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.
Though the transaction price for Progressive Waste Solutions Ltd. (BIN-N, BIN-T) came in below the expectations of RBC Dominion Securities analyst Derek Spronck, he said he's "positive on the upside potential in the anticipated merged entity."
On Tuesday, U.S.-based Waste Connections Inc. (WCN-N) announced it was buying Progressive for about $2.67-billion (U.S.) in an all-stock deal structured as a reserve merger. Waste Connections will move its tax domicile to Canada.
"From a strategic perspective, we see no better buyers of BIN's assets," said Mr. Spronck. "The combined entity creates the third largest solid waste company, with a broad breadth of regional waste assets. While economies of scale and consolidation at the [selling, general and administrative expenses] level are the predominate drivers of the $50-million in synergies, it is Waste Connections' strong management team and proven track record of execution that is most compelling for longer-term shareholders, in our view."
Mr. Spronck estimates a valuation for current Progressive shareholders of close to $30 (U.S.) per share.
"We apply $50-million in anticipated synergies, $12-million in EBITDA add from the anticipated NYC contract, and an additional $25-million in further synergies management expects to drive out of the combined entity," the analyst said. "This provides us with a proforma EBITDA in 2017 of $1.4-billion. However, the key is that because of the Canadian domicile of the 'newco,' the combined effective tax rate is set to come in at [approximately] 27 per cent (and much lower than WCN's current 40 per cent). This provides for a further $50-million in cash savings on an annual basis, and what we see as driving proforma net debt of $2.9-billion in 2017 (down from $3.5-billion today)."
He added: "WCN brings to BIN a best in class safety record and low employee turnover rate – largely driven by high levels of equity participation of employees. Combined with the 'asset light' or 'franchise model' representing [about] 50 per cent of WCN's revenue base, WCN's free cash flow [FCF] generation of 15 per cent of revenue is well ahead of the industry. Management of WCN expects to derive the same FCF levels in the combined entity, pushing proforma FCF north of $625-million in the first year of the merger. This provides for further acquisition capacity, as well as a steady share buyback plan and potentially double-digit dividend increases going forward."
Maintaining his "sector perform" rating, he raised his price target to $30 (U.S.) from $28. The analyst average target price is $28.25, according to Bloomberg.
"While 2016 remains a transition year and integration risk could limit upside in the near term, proforma EBITDA and FCF levels remain compelling and we do see WCN's management team driving significant shareholder value longer term," he said.
Meanwhile, Gabelli & Co. analyst Tony Bancroft downgraded his rating for the stock to "hold" from "buy."
Barclays analyst Jon Windham upgraded his rating to "overweight" from "underweight" while raising his target to $27 from $23.
Waste Connections was raised to "strong buy" from "outperform" by Raymond James analyst Patrick Brown with a target price of $65. The analyst consensus is $59.
In conjunction with a reduction in his financial estimates, BMO Nesbitt Burns analyst Randy Ollenberger downgraded his rating for Husky Energy Inc. (HSE-T) to "underperform" from "market perform."
On Tuesday, Husky announced an update to its 2016 capital budget and production guidance. It reduced capital spending expectations to $2.1-$2.3-billion from $2.9-$3.1-billion. Production guidance was lowered to 315,000-345,000 barrels of oil equivalent per day from 330,000-360,000 boe/d.
The company also suspended its quarterly dividend for the fourth quarter, announcing it would review future payouts on a quarterly basis going forward. Husky had introduced a stock dividend for the third quarter in lieu of a cash payout.
Accordingly, Mr. Ollenberger lowered his 2015 earnings estimate to 2 cents per share from 3 cents. His 2016 projection fell to a loss of 37 cents per share from a loss of 28 cents.
He also dropped his target price for the stock to $14 from $16. The analyst average is $18.04.
"While we believe the spending reduction and dividend cut are prudent approaches in the current environment, we believe that the shift in dividend policy will lead to a reduction in ownership among funds, with the overhang expected to weigh on shares," said Mr. Ollenberger. "Planned asset divestitures could strengthen Husky's financial position; however, we believe that the current pricing environment could provide further downward pressure on shares."
The operating expense and capital expense reductions resulting from the closure of its New Brunswick operations will not be enough to support the dividend of Potash Corporation of Saskatchewan Inc. (POT-N, POT-T) in the current fertilizer pricing environment, said CIBC World Markets analyst Jacob Bout.
"We believe it likely that POT could further rationalize assets (Patience Lake most likely) in an effort to drive opex and capex lower," he said. "Rocanville has the lowest operating costs of less than $50/tonne."
Mr. Bout increased his earnings per share estimates due to lower-than-expected operating costs, raising his 2016 and 2017 projections to $1.08 and $1.18 from $1.05 and $1.15, respectively. He said consensus forecasts ($1.47 and $1.56) "are too high."
Maintaining his "sector outperformer" rating, he increased his price target to $23 (U.S.) from $22. The analyst consensus is $22.62.
Whitecap Resources Inc.'s (WCP-T) decision to lower spending and production guidance will bring "near-term pain" but will prove to be the right decision over time, said BMO Nesbitt Burns analyst Ray Kwan. Whitecap annnounced Tuesday a reduction in its capital spending program to $70-million from $150-million and a drop in its production guidance to 37,000 barrels of oil equivalent per day from 40,1000 boe/d. It also reduced its annual dividend to 45 cents from 75 cents.
"The lower dividend combined with the reduction in the capital program puts the company's 2016 estimated all-in payout ratio at 71 per cent on the BMO price deck and 102 per cent at strip," said Mr. Kwan. "We note that in the current price environment, namely sub-$35 (U.S.)/barrel WTI oil, it is not economic to drill wells and therefore Whitecap's decision of letting production slide and deferring drilling is the best capital allocation decision, in our view. In a $45/bbl environment next year, we believe Whitecap is sustainable; however, if the current forward curve for WTI oil materializes, we believe the company would have to adjust its capital program and dividend accordingly."
Mr. Kwan lowered his 2016 and 2017 production estimates to 37,193 boe/d and 34,117 boe/d from 40,241 boe/d and 39,479 boe/d, respectively. Accordingly, he reduced his 2016 and 2017 cash flow per share projections to 99 cents and $1.05 from $1.09 and $1.24, respectively.
"While the decision to cut capital and lower the dividend payout is never an easy one, we think Whitecap made the right choice and will be on a more sustainable footing going forward," said Mr. Kwan.
Maintaining his "outperform" rating for the stock, he reduced his price target to $9 from $11. The analyst average is $11.04.
Meanwhile, Barclays analyst Grant Hofer downgraded the stock to "equalweight" from "overweight" and his target to $6 from $12.
Euro Pacific analyst Rob Goff selected DHX Media Ltd. (DHX.B-T) his "top pick" for 2016.
"While disappointed with the 14.08 per cent decline in the shares for 2015, we believe that DHX made significant strides forward that will significantly benefit shareholders," he said. "We are encouraged by DHX's moves to reposition the Family Channel (bringing it into the family for programming), new initiatives in China, the Teletubbies relaunch, and more recently its innovative Mattel partnership. Beyond these strategic moves, the Company continues to execute internally delivering 26-per-cent organic growth for 2015."
He added: "We note that production revenues increased by 69 per cent in the 2015 fiscal year to $70.7-million or 27 per cent of total revenues with organic growth of $20-million or 29 per cent year over year, as delivered content increased 31 per cent y/y from 171 half-hours to 224 half-hours, and the average price increased 24 per cent from $137,000 to $170,000 per half-hour. We believe the 31-per-cent volume growth and 24-per-cent price gains have been very much overlooked in the market. The volume growth is a key consideration given it represents additional IP to the Company that then moves to distribution globally and offers [merchandising and licensing] opportunities in names with the potential for extended shelf lives of up to 20 years."
Mr. Goff maintained his "buy" rating and $13 target. The analyst average is $10.78.
In other analyst actions:
Alexion Pharmaceuticals Inc (ALXN-Q) was rated new "neutral" at Credit Suisse by equity analyst Alethia Young. The target price is $201 (U.S.) per share.
Amgen Inc (AMGN-Q) was rated new "outperform" at Credit Suisse by equity analyst Alethia Young. The target price is $205 (U.S.) per share.
Bank of America Corp (BAC-N) was raised to "buy" from "hold" at Sandler O'Neill by equity analyst Jeffery Harte. The 12-month target price is $17 (U.S.) per share.
Blackbird Energy Inc (BBI-X) was downgraded to "hold" from "speculative buy" at Paradigm Capital by equity analyst Ken Lin. The target price is 13 cents (Canadian) per share.
Biogen Inc (BIIB-Q) was rated new "neutral" at Credit Suisse by equity analyst Alethia Young. The target price is $322 (U.S.) per share.
BioMarin Pharmaceutical Inc (BMRN-Q) was rated new "outperform" at Credit Suisse by equity analyst Alethia Young. The target price is $110 (U.S.) per share.
Celgene Corp (CELG-Q) was rated new "outperform" at Credit Suisse by equity analyst Alethia Young. The target price is $149 (U.S.) per share.
Comerica Inc (CMA-N) was raised to "outperform" from "market perform" at FBR Capital Markets by equity analyst Bob Ramsey. The 12-month target price is $48 (U.S.) per share.
First Quantum Minerals Ltd (FM-T) was downgraded to "hold" from "buy" at TD Securities by equity analyst Greg Barnes. The 12-month target price is $4.25 (Canadian) per share.
HudBay Minerals Inc (HBM-T) was downgraded to "hold" from "buy" at TD Securities by equity analyst Greg Barnes. The 12-month target price is $4 (Canadian) per share.
Rock Energy Inc (RE-T) was downgraded to "hold" from "buy" at Paradigm Capital by equity analyst Ken Lin. The target price is $1.50 (Canadian) per share.
Regeneron Pharmaceuticals Inc (REGN-Q) was rated new "neutral" at Credit Suisse by equity analyst Alethia Young. The target price is $552 (U.S.) per share.
Vertex Pharmaceuticals Inc (VRTX-Q) was rated new "outperform" at Credit Suisse by equity analyst Alethia Young. The target price is $151 (U.S.) per share.
Western Gas Equity Partners LP (WGP-N) was downgraded to "hold" from "buy" at Wunderlich by equity analyst Jeffrey Birnbaum. The target price is $28 (U.S.) per share.
Yangarra Resources Ltd (YGR-T) was downgraded to "hold" from "buy" at Paradigm Capital by equity analyst Ken Lin. The target price is 50 cents (Canadian) per share.
With files from Bloomberg News