T) to "outperform" from "market perform" and raised his target to $4.50 from $4. The average is $5.13.
"Teranga reported 2017 gold production of 233,267 ounces from its Sabodala mine in Senegal, exceeding the high end of its 205,000-225,000 ounze full-year guidance range," said Mr. Breichmanas. "The result implies Q4/17 production well ahead of our estimate. The strong performance during the period could mark a turning point as operations enter a period that the mine plan suggests will result in strong cash flow. Teranga appears to present an interesting investment opportunity through 2018 based on a combination of improving cash generation, anticipated project catalysts, and attractive relative value; we are upgrading our rating to Outperform."
Paradigm Capital analyst Daniel Kim initiated coverage of Photon Control Inc. (PHO-X) with a "buy" rating and target of $2.60. The average is $2.42.
Barclays initiated coverage of Netflix Inc. (NFLX-Q) with an "overweight" rating and $245 (U.S.) target. The average target is $220.11.
Wells Fargo Securities analyst Michael Blum downgraded Kinder Morgan Inc. (KMI-N) to "market perform" from "outperform" with a $21 (U.S.) target, dropping from $24. The average is $22.
He also downgraded Spectra Energy Partners LP (SEP-N) to "market perform" from "outperform" and lowered his target to $46 (U.S.) from $51. The average is $47.33.
Mr. Blum upgraded Oneok Inc. (OKE-N) to "outperform" from "market perform" with a $66 (U.S.) target, rising from $58. The average is $59.12.