Inside the Market's roundup of some of today's key analyst actions. This file will be updated often during the trading day so check back for new details.
The all-share offer from Suncor Energy Inc. (SU-T;SU-N) to acquire Canadian Oil Sands Ltd. (COS-T) did not shock Desjardins Securities analyst Justin Bouchard, though he was surprised the transaction, worth $6.6-billion, was unsolicited.
Mr. Bouchard said shares of COS "were too cheap" from a "risk-reward" perspective. He added: "the potential return from current levels does not warrant hanging on to the stock. Accordingly, he downgraded his rating to "sell" from "hold."
"We could argue about that -- particularly in the context of the current pricing environment -- but the one undeniable fact is that the Syncrude asset is a very long-life project -- upward of 50 years," he said. "And, our bet is that oil prices will recover significantly at some point within that timeframe. The pressing issue, though, is whether the company has the wherewithal to survive in a 'lower for longer' environment; the company has clearly stated that it requires [$60 per barrel] to cover its cash operating costs, sustaining capital, interest, dividends and overheads -- anything less and something has to give. Granted, the company's balance sheet is stretched a bit thin -- but by no means is it out of control and there is still ample liquidity with no near-term maturities. So from our perspective, the company is decently positioned to ride out the storm to a better day. Would you rather be along for the ride with COS or SU driving the bus?"
He added: "We believe the offer is a bit on the low side; the market arguably agrees, with the shares currently trading at an 8.5-per-cent premium to the offer price, and close to our fair value estimate of [$10 (Canadian) per share]. Is it plausible that we will see a higher bid? Sure it is. However, our perspective is that investors should sell their shares given the small difference between the current price and our fair value estimate."
The analyst maintained his $10 (Canadian) target for shares of Canadian Oil Sands. The average analyst target price is $8.88, according to Bloomberg.
Mr. Bouchard maintained his "hold" rating for Suncor with a $39 target, compared to the average of $41.45.
He said the only other logical buyer for COS is Imperial Oil (IMO-T), and he said it's "unlikely to bite."
"We would be surprised if IMO/SU have not already spoken on this transaction, and thus believe we could see some level of 'co-operation'. As a result, we believe it's unlikely that IMO comes over the top with a competing bid."
He added: "This changes everything; bid shines spotlight on high-quality assets. We firmly believe that a hostile bid by one of Canada's premier E&P companies paves the way for more to come in the Canadian oil patch. High-quality assets are especially at risk, and that's food for thought when it comes to other high-quality assets -- Cenovus is one such company."
Meanwhile, Macquarie analyst Chris Feltin upgraded Canadian Oil Sands to "neutral" from "underperform" and raised his target to $8.85 from $6.50. TD Securities analyst Menno Hulshof downgraded his rating to "reduce" from "hold," though he raised his target to $8.85 from $8.50.
Raymond James analyst Chris Cox maintained his "market perform" rating for COS, but he raised his target price to $10.25 from $9. He explained:
"We believe that the current offer reflects fair value for the shares under a long-term price of [approximately $65 to $70 (U.S.) per barrel of WTI. This is a slight premium to what other large cap energy names with stronger balance sheets are currently implying, as well as a noticeable premium to the current strip.
"We suspect the COS Board of Directors will recommend investors reject the current offer. Both management and the Board at COS had previously rejected offers at a higher exchange ratio, so we believe it is unlikely that COS would accept the 0.25/share offer. We also highlight that there is the possibility that another large owner in the Syncrude partnership could try to offer a competing bid."
Mr. Cox said he likes the deal from "a strategic angle for Suncor" though he said it is paying a "healthy price." He added that premium is "a reflection in our view of the hostile nature of the deal, the company's previous attempts at acquiring Canadian Oil Sands at a higher exchange ratio and the risk of potential premium bids from competing buyers within the existing Syncrude partnership."
Maintaining his "outperform" rating and $41 target for Suncor, he said a competing bid could emerge or Suncor may "notionally" increase its offer to get the deal "across the finish line." He added:
"We continue to recommend Suncor within the Canadian large cap energy space. The company boasts an enviable combination of: 1) a strong balance sheet; 2) strong operational execution; 3) strength of the company's integrated business model; and, 4) effectively no gas exposure, providing significant leverage to higher oil prices. However, while Suncor has demonstrated strong performance on capital discipline with its legacy assets, we do believe the premium offered for Canadian Oil Sands could negatively impact the strong reputation Suncor has earned in recent years."
BMO Nesbitt Burns analyst Randy Ollenberger called the acquisition "positive" for Suncor, which he said "remains our top investment recommendation" with an "outperform" rating and unchanged $43 target.
"Aside from the obvious synergies related to eliminating the corporate overhead, there is potential to tie Syncrude facilities back to Suncor's existing mining operations to add redundancies and improve reliability," he said. "Further, we believe Suncor could seek operatorship of Syncrude in the future providing additional leverage to potential operational improvements."
Despite applauding the decision by Potash Corp. of Saskatchewan Inc (POT-T;POT-N) to withdraw its $8.8-billion (U.S.) bid for K+S AG, Raymond James analyst Steve Hansen said he "remains cautious" on the stock.
Citing "persistent" macro headwinds and "steadily deteriorating" potash fundamentals, he lowered his price target for the U.S. issue of the stock to $25 (U.S.) from $30. The analyst average is $29.51. He maintained his "market perform" rating for the stock.
"Despite our positive view of POT's aforementioned decision, we continue to harbor escalating concerns over deteriorating global potash fundamentals," said Mr. Hansen. "Specifically, we point to weakening demand in key growth markets (Brazil, China, India, Indonesia) associated with the sharp depreciation in domestic currencies [versus the U.S. dollar], lingering crop price weakness, and China's recent decision to reintroduce a 13-per-cent value-added tax on fertilizer sales -- just to name a few. Meanwhile, global producers seem content to push copious volume at the market, many seemingly attempting to protect market share in key markets, thus driving spot prices in several regions to drop below the benchmark Chinese contract. Against this backdrop, we now expect the next Chinese contract will reset lower ($300 (U.S.)/mt), an outcome with reverberating price implications globally, ultimately weighing on our 2016 forecast."
The $57.5-million acquisition of Mobil Capital Holdings by AGT Food and Ingredients Inc. (AGT-T) is a "highly strategic" transaction, according to Raymond James analyst Steve Hansen.
In the wake of the announced agreement for the private group, which came after markets closed Monday, and a recent decline in AGT share prices, Mr. Hansen upgraded his rating for the stock to "outperform" from "market perform."
"While specific metrics were not disclosed, we assume the purchase will prove accretive, consistent with the company's long-held strategy to pay less than 5 times EBITDA for tuck-ins," he said, adding: "In addition to the deal likely being accretive … we like that the sellers will become closely aligned with AGT management by taking equity. We also like that the residual, staged payout is easily handled by the company's existing credit facilities."
Mr. Hansen said: "While less obvious on the surface, we believe one of the most significant benefits stemming from this deal will be the enhancement and broader fortification of AGT's originating capabilities in southern Saskatchewan. In other words, we expect AGT's consolidation of these complimentary rail assets will significantly reduce the origination competition previously faced across key growing regions -- leaving as many as four large competitors to look elsewhere for their supply. Make no mistake -- origination is a critical upstream competitive advantage, in our view, particularly in a world where demand often exceeds supply."
He also raised his target price for the stock by a loonie to $35 (Canadian). Consensus is $34.21.
When analyzing "potential paths" for Callidus Capital Corp. (CBL-T), CIBC World Markets analyst Paul Holden said he keeps landing on the same answer: "[Founder, managing partner and chief executive officer] Newton Glassman will have to consider taking the company private."
Mr. Holden downgraded the stock to "sector performer" from "sector outperformer" based on the privatization outcome.
"The stock is not responding to what we believe are the most important drivers for the company: loan growth, credit provisioning and earnings growth," he said. "However, more loan growth, more provisioning at current levels and more earnings growth appear unlikely to take the stock higher."
He added: "Management has taken capital measures to address the sagging share price. The company has aggressively used its normal-course issuer bid and introduced a 70-cent per share annual dividend in August, which now implies a 6.1 per cent yield. Since these actions the stock has only traded lower."
The analyst also lowered his target to $14.50 (Canadian) from $20. Consensus is $22.42.
"Newton Glassman stated that he believes Callidus should be valued at 1.8 times loans o/s [outside the U.S.], implying a valuation of around $25.70," Mr. Holden said. "Given that the stock is trading at $11.49, such a high price is not necessary to take the company private. Instead we simply assume a slight premium to the $14 IPO price, leading to our new price target of $14.50. A go-private could happen mid-2016.
"We believe the stock is unlikely to trade materially higher in the absence of a take private transaction. That opinion could change if more specific action is taken to address market concerns. Items that we believe could help are: 1) comments/disclosure around specific loan situations; and 2) more principal re-payments."
The new management of NuVasive Inc. (NUVA-Q) has started to focus on operational improvements and will drive continued operational leverage, a focus of investors, even if revenue doesn't meet expectations, said Canaccord Genuity analyst William Plovanic.
"Our previous concerns about slowing (or constrained) top-line growth have played out in the [first half of 2015], but not to the extent we feared," said Mr. Plovanic. "We believe a current and projected strong U.S. macro for the broad spine market offset tough comps and will continue to provide a solid tailwind. However, we note that management has noted challenges for OUS with tough comps and management changes impacting [year over year] growth rates for the [second half of 2015."
He upgraded the stock to "buy" from "hold" and raised his target to $58 (U.S.) from $52. Consensus is $57.60.
"NuVasive management has undergone a significant transition over the past 12 to 18 months (CEO, CFO and COO)," said Mr. Plovanic. "While we were admittedly worried that the turnover in senior management would impact day-to-day operations, the execution over the past nine months gives us confidence that the company was able to navigate any potential issues. Furthermore, we believe new management has yet to implement major operational improvement initiatives of their own."
In other analyst actions:
FedEx Corp (FDX-N) was raised to "buy" from "hold" at Stifel by equity analyst David Ross. The 12-month target price is $172 (U.S.) per share.
Heartland Payment Systems Inc (HPY-N) was downgraded to "market perform" from "outperform" at Keefe Bruyette by equity analyst Steven Kwok. The target price is $70 (U.S.) per share.
Springleaf Holdings Inc (LEAF-N) was raised to "outperform" from "market perform" at Keefe Bruyette by equity analyst Sanjay Sakhrani. The 12-month target price is $55 (U.S.) per share.
Linn Energy LLC (LINE-Q) was downgraded to "hold" from "buy" at Stifel by equity analyst Brian Brungardt.
Medicure Inc (MPH-T) was rated new "buy" at PI Financial by equity analyst Sheila Broughton. The 12-month target price is $5.75 (Canadian) per share.
Select Medical Holdings Corp (SEM-N) was raised to "outperform" from "market perform" at Wells Fargo by equity analyst Gary Lieberman.
Smart & Final Stores Inc (SFS-N) was raised to "overweight" from "equal-weight" at Barclays by equity analyst Meredith Adler. The target price is $19 (U.S.) per share.
Teledyne Technologies Inc (TDY-N) was downgraded to "hold" from "buy" at Needham & Co. by equity analyst James Ricchiuti.
Vantiv Inc (VNTV-N) was downgraded to "market perform" from "outperform" at Keefe Bruyette by equity analyst Steven Kwok. The target price is $49.00 per share.
With files from Bloomberg News