Jim Wilson
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.
Following the announcement of its proposed all-share purchase of Lake Shore Gold Corp. (LSG-T), Raymond James analyst Chris Thompson upgraded his rating for Tahoe Resources Inc. (THO-T, TAHO-N)
Under the agreement, Tahoe will issue 0.1467 of its stock for each Lake Shore Gold share in a deal worth $884-million, according to Mr. Thompson's calculations based on a Feb. 8 share closing price of $10.91. He noted his net asset value (NAV) estimate for LSG's asset base was $888-million.
"The deal value [prices] LSG's assets at 1.2-times NAV (or one-times NAV for all assets including non-production ounces), a fair price compared with peers (junior/intermediate producers currently trading at 1.1-times NAV)," he said. "As such, we see interloper risk as being intermediate sector specific and limited."
He added: "For THO shareholders, our view of the transaction is constructive (adding North American production), albeit a tad expensive (valuation neutral). Upside for shareholders (THO, LSG) is offered by growth from both companies, high margin cash flow from THO and North American production from LSG. Whilst we have long maintained Escobal's robust economics and healthy mine life compensates investors for geopolitical uncertainty, the addition of LSG's asset base should be welcomed, even if it translates to being NAV neutral."
In reaction to the deal, Mr. Thompson lowered his 2015 and 2016 earnings per share estimates for Tahoe to 21 cents (U.S.) and 39 cents, respectively, from 29 cents and 48 cents. His cash flow per share forecasts moved to 54 cents and 88 cents from 73 cents and 92 cents, respectively. His revenue estimate for 2015 remains $510-million, but his 2016 projection moved to $768-million from $617-million.
Moving his rating for stock of Tahoe to "strong buy" from "outperform," Mr. Thompson maintained a target price of $15.25 (Canadian). The analyst average target price is $15.93, according to Bloomberg.
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Desjardins Securities analyst Michael Parkin raised his rating for Lake Shore Gold Corp. (LSG-T) following the friendly all-share acquisition by Tahoe Resources Inc. (THO-T, TAHO-N)
"We note that the market appears to have expected a transaction last Friday, with LSG shares significantly outperforming the peer group and Tahoe underperforming," said Mr. Parkin. "We view this as a good offer and recommend shareholders of Lake Shore tender to the offer; we are thus moving our target price to be in line with the offer price and changing our recommendation to tender from buy. We no longer view Lake Shore as trading on fundamentals now that a bid is in place."
He raised his target price for Lake Shore shares to $1.71 from $1.50. The analyst average is $1.66.
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Commodity prices will continue to weigh on the results of Canadian energy infrastructure companies, said Raymond James analyst Chris Cox in a fourth-quarter 2015 earnings preview note.
Midstream-related companies begin reporting financial results on Feb. 10 with Keyera Corp. (KEY-T)
"4Q15 was once again another quarter in which most commodity exposed cash flows will likely be weak for our midstream peer group," he said. "That said, frac spreads bounced off the bottom seen in 3Q15, albeit still at levels that are barely profitable. Unfortunately, Alberta power prices still haven't found a bottom, setting another record low this past quarter. For a number of the midstream names in our coverage universe, the saving grace is likely to come in the form of the positive impact of the weaker Canadian dollar impacting the translation of U.S. dollar earnings for a number of companies."
Mr. Cox added: "We see two themes driving increased attention to M&A in the space following 4Q15 results. First, the continued drop in oil prices into 2016 is now forcing even more drastic reductions in spending from all producers and even pressuring the balance sheets of some of the more resilient operators to date. With access to capital markets virtually non-existent for most producers today, divesting of midstream assets is beginning to look increasingly compelling, not to mention the additional pressure from lending groups to manage balance sheets. Secondly, with the partial completion of the Alberta royalty review, we believe there is sufficient clarity for producers and midstream operators to consider such transactions, which should narrow the bid-ask spread on asset sales. Combined, these two factors are likely to drive a wave of transactions in the space and we expect to hear commentary from a number of management teams regarding their plans in this environment."
Ahead of the release of results, Mr. Cox lowered his target price for Keyera to $48 from $50 with an "outperform" rating. The analyst consensus is $45.36, according to Thomson Reuters.
"We are expecting adjusted EBITDA of $166-million, which is up 30 per cent year-over-year, but down 12 per cent from the prior quarter," the analyst said. "Contributions to the strong year-over-year growth are fairly balanced across the company's business segments, while the decline in EBITDA versus 3Q15 is primarily attributable to seasonally lower margins from Alberta EnviroFuels (AEF)."
He also lowered his target for Gibson Energy Inc. (GEI-T) by a loonie to $20 with an unchanged "outperform" rating. Consensus is $18.63.
"We are expecting adjusted EBITDA of $96-million, down 18 per cent versus a year ago but up roughly 3 per cent from 3Q15," said Mr. Cox. "Year-over-year declines reflect the continued pressures on the company's more services-oriented business segments while the modest increase in EBITDA sequentially primarily reflects seasonality within the propane segment.
"A key focus for investors heading into the quarter will be the dividend. We expect the company will maintain its current dividend policy, despite previous commentary from management alluding to dividend growth."
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The recent sell-off in shares of Primero Mining Corp. (PPP-N, P-T) "appears overdone," according to RBC Dominion Securities analyst Dan Rollins, who believes the market has assumed a "worst case tax outcome at San Dimas is a given."
Toronto-based Primero is facing a legal claim from the Mexican tax authority (SAT), which is aiming to nullify a 2012 APA (Advance Pricing Agreement) ruling.
"While the market may have taken a 'shoot first ask questions later' stance, assuming a worst case tax outcome at San Dimas is, in our view, premature as there is no certainty the Advanced Pricing Agreement (APA) will actually be nullified and/or a long-term tax framework not be reached between Primero and the Mexican tax authorities," said Mr. Rollins.
"Since announcing last Wednesday that the Mexican tax authorities had filed a legal claim to nullify the APA granted by the same tax authorities in 2012, Primero's share price has fallen 36 per cent on an absolute basis. Relative to the Gold Miners Index (GDX), the company's share price has underperformed by 50 per cent. Further weighing on the company's share price performance could have been concerns related to Primero's potential ability to draw on its line of credit in order [to] pay back a portion of the convertible debt facility due in March, 2016."
Maintaining his "outperform" rating, Mr. Rollins lowered his target price to $2.25 (U.S.) from $3.25. The analyst consensus is $4.70.
"In our view, the sell-off has created an attractive risk/reward opportunity for investors with the patience to allow for the legal process to play out in Mexico and the patience for Primero to reach an agreement with the Mexican tax authorities and/or potentially negotiate better terms under the silver streaming agreement," the analyst said. "Any of the scenarios could result in an improvement in the company's share price."
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The coming year will be "one of the most trying periods for the oilfield services sector in three decades," said CIBC World Markets analyst Jon Morrison in a fourth-quarter 2015 earnings preview.
Mr. Morrison said activity levels for the quarter are largely in line with his projections; however, he said "immense" volatility in commodity prices and troubling data points lead to his pessimistic outlook.
He said: "While we believe it is important for investors to maintain perspective and recognize that: 1) volatility creates opportunity; and, 2) we are at the point in the cycle when the market tends to misprice cyclical stocks, most of this potential upside will probably be entirely overshadowed by negative data points and narrative over the coming weeks, months and quarters. As such, while we are structurally positive on where equity prices will be in the next 12 to 18 months, we would emphasize that the coming year will be a period that harvests structural winners and losers and leaves a number of bankruptcies and balance sheet restructurings ahead. As such, we believe 2016 will be a year entirely about survivability and strategic positioning."
He advocated investors use "strong caution" on holding oilfield service equities "with any material exposure to the oil sands development," noting he believes it will be three to five years before any structural expansion to the oil sands market occurs again.
Mr. Morrison downgraded his rating for Calfrac Well Services Ltd. (CFW-T) to "sector performer" from "sector outperformer."
He based his change on "the combination of: 1) existing and expanding leverage ratios; 2) long-term balance sheet challenges, which may include the need for a potential restructuring depending on how market conditions evolve; and 3) the company's soon-to-be-vacant CFO chair, with Mick McNulty stepping down after Q4/2015, creates too many headwinds that need to be addressed before we can focus on the 'upside case' in the equity."
He lowered his price target for the stock to $2.25 from $3. Consensus is $2.59.
He also made target changes to the following companies:
- Black Diamond Group Ltd. (BDI-T, sector performer) to $6.25 from $7.25. Consensus: $9.53.
- Enerflex Ltd. (EFX-T, sector outperformer) to $17 from $18. Consensus: $16.
- Ensign Energy Services Inc. (ESI-T, sector performer) to $7.50 from $8.50. Consensus: $8.26.
- Pason Systems Inc. (PSI-T, sector underperformer) to $16 from $16.25. Consensus: $19.96.
- Precision Drilling Corp. (PD-T, sector outperformer) to $7.50 from $8. Consensus: $6.98.
- Savanna Energy Services Corp. (SVY-T, sector outperformer) to $2.25 from $2.50. Consensus: $2.19.
- Trinidad Drilling Ltd. (TDG-T, sector outperformer) to $2.75 from $3.25. Consensus: $3.14.
- Western Energy Services Corp. (WRG-T, sector outperformer) to $5.50 from $6. Consensus: $4.59.
"There's no other way of saying it – the macro environment is terrible," he said. "Oil prices continue to slide and visibility for the North American oilfield services sector is near a three-decade low. And while there are endless reasons to be positive about where commodity prices will head in the second half of 2016 and how the operating environment should improve over the next 12 to 18 months, today the outlook looks opaque at best and downright scary at worst. With this said, therein lies the opportunity. Great investments in the oilfield services sector are rarely made by initiating new positions mid-cycle following a bullish run in stocks and while the outlook is still glowing. We have long stated that in order to make adequate risk-adjusted returns within the sector, investors need to be positioned near the bottom of the cycle when the outlook is terrible (or worse), proceed to hold the names through the market malaise and then be prepared to sell equities and reduce sector weightings once the health of the industry is widely accepted and forward upside potential is compelling. As it sits, we feel we are near point one in that three-stage cycle. While there are lots of reasons as to why high-quality names could slide further and provide incremental negative short-term beta, we view the bottom as being somewhat near and believe now is the time for investors to do their homework and start selectively adding exposure to the space."
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BMO Nesbitt Burns analyst Heather Kirk increased her target price for Milestone Apartments Real Estate Investment Trust (MST.UN-T) after resuming coverage following the completion of its $502-million (U.S.) acquisition of a 15-property portfolio from Landmark Apartment Trust Inc.
"We view the acquisition as consistent with the REIT's goal of adding scale, enhancing portfolio quality and leveraging MST's operating platform," she said. "The 15 acquired properties are newer vintage, with an average age of 10 years, which compares favourably to MST's average portfolio age of 27 years.
"The transaction also establishes a strategic relationship with Starwood Capital Group, a well-capitalized and sophisticated investment group with a 25 year track record of successful and opportunistic real estate investment. MST has entered into a strategic agreement with Starwood to manage 63 properties with a value of $1.4-billion (U.S.) on Starwood's behalf. The agreement with Starwood leverages the REIT's property management platform, close to triples fee income and is expected to add $1.8-million annually to [adjusted funds from operations] or 2 cents per unit."
Maintaining her "outperform" rating, Ms. Kirk raised her target to $17.50 from $16.50. Consensus is $18.70.
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In other analyst actions:
Black Diamond Group Ltd. (BDI-T) was downgraded to "underperform" from "market perform" at FirstEnergy Capital by equity analyst Ian Gillies. The 12-month target price is $3.50 (Canadian) per share.
Cathedral Energy Services Ltd. (CET-T) was downgraded to "underperform" from "market perform" at FirstEnergy Capital by equity analyst Ian Gillies. The 12-month target price is 20 cents (Canadian) per share.
Canadian Energy Services & Technology Corp. (CEU-T) was downgraded to "underperform" from "market perform" at FirstEnergy Capital by equity analyst Ian Gillies. The 12-month target price is $2.75 (Canadian) per share.
Canaccord Genuity Group Inc. (CF-T) was downgraded to "hold" from "buy" at TD Securities by equity analyst Graham Ryding. The 12-month target price is $5 (Canadian) per share.
Calfrac Well Services Ltd. (CFW-T) was downgraded to "market perform" from "outperform" at FirstEnergy Capital by equity analyst Ian Gillies. The 12-month target price is $1.75 (Canadian) per share.
salesforce.com inc. (CRM-N) was raised to "hold" from "underperform" at Jefferies by equity analyst John Difucci. The 12-month target price is $54 (U.S.) per share.
Ultragenyx Pharmaceutical Inc. (RARE-Q) was rated new "buy" at HC Wainwright by equity analyst Carol Werther. The 12-month target price is $104 (U.S.) per share.
SS&C Technologies Holdings Inc. (SSNC-Q) was raised to "outperform" from "market perform" at Raymond James by equity analyst Patrick O'shaughnessy. The 12-month target price is $66 (U.S.) per share.
TCF Financial Corp. (TCB-N) was raised to "neutral" from "sell" at Compass Point by equity analyst Jesus Bueno. The 12-month target price is $12.50 (U.S.) per share.
Yelp Inc. (YELP-N) was raised to "neutral" from "sell" at B. Riley by equity analyst Sameet Sinha. The 12-month target price is $15 (U.S.) per share.
With files from Bloomberg News
David Leeder