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Inside the Market's roundup of some of today's key analyst actions
SNC-Lavalin Group Inc. (SNC-T) should appeal to both growth and value investors given its "highly discounted" valuation and "best in class" earnings per share growth profile, according to Canaccord Genuity analyst Yuri Lynk.
He raised his target price for shares of the Montreal-based engineering and construction company following the closing of its $3.6-billion acquisition of WS Atkins plc on Monday, which he called "transformational."
"From a capital markets perspective, SNC is now the largest publicly traded E&C company in North America," said Mr. Lynk. "This should attract a wider spectrum of investors and could help to close the valuation gap that presently exists compared to its peers. Similarly, we think the core E&C business has reached an inflection point with Atkins boosting SNC from the twelfth to the fourth largest design firm globally. In our view, this should allow SNC to compete for the next level of marquee projects, where less competition exists. Furthermore, working on such projects goes a long way towards attracting and retaining top engineering talent."
He added: "By revenue, the company is now the fourth largest design firm globally and it employs 50,000 people. This scale positions SNC well to compete for the largest, most complex, and most prestigious projects, where less competition and better margins reside. From a capital markets perspective, SNC is now the largest publicly traded E&C in North America with a market capitalization of $7.6-billion (U.S.) and a cornerstone shareholder in the Caisse de dépôt et placement du Québec. We see this increased trading liquidity potentially leading to a valuation re-rating as SNC may appeal to a wider spectrum of investors."
In response to the deal, Mr. Lynk bumped his 2017 adjusted-E&C EPS projection to $2.15 from $1.85, which is the mid-point of management's $1.70 to $2.00 guidance. His 2018 estimate jumped to $3.15 from $2.25.
"Our estimates assume $30-million of cost synergies are realized in 2017 with $90-million more in 2018," the analyst said. "We note Atkins will be reported separately. We see growth next year driven by the Infrastructure & Construction (I&C), Power, Mining & Metallurgy (M&M) segments in addition to a full year of Atkins and the associated cost synergies."
Mr. Lynk said he views SNC as a "catalyst-rich story" moving forward.
"On Aug. 3, SNC is scheduled to release Q2/17 results. We believe management will take the opportunity to increase full year adjusted E&C EPS guidance from $1.70-$2.00 to $2.05-$2.25 to reflect the accretive nature of the Atkins acquisition," he said. "Separately, we believe SNC's backlog is at an inflection point and see numerous awards in infrastructure and construction, mining and metallurgy, and Power that could increase backlog and improve earnings visibility."
Mr. Lynk maintained a "buy" rating for the stock with his target increasing to $76 from $64. The analyst consensus price target is $65.82, according to Thomson Reuters data.
"Our valuation of the E&C business is now $50.00 per share (16.0 times 2018 estimated EPS of $3.15) compared to $36.00 previously (16.0 times 2018 estimated EPS of $2.25)," he said. "Our Highway 407 valuation for SNC's 17-per-cent stake decreases to $22.00 per share from $25.00 per share previously due to the increase in SNC's shares outstanding following the Atkins acquisition. Lastly, we have increased our valuation of the Capital portfolio to $4.00 per share from $3.00 per share to better reflect the value we believe SNC can realize through its new infrastructure investment vehicle."
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Crude prices continue to slide below the projections of Acumen Capital analyst Trevor Reynolds, who noted a "material deterioration" in his strip price-based outlook.
Accordingly, Mr. Reynolds updated his commodity price deck in a research report released Tuesday.
"The result is a 10-per-cent decrease in our Canadian light oil forecasts for the remainder of 2017, and 11-per-cent decrease in 2018," he said. "NYMEX pricing has been much more stable than oil, however Canadian producers continue to face a deep discount due to a lack of egress, or concerns thereof."
He also downgraded Traverse Energy Ltd. (TVL-X) and Altura Energy Inc. (ATU-X) to "speculative buy" from "buy." He also added Yangarra Resources Ltd. (YGR-T) to his "top ideas" list.
"The most impactful change to our coverage list is on the crude side as prices tracked below our expectation in Q2/17, with a material deterioration in the outlook (strips) at this time," he said.
His 2017 WTI price deck fell to $48 from $53.25, a 9.9-per-cent decline, while his 2018 estimate fell to $48.50 from $55 (down 11.8 per cent). His NYMEX natural gas price deck for 2017 fell 5.6 per cent to $3.04 per million British Thermal Units (mmbtu) from $3.22, and to $3 for 2018 from $3.10 (a 3.2-per-cent drop).
"Crude pricing faced pressure through the back half of the quarter with WTI down over 10 per cent in the month of June alone," said Mr. Pow. "The recent weakness is primarily attributed to several factors including; increasing production from Libya and Nigeria (both exempt from the OPEC agreement), strong growth in U.S. production (up 1.0 million barrels per day year over year) attributed to increased Permian activity, and less severe declines which have not allowed for the expected draw in storage levels, strong drilling rig efficiencies, and a decrease in demand from China.
"In the U.S., land based oil rig activity has more than doubled year over year to over 750, with over half of the 442 rigs added over the past year (232) positioned in the Permian. While the overall drilling rig additions are one thing, a big contributor to the rise in production has been the strong efficiencies reported from longer horizontals with higher frac intensity in shale plays. All told, the result was material downward pressure on the price of crude through the month of June as traders turned negative (short). Over the past week we have seen a rebound in the price which is largely believed to be based on the market covering theirshort positions. Overall, despite the overwhelmingly negative outlook for Crude of late, the market appears to be more in balance today than in January 2017, while the price of WTI is down 13 per cent since that time. As a result we expect continued volatility for crude over the near term, and ultimately believe there is upside to our price deck."
With the declines to his price deck, he made target price changes to stocks in his coverage universe, which he said "see a fairly material impact."
His changes were:
- Altura Energy Inc. (ATU-X, “speculative buy”) to 65 cents from 80 cents. Consensus is 76 cents.
- Bonterra Energy Corp. (BNE-T, “buy”) to $25 from $32. Consensus: $26.60.
- Eagle Energy Inc. (EGL-T, “hold”) to 40 cents from 70 cents, which is the consensus.
- Freehold Royalties Ltd. (FRU-T, buy”) to $17 from $17.85. Consensus: $16.72.
- Ikkuma Resources Corp. (IKM-X, “speculative buy”) to $1 from $1.15. Consensus: $1.07.
- Journey Energy Inc. (JOY-T, “buy”) to $4 from $4.50. Consensus: $3.70.
- Leucrotta Exploration Inc. (LXE-X, “buy”) to $3.50 from $4.25. Consensus: $3.32.
- Marquee Energy Ltd. (MQX-X, “speculative buy”) to 10 cents from 15 cents. Consensus: 14 cents.
- RMP Energy Inc. (RMP-T, “speculative buy”) to $1 from $1.10. Consensus: 91 cents.
- Surge Energy Inc. (SGY-T, “buy”) to $3.50 from $4.50. Consensus: $3.33.
- Tamarack Valley Energy Ltd. (TVE-T, “buy”) to $4.15 from $5. Consensus: $4.17.
- Traverse Energy Ltd. (TVL-X, “speculative buy”) to 45 cents from 55 cents, which is the consensus.
- Yangarra Resources Ltd. (YGR-T, “buy”) to $4.75 from $5.25. Consensus: $4.71.
"As a reminder, in our last report published in April we highlighted FRU, SGY, TVE, BNE and TWM as top ideas," he said. "Those names returned an average of negative 15 per cent versus the group average of negative 18 per cent, with the top performers of the group being TWM and FRU. In addition, we highlighted YGR, ATU, IKM, and RMP as catalyst rich ideas which we viewed as having a higher risk profile, but also presenting the potential for stronger returns. Our catalyst rich names averaged a negative 10-per-cent return with YGR providing the only positive return in our universe on the back of continued strength in Cardium results."
"Our focus remains on the ability to manage debt, play quality, and potential catalysts. On those parameters the names which we believe are best positioned in the current environment include LXE, FRU, SGY, TVE, YGR and TWM. The only meaningful change in the list is YGR moving up from a catalyst rich idea as a result of continued outperformance in the Cardium. In addition, we have removed BNE for the near term based on the decrease to our crude price deck along with the company's debt level. That being said, we continue to see BNE as one of the names with the most torque in an improving oil price environment. In addition, a solution to the companies over leveraged position would be a catalyst in our opinion. In terms of catalyst rich, or underfollowed names where we see the potential for outperformance we have added JOY (based on their weak valuation but strong sustainability in the current commodity price environment), while we continue to highlight ATU (based on additional activity at Leduc-Woodbend) and IKM (upcoming frac on two Foothills Cardium wells). As a reminder we see our catalyst rich names as having somewhat higher risk profiles for various reasons, while we believe they present the potential for outperformance based on valuation, or upcoming well results."
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Canaccord Genuity analyst Neil Maruoka believes Theratechnologies Inc.'s (TH-T) ibalizumab drug has a "good shot" at receiving approval from the U.S. Food and Drug Administration.
On June 30, the Montreal-based announced the FDA has accepted for review the Biologics License Application (BLA) and granted a priority review for ibalizumab, which is a treatment for multidrug resistant Human Immunodeficiency Virus-1. That approval shortens the review period to six months from 10.
Mr. Maruoka now projects a U.S. commercial launch of the drug for the first quarter of next year. He points out it would be the first novel therapeutic class for the treatment of HIV approved in the last 10 years.
"The efficacy and safety data for ibalizumab is strong, and the drug has been granted both Orphan Drug and Breakthrough Therapy designations by the FDA," he said.
"Theratechnologies has not yet completed its assessment, we believe that ibalizumab could be priced at a premium to other HIV drugs. However, given that ibalizumab will be part of expensive combination therapy, we expect that pricing will be a key determinant of optimal penetration."
Mr. Maruoka said Theratechnologies currently trades at a "significant" discount to its partner, TaiMed Biologics, noting: "Although ibalizumab represents the primary asset for both companies with economics split roughly evenly, we note that TaiMed trades at [approximately] 3 times the market cap of Theratechnologies; eventually, we expect that Theratechnologies should close this valuation gap."
He kept a "speculative buy" rating for the stock and raised his target to $9.50 from $7.50. The analyst average target is $8.88, according to Bloomberg data..
"We value Theratechnologies using a DCF [discounted cash flow] analysis of the U.S. market opportunity for Egrifta and an explicit risk-weighted NPV for ibalizumab in the US and EU," he said. "Following the receipt of an FDA Priority Review, we have lowered our discount rate from 22 per cent to 17 per cent in the U.S., and from 24 per cent to 20 per cent in Europe. As a result of this change, we are raising our target price to $9.50 (from $7.50); our revised target represents a forecast 10.7% annualized return and continues to support our SPECULATIVE BUY recommendation."
Meanwhile, National Bank Financial analyst Endri Leno downgraded Theratechnologies to "sector perform" from "outperform" with a target of $9.25, up from $7.15.
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Innova Gaming Group Inc.'s (IGG-T) business "fits nicely" into Pollard Banknote Ltd.'s (PBL-T) existing suite of games, said Acumen Capital analyst Brian Pow.
On June 30, Winnipeg-based Pollard, a provider of products and services to the lottery and charitable gaming industries, announced a revised offer to acquire all outstanding shares of IGG for $2.50 (up from $2.10). The total equity value of the deal, which is expected to close in mid-August, is $51.2-million.
"The two companies will benefit from their combined experience in the lottery and gaming marketplace," said Mr. Pow. "Additionally, IGG's assets provide synergistic opportunities to leverage PBL's current relationships. As PBL and IGG share a number of customers, there is likely opportunities to consolidate sales and marketing efforts. As we consider the transaction, it is reasonable to conclude that the combined businesses are better positioned to compete in the lottery and charitable gaming sectors."
He added: "PBL is favorably positioned in both the instant ticket and charitable gaming markets, and we see the business continuing to expand at rates above the overall industry growth levels for the following reasons:
- “PBL is in a better competitive position with its new plant and therefore we expect market share gains.
- “PBL has sufficient capacity at the new Ypsilanti plant to grow sales by 35 per cent, which supports our longer-term growth outlook.
- “Management has become more confident in the ilottery opportunity and is starting to gain traction.”
Mr. Pow kept a "buy" rating for Pollard shares with a target price of $14.25, rising from $12.50, which is the consensus.
Meanwhile, Cormark Securities Inc. analyst David McFadgen downgraded Innova Gaming Group Inc. to "tender" from "buy" and lowered his target to $2.50 from $4.20. The average is $2.75.
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Raymond James analyst Brenna Phelan increased her target price for shares of Crown Capital Partners Inc. (CRWN-T) in reaction to "meaningful acceleration" in investment activity in its Crown Capital Fund IV during the second quarter.
Crown, a Calgary-based specialty finance company, deployed $55-million through the fund, an investment fund managed by Crown and in which Crown holds a 35-per-cent interest, during the period, rising from $15-million in the first quarter.
"We are updating our estimates to reflect 2Q17 deployment activity which includes a $30-million loan to Marquee Energy (MQX-X) and a $25-million loan to Ferus Inc., both deployed through CCF IV," said Ms. Phelan. "We were previously forecasting $15-million to be deployed through CCF IV in each of 2Q17 and 3Q17, followed by $20-million in 4Q17. Our revised forecasts look for no capital deployed through Fund IV in 3Q, while we continue to assume the fund makes another loan in 4Q. The incremental $20-million deployed in 2017 offsets lost interest due to the CRH medical repayment. We are forecasting that CRWN extends long-term loans of $25-million in 3Q17 and $60-million in 2018."
Ms. Phelan added: "We note that Fund IV's energy exposure currently sits at ~65%, with each of Petrowest, Touchstone, Source, Marquee and Ferus having either direct or indirect energy exposure. Solo Liquor, also headquartered in Alberta also has its fortunes influenced by the health of the resources market. While we acknowledge that this exposure increases commodity price risk, the previous track record of this team in investing in resource-based companies, and its ability to prudently assess an inflection point in the market, serves to mitigate this risk, in our view. We expect future deployment across a diverse range of businesses."
The analyst kept an "outperform" rating for the stock with a target of $12, up from $11.50. Consensus is $11.96.
"Our favourable outlook on Crown is based on the opportunity for meaningful asset growth, supported by demand for its unique financing products, projected [return on equity] expansion as it grows its loan portfolio and adds leverage, the fee generation inherent in its business model and its dividend growth prospects," said Ms. Phelan. "As such, at this stage of Crown's evolution into a hybrid commercial lender/fund manager, we view the pace of capital deployment as the key metric to watch."
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In response to a number of recent corporate announcements that she deems positive for 2018 earnings, Raymond James analyst Brenna Phelan raised her target for shares of Alaris Royalty Corp. (AD-T).
"Alaris' investment portfolio has recently featured an elevated number of investments that have, to varying degrees, become impaired in their ability to make regularly scheduled distribution payments, pressuring operating cash flow and dividend coverage in the process," she said. "To additionally cloud the outlook, recent management commentary suggests that the current ultra-competitive state of the market may make it challenging to invest capital productively over the near-to-medium term. The impact of recent corporate announcements, including deployment through Salaris, steps in resolution of KMH and reversal of Sequel's partial redemption is positive to our 2018 EBITDA estimates and our target price increases commensurately. That said, we continue to believe that resolution of Alaris' most material problematic investment, Group SM, to which exposure sits at $74-million will be required for Alaris' valuation to improve meaningfully. Given the largely binary outcome of this situation, which is dependent on an arbitration decision, resolution is challenging to forecast."
With a "market perform" rating, Ms. Phelan's target jumped a loonie to $23. Consensus is $23.94.
"Our $23 target price is based on a target 2018 EV/EBITDA [enterprise value to earnings before interest, taxes, depreciation and amortization] multiple of 9.5 times, roughly in-line with its one-year average, and towards the low end of its five-year historical valuation range of 7.5–20.0 times to reflect a higher-than-usual level of investment risk and reduced dividend growth outlook versus historical levels," she said.
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In other analyst actions:
Cormark Securities Inc. analyst Jeff Fenwick downgraded Home Capital Group Inc. (HCG-T) to "market perform" from "buy" with a $20 target. The analyst consensus price target is $18.97.
Scotia Capital analyst Tanya Jakusconek upgraded Newmont Mining Corp. (NEM-N) to "sector outperform" from "sector perform" with a target of $43.50 (U.S.), up from $43. The average is $39.39.
David Leeder