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TransCanada Corp.s Keystone XL pipeline.Nathan VanderKlippe/The Globe and Mail

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

After a strong end to fiscal 2017, Boyd Group Income Fund (BYD.UN-T) continues to possess a "solid" growth outlook, according to Raymond James analyst Steve Hansen.

On Wednesday, Winnipeg-based Boyd reported fourth-quarter adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $41.8-million, up 28 per cent year over year and a "healthy" beat versus both Mr. Hansen's projection of $40.4-million and the Street's expectation of $40-million. The variance was due largely to stronger-than-anticipated EBITDA margins.

"Revenue grew 15 per cent year over year to $414.6-million benefitting from acquisitions and modest SSS growth (up 1.4 per cent), offset by stiff FX headwinds ($15.8-million) and an industry-wide shortage of repair technicians," said Mr. Hansen. "On the latter specifically, management described the shortage as an issue that limited its ability to handle the workload available (crimping same store sales growth). BYD is stepping up its efforts in response. Specifically, management intends to use 50 per cent of the firm's recent U.S. tax reform savings to fund an enhanced employee benefits package aimed at improved recruitment/retention—a move that will reportedly make the firm 'highly' competitive in the market.

"BYD's M&A team remains very active, adding 16 locations during the quarter, including a 9-store MSO in the Nashville region, the firm's first foray into the state of Tennessee. Subsequent to quarter-end, the company added 11 more locations, including its first locations in Texas—arguably one of the country's largest and fastest growing markets (& most competitive). Management clearly expects to build off these initial beachheads. Taken together, Boyd now boasts 509 locations in 22 states and 5 Canadian provinces. In 2017, the company added 106 locations (up 26 per cent). Still, with more than $400-plus million in dry powder available, we expect further growth to ensue."

Maintaining an "outperform" rating for Boyd based on a "constructive view of Boyd's proven leadership team, remarkable execution, and long-term growth prospects," Mr. Hansen hiked his target to $125 from $110. The analyst average target is $119.30, according to Bloomberg data.

"With its M&A pipeline reportedly flush, management remains confident in its growth ambitions," the analyst said. "That said, while industry conditions (demand) remain robust, the technician shortage issue is expected to keep SSS below historical levels near-term. FX was also flagged as a near-term headwind. Notwithstanding these near-term issues, we remain positive on Boyd's long-term prospects and remarkable track record of execution."

Laurentian Bank Securities analyst Elizabeth Johnston raised her target for Boyd to $120 from $115 with a "buy" rating (unchanged).

Ms. Johnston said: "While we recognize that the valuation multiple has remained elevated (now trades at 13.7 times our 2018 enterprise value-to-EBITDA estimates, compared to the overall peer group at 12 times), we continue to believe that a premium multiple is warranted as the company delivers consistent revenue, EBITDA and EPS growth, consistent and improving EBITDA margin (over time) and maintains a strong opportunity for growth through M&A with the balance sheet to support it."


TSO3 Inc. (TOS-T) is entering a "crucial" year as its new co-commercial strategy with Getinge Infection Control AB, its global distribution partner, takes effect, said Desjardins Securities analyst Frederic Tremblay.

In late January, TSO3 announced changes to its distribution deal with Sweden-based Getinge. Under the revised agreement, TS03 will sell its STERIZONE VP4 Sterilizers and associated products and services directly into the United States and Canada.

"Following the announcement of modifications to the agreement with Getinge in January, work has begun for TSO3's recently assembled sales team," said Mr. Tremblay. "In the first six weeks, the team submitted six customer quotes (for 1–2 devices each). In the coming weeks, the plan is to continue to establish contact with new accounts (eg trade shows) and communicate the benefits of the VP4 sterilizer."

"We have limited visibility on the pipeline of opportunities for TSO3's direct sales team at this point and expect the company's cash burn to accelerate at this early stage of the co-commercialization agreement. In addition, TSO3 and Getinge continue to actively negotiate as the agreement will terminate on August 1, 2018 unless extended by mutual agreement."

Mr. Tremblay called Quebec City-based company's in-line fourth-quarter financial results, released Tuesday, "essentially a non-event" given it had pre-leased shipments to Getinge.

However, he did lower his 2018 earnings per share projection to a loss of 10 cents from a 6-cent loss. His 2019 estimate is now a 4-cent loss, down by 2 cents.

Keeping a "hold" rating for TSO3 shares, he dropped his target to $1.60 from $2. The average is $1.90.

"Considering the low visibility on the pipeline for TSO3's direct sales at this early stage of the new commercialization approach, we reiterate our Hold–Above-average Risk rating," he said. "Returning to a more constructive view would largely be a function of witnessing clear indications of early success from TSO3's direct sales efforts."

Meanwhile, Laurentian Bank Securities analyst Nick Agostino dropped his target to $1.40 from $2.25 with a "hold" rating.

"At this stage we elect to remain on the sidelines, awaiting Q1/18 results which should include indications of Q2 sales activity, and any progress with the FDA," he said.


Global pulse markets are likely to remain "challenged" through the first half of 2018 due to the impact of multiple industry headwinds, placing further pressure on AGT Food and Ingredients Inc. (AGT-T) following "fundamentally weak" fourth-quarter 2017 results, said Raymond James analyst Steve Hansen.

"In the more immediate term, we also highlight the risk of rail congestion throughout western Canada as a headwind to export shipments and normalized bulk handling operations," he said. "While AGT management is optimistic that a cyclical recovery will ensue in [the second half of 2018], we will reserve judgement until more convincing data/evidence surfaces, with our eye specifically focused on the Indian pulse harvest (quality/quantity) and any commensurate implications on the country's import expectations."

On Tuesday, Regina-based AGT reported adjusted EBITDA for the quarter of $15.6-million, meeting the $15.5-million expectation of both Mr. Hansen and the Street and representing a drop of 55 per cent year over year.

Mr. Hansen said "sustained" weakness in the company's core pulse business led to lower consolidated sales (down 37.4 per cent) and gross profit (down 37.2 per cent).

Despite the declines, he did emphasize the potential of AGT's ingredients business, which he said is "paying off."

"We believe AGT's strategic foray into value-added food ingredients continues to pay off, evidenced by the moderating effect of the division through the current cycle, accounting for 50 per cent of 2017 EBITDA ($32.9-million) versus only 15-per-cent volume processed," said Mr. Hansen. "With its four ingredient lines now running at high rates, the installation of a new fiber milling line is expected to drive additional growth. A sharp decline in pea prices is also expected to help bolster margins."

With the results and the expectation of sustained macro challenges, Mr. Hansen lowered his 2018 earnings per share projection to 5 cents from $1.21. He introduced a 2019 estimate of 38 cents.

Maintaining a "market perform" rating for AGT shares, he dropped his target to $18 from $21. The average on the Street is $20.13.

He noted: "AGT's Board recently approved a NCIB (up to 10 per cent of shares outstanding) and amended the terms of the purchase warrants held by strategic investor Fairfax Financial that previously limited the firm from accumulating more than a 19.99-per-cent stake in AGT (converted warrants represent 19.09 per cent). In effect, the amendment allows Fairfax to accumulate additional shares in the open market, a move that admittedly puts a committed buyer into the market."

Elsewhere, GMP analyst Anoop Prihar upgraded AGT to "buy" from "hold" with a target of $20, down from $21.

Laurentian Bank Securities analyst John Chu lowered his target to $22 from $24 with a "buy" rating (unchanged).

"The Q4 results and management commentary reinforce near-term headwinds from an oversupplied pulse market," said Mr. Chu. "While AGT believes H1/18 should be a period of recovery with a more normalized market as early as H2/18, we remain cautious that it may take longer than expected. Having said that, we recognize that ag crop cycles are generally self-correcting (oversupply eventually leads to a balanced or undersupplied market) and AGT should benefit significantly when that time comes (we est. 2019). As such, we remain a Buy but lower our TP to reflect the risk of a longer road to recovery. Industry data points (India, Canada, U.S., Australia) will be key in determining when and to what degree the market is recovering."


Though he said the rapid rise in shipping costs has surprised many U.S. food companies this year, RBC Dominion Securities analyst David Palmer believes General Mills Inc. (GIS-N) has been disproportionately affected.

"First, a rapid improvement in volume growth is adding capacity constraints to its supply chain," he said. "And secondly, its ongoing footprint optimization is driving more facility-to-facility shipments internally. Separately, the company is paying more for certain commodities like grains and dates, partly due to higher inbound freight costs. Still, we are surprised how the company overlooked these incremental cost items, especially after issuing its prior guidance only one month ago at the [Consumer Analyst Group of New York conference]."

On Wednesday, shares of the Minneapolis-based food manufacturer dropped 8.9 per cent after it cut its full-year profit forecast due to higher freight and commodity costs. The owner of the Häagen-Dazs and Betty Crocker brands now expects full-year segment operating profits to decline by 5 per cent to 6 per cent, a significant drop from the decline of as much as 1 per cent company announced in February.

"Fiscal '18 continues to be a top-line recovery year (org sales guidance up 1 per cent)," said Mr. Palmer/ "While we had been bracing for some increased merchandising expense, the magnitude of gross margin deterioration was surprising. The degree of profit guidance revision was also surprising—especially given Mills' strong track record in cost management and forecasting. In the quarters ahead, we will see cost reduction programs and the closure and integration of the initially dilutive Blue Buffalo (BUFF) acquisition."

Mr. Palmer lowered his fiscal 2018 EBIT growth forecast to a drop of 5 per cent from a 2-per-cent decline. He now expects 2019 growth to be 4 per cent, falling from a 5-per-cent increase.

He lowered his earnings per share by 1 US cent to US$3.10 (consensus is US$3.15) with his 2019 projection falling to US$3.28 from US$3.33 (versus US$3.36).

Keeping a "sector perform" rating for the stock, he dropped his target to US$52 from US$60 due to a lower earnings expectation. The average on the Street is US$52.65.

"We are also more cautious with respect to the company's sales and market share recovery while simultaneously pursuing new cost cutting to offset freight," said Mr. Palmer. "Mills' plate is full heading into FY19 with cost reduction, potential competitor response in cereal, and the pending acquisition of Blue Buffalo."

Elsewhere, Société Générale analyst Warren Ackerman upgraded his rating for General Mills to "hold" from "sell" with a US$48 target.

BMO Nesbitt Burns' Kenneth Zaslow lowered his target to US$51 from US$60 with a "market perform" rating.

Mr. Zaslow said: "GIS performance, outlook, and strategy, in our view, extends beyond industry challenges. To be fair, the industry continues to face incremental cost pressures from higher freight and lower retail inventory levels that are systemic and structural that may not yet be fully incorporated into estimates/guidance."


Initiating coverage with a "buy" rating, Acumen Capital analyst Brian Pow said he likes the business model of Redishred Capital Corp. (KUT-X), a Mississauga-based document and electronic data destruction company, as it's both easy to understand and simplistic in nature.

"The company's growth opportunities come in two forms: 1) organically growing its client base – KUT targets companies in buildings with existing clients or along existing routes, which provides the opportunity to achieve significant efficiencies and margin contribution. 2) Acquiring existing franchisees as they look to exit the market (usually retirement related), or acquiring small competitors and consolidating the routes into KUT's existing routes," said Mr. Pow.

Mr. Pow said the industry's low barrier for entry should not concern investors, believing it actually creates opportunities for Redishred, noting: "With the majority of KUT's competition being one or two truck operations, there are significant acquisition opportunities to choose from. Furthermore, the small new entrants typically cannot achieve the size and scale which KUT operates on, and if they build up a strong recurring customer business, then it sets them up as an acquisition target for KUT. KUT's looks for independent operators with revenues less than $500k/annum. The Company has historically completed acquisitions in the 3x-5x EBITDA range, and may pay a higher multiple if recurring revenue is strong."

Mr. Pow set a price target of 80 cents for shares of Redishred, which is in line with the consensus.

"We see significant opportunity for Redishred to capitalize on industry trends which necessitates the use of document and equipment destruction," he said. "Recent high-profile data breaches (Equifax, eBay, JP Morgan Chase, Yahoo) have garnered global attention, highlighting the need for document and equipment destruction. As massive fines are imposed on companies for improperly securing confidential information, we believe more companies will develop mandatory safeguarding policies for both paper and electronic information. We believe these macro trends support KUT's organic growth and acquisition roll-up strategies."


In other analyst actions:

Citing the impact of the U.S. Federal Energy Regulatory Commission's ruling on cost of service pipelines, Wells Fargo Securities analyst Praneeth Satish downgraded TransCanada Corp. (TRP-T) to "market perform" from "outperform" with a target of $62, which sits lower than the consensus of $69.62.

Morgan Stanley analyst Armintas Sinkevicius downgraded Magna International Inc. (MGA-N, MG-T) to "underweight" from "equal-weight" with a target of US$52. The average on the Street is US$64.09.

Desjardins Securities analyst Josh Wolfson downgraded Eldorado Gold Corp. (ELD-T) to "sell" from "hold" with a target of $1, down from $1.75. The average is $2.11.

TD Securities analyst Juan Jarrah upgraded Birchcliff Energy Ltd. (BIR-T) to "action list buy" from "buy." He lowered his target to $6 from $6.50, which remains higher than the average of $5.72.

Mr. Jarrah downgraded Raging River Exploration Inc. (RRX-T) to "buy" from "action list buy," believing potential positive catalysts have emerged over the past 10 months. He maintained a $12.50 target, which sits above the average of $9.87.

He also lowered Ikkuma Resources Corp. (IKM-X) to "hold" from "buy" with a 30-cent target, down from 60 cents. The average is 56 cents.

TD Securities' Aaron Bilkoski upgraded PrairieSky Royalty Ltd. (PSK-T) to "buy" from "hold" and lowered his target by a loonie to $32. The average is $33.75.

Macquarie analyst Brian Bagnell upgraded Seven Generations Energy Ltd. (VII-T) to "outperform" from "neutral" with a target of $22, rising from $18. The average among analysts covering the stock is $23.11.

National Bank Financial analyst Brian Milne downgraded RMP Energy Inc. (RMP-T) to "sector perform" from "outperform" with a 75-cent target, down from $1. The average is 79 cents.