Inside the Market's roundup of some of today's key analyst actions
Raymond James analyst Steve Hansen downgraded Bombardier Inc. (BBD.B-T) in reaction to reports it has been forced to halt delivery of its CSeries aircraft for two months due to a shortage of Pratt & Whitney geared turbo fan (GTF) engines.
"Industry reports suggest that the ongoing engine shortage is driven by an upstream manufacturing bottleneck associated with the GTF's complex metallic fan blades," said Mr. Hansen. "While P&W reportedly has plans in place to promptly rectify this issue, including the commissioning of new fan blade facilities in both Japan and Michigan, we believe it prudent to wait on definitive clarity on the issue. Investors will recall this is the same issue that drove BBD's previous delays and only seven deliveries in 2016 (versus the company's original plan for 15)."
He added: "While BBD is reportedly able to take advantage of the current delay to refine its production system and upgrade the existing assembly line, it remains unclear as to how this will impact the firm's targeted 30-35 deliveries in 2017. To be fair, the firm's current delivery schedule is already back-end weighted, so it could be that this issue has no net effect to the FY guidance. We will wait for definitive clarity."
Mr. Hansen moved his rating for the stock to "market perform" from "outperform" and lowered his target price to $2.50 from $3. The analyst consensus price target is $2.90, according to Thomson Reuters.
"While we continue to admire BBD's great strides toward financial stability and margin improvement over the past 18 months, the persistence of the aforementioned engine shortage issue (albeit short) gives us adequate reason to take pause and move to the sideline with our rating until greater visibility emerges," he said.
Shares of Yellow Pages Ltd. (Y-T) are likely to remain under pressure in the near term, according to Canaccord Genuity analyst Aravinda Galappatthige.
Suggesting the Montreal-based digital media and marketing solutions company is an "attractive" takeout candidate, he downgraded his rating to "speculative buy" from "buy."
"Yellow's stock is down a staggering 53 per cent in 2017 thus far as the market reacted to the $600-million write off alongside the Q4 results, cautionary comments on outlook and subsequent 2017 guidance," said Mr. Galappatthige. "With the stock trading at 2.9 times 2017 estimated enterprise value to EBITDA and a 28.6-per-cent free cash flow yield on revised-down estimates, the natural question is – is it overdone here? Our position is the following: First, we have to concede that the thesis for a meaningful rebound in the near term appears weak. First, there is little visibility around the timeline to 'fix' the challenges facing the digital business. While there would be substantial investments made in H1/2017 aimed at dealing with the unfavourable product mix issues, given the structural nature of the problem, we suspect that reversing this would take time. Second, the erosion in confidence in the current shareholder base may be severe to the point where any new bouts of buying could be gobbled up by heavy selling, thereby quickly quelling any uptick in the stock.
"We would also point out that there is little sense in playing for a 10-15-per-cent rebound on the stock as we believe the risk attributed to Yellow's equity now demands a much greater return profile."
On Feb. 21, a week after it released fourth-quarter financial results, Yellow Pages provided a 2017 financial guidance update. Its earnings before interest, taxes, depreciation and amortization (EBITDA) margin expectation of 22-24 per cent represented a significant drop from 29 per cent in 2016.
Based on the update, Mr. Galappatthige lowered his 2017 revenue and EBITDA projections to $778.6-million and $180.9-million, respectively, from $775.8-million and $206.3-million. His 2018 estimates fell to $746.9-million and $170.4-million from $754.6-million and $198.8-million.
"In addition to initiatives aimed at dealing with the challenge of product mix …we believe this guidance reflects another round of investments in the digital business, the details of which we expect would be outlined in May 2017 when the company presents their updated business strategy following their ongoing review," he said. "Recall the company made significant investments in its digital business starting 2014, which continued through to 2016. Our revised estimates reflect 2.5-per-cent organic digital growth in 2017 and a 25-per-cent print decline rate. In 2018, we are reflecting a modest decline in EBITDA, although management commentary is pointing towards a stabilization of EBITDA at the 2017 levels."
He added: "While we understand management's desire to continue to invest heavily in the digital business to return it to more sustainable growth, we believe that it is time to concede that greater shareholder value may be unearthed by harvesting Yellow's FCF generative potential by focusing on cost reduction and utilizing investments in a more limited, incremental and success-driven basis. We estimate that the 'return to growth' plan initiated in 2014 involved a $30-40-million incremental investment in opex on annual basis, while capex was also maintained $25-40-milliona year above what we believe is Yellow base capital spend. The strategy update to be provided alongside Q1/17 results would also likely have $20-25M in additional investments going through the opex line. So we are talking about very substantial cash investments. The FCF generation we project for 2017 and 2018 is after factoring in this additional spend. Hence there may well be a good degree of cost reduction to be achieved. Factoring all this in, we believe that Yellow could still be very attractive to a financial (e.g. PE firm) or strategic buyer due to its FCF generation."
Mr. Galappatthige said he expects Yellow Pages to generate $60-70-million in adjusted FCF going forward. With "relatively lower balance leverage," he said the company is an "an attractive take out candidate; particularly now at these depressed valuations."
"In addition, we believe that some of Yellow's 'non-core' digital assets such as Comfree, Mediative and JUICE could be worth nearly $100-million (valued at 1 times revenue). There is a compelling case to be made to a buyer to sell these non-core assets (which generate minimal if any FCF) to pay down much of the debt and effectively acquire the company at an attractive FCF yield. The returns can obviously be enhanced if the balance sheet is leveraged towards 2.5 times (or more). As we have illustrated below, if the buyer can lever up the business in a private setting, Yellow Pages could be acquired for a net cash investment of $225-million and a FCF yield of 19.9 per cent. This assumes a $15 acquisition price, representing a 78-per-cent premium to the current share price. We note that this excludes the potential for cost reduction at Yellow Pages, which we believe is quite substantial. Considering the potentially long road to bringing the digital business to a point of sustainable growth as well as rebuilding shareholder confidence and the significant risk associated to that path, we believe that the initiation of a sale process may well be the best course of action."
Mr. Galappatthige lowered his target price for the stock to $15 from $22. Consensus is $16.25.
"We have also downgraded the stock … due primarily to the fact that our investment thesis now depends heavily on the prospect of a sale of the business," he said. "Moreover … the refinancing process could produce periods of significant nervousness for investors and thereby further volatility in share price."
In reaction to its agreements to acquire a pair of U.S. companies in a move to expand its solar and wind power holdings, Industrial Alliance analyst Jeremy Roesenfield upgraded his rating Brookfield Renewable Partners LP (BEP.UN-T).
On Tuesday, Brookfield announced it is set increased its stake in TerraForm Power Inc. (TERP-Q) to 51 per cent, giving the yieldco a market value of $1.7-billion (U.S.). It will pay $787-million in cash and assume $455-million in debt to its sister yieldco TerraForm Global Inc. (GLBL-Q). The transaction values the two entities at an enterprise value of approximately $7.9-billion.
Moving his rating to "buy" from "hold," Mr. Rosenfield said: "BEP offers investors (1) an attractive renewable power investment platform, focused on long-life hydroelectric assets (greater-than 80 per cent of current capacity), (2) a high degree of contracted cash flows (greater-than 90 per cent in 2017, greater-than 60 per cent through 2020), (3) a long-term global growth strategy (1GW of organic projects and greater-than $500-million (U.S.) per year of potential acquisitions, with a 12-15-per-cent total return objective), and (4) a favourable outlook for long-term dividend growth (5-9-per-cent per year). Although the shares trade at a relative valuation premium compared with the Company's Canadian IPP peers (2-3 times enterprise value/EBITDA above the peer group average, and several multiple points on a price/free cash flow basis), we see BEP as unparalleled in terms of its potential reach for global renewable asset growth. The current acquisition appears modest at this time, but has the potential to lead to significant future cash flow growth for the Company in the future via the existing TerraForm platforms. Within this context, we believe a premium valuation multiple is warranted."
Mr. Rosenfield said the deal provides Brookfield with "attractive" existing renewable power portfolios and a "beachhead" for future growth.
"BAM expects to position TERP as its preferred vehicle for holding North American and Western European wind and solar assets," he said. "As such, BEP has provided TERP with access to a 3,500MW ROFO pipeline (including 1,200MW of operating wind assets, and 2,300MW of development-stage wind and solar projects). BAM will also provide TERP with a $500-million (U.S.) acquisition financing facility that can be used as a source of equity capital to fund TERP growth over the near term, while its own cost of capital remains elevated, and access to external equity capital markets remains unattractive. We would expect TERP to employ this facility to acquire late-stage development assets from BEP, allowing BEP to re-cycle equity capital into future development opportunities and further long term growth."
He increased his target for Brookfield stock to $45.78 from $41.61. The average is $42.99.
On Tuesday, Calgary-based Bellatrix announced its 2016 year-end reserves as well as an operation update.
In reaction to those results, Mr. Petrucci upgraded the stock to "speculative buy" from "hold," citing what he projects to be "a significantly lower decline rate in 2017."
"In addition, with the removal of essentially all bank debt, and no term debt due until 2020, we believe the risk profile has improved materially over the last year," he said. "Net debt levels and [debt to cash flow] levels remain above average, hence the Speculative rating."
"While per share reserve numbers dropped materially (as expected given asset sales and the issuance of shares), overall reserve levels and reserve value held in better than we had anticipated. In addition, the early well results from the Spirit River provided in the release suggest BXE has the potential to return to a growth platform in 2017."
Mr. Petrucci did lower his target price for the stock to $1.50 from $1.60 "due to a reduced pace of drilling assumed in our asset valuation." Consensus is $1.53.
"BXE is currently trading at 5.1 times 2017 estimated EV/ DACF [enterprise value to debt-adjusted cash flow], which is a material discount to the peer group at 6.4 times," he said.
"With no debt due for another 3+ years, BXE has given itself time to participate in a commodity price rally. In addition, the NAV support, the discounted trading multiple, and the hedge book for 2017 provide some downside protection, in our view."
2016 was a "transformational year" for Endeavour Mining Corp. (EDV-T), according to BMO Nesbitt Burns analyst Andrew Breichmanas.
On Tuesday, the Paris-based gold miner reported fourth-quarter adjusted earnings per share of 44 cents, exceeding the 33-cent projection of both the analyst and the Street. The company announced quarterly production of 175,411 ounces at all-in sustaining costs of $855 per ounce, which exceeded its guidance of 175,146 and $865.
"Endeavour reported Q4/16 financial results, capping a transformative year that saw the company recapitalized, management reorganized, the Youga mine divested, the Karma mine acquired, the Houndé project launched, and aggressive exploration programs initiated," said Mr. Breichmanas. "Looking forward, 2017 promises to be an important year to demonstrate further value through delivery of Houndé, expansion plans at Ity, and resource additions across the portfolio."
With an unchanged "outperform" rating, Mr. Breichmanas increased his target price for the stock to $31 from $28. Consensus is $31.60.
"The company has the potential to grow production from 583,000 ounces in 2016 to 900,000-plus ounces with ramp-up of the Karma mine, completion of the Houndé project, and addition of CIL processing at Ity," he said. "A renewed focus on exploration to extend the portfolio's mine life is expected to support attainment of peer average multiples."
Shares of Pretium Resources Inc. (PVG-T, PVG-N) have entered a "key re-rating period," said RBC Dominion Securities analyst Dan Rollins.
He upgraded the Vancouver-based exploration and development company to "outperform" from "sector perform."
"We expect the company's shares to re-rate over the coming months as Brucejack successfully ramps up following startup in Q2/17," said Mr. Rollins. "With convertible financing closed, we believe Pretium has more than sufficient funds to bring Brucejack into commercial production. Our Outperform rating is supported by Pretium's attractive valuation relative to its future Tier II peers. With Brucejack nearing completion and commercial production expected before year-end, we have decided to move from a straight price/net asset value (P/NAV) target methodology to our standard P/NAV and enterprise value to adjusted cash flow (EV/AdjCF) methodology. Our price target remains unchanged, as we have applied lower P/NAV and EV/AdjCF target multiples (1.10 times and 11 times) relative to Pretium's future Tier II peers (1.15 times and 13.1 times), reflecting elevated risk during the ramp-up period."
Mr. Rollins noted re-rating normally occurs around commercial production, saying: "Looking at the share price performance of recent successful start-ups, we estimate an average outperformance of nearly 60 per cent relative to the Junior Gold Miners Index (GDXJ) over a 12-month period starting six months prior to the declaration of commercial production. While we may have missed the initial re-rating (Pretium's share price is up 28 per cent since the December lows versus GDXJ up 20 per cent), we believe a large portion of the potential rerating still lies ahead."
"We expect grades to be variable quarter-over-quarter until sufficient stopes are developed to allow for optimal blending underground. In addition, it will take time for Pretium to evaluate how well the block model reconciles with actual results and on-site team to gain experience mining this unique ore body. We believe this could take a number of quarters."
He maintained a target price for $18 for Pretium shares. Consensus is $18.21.
TransAlta Renewables Inc.'s (RNW-T) fourth-quarter earnings beat capped a "strong" 2016, said Desjardins Securities analyst Bill Cabel.
"RNW delivered very strong 4Q results, with adjusted EBITDA and adjusted FCF well above our estimates and consensus," he said. "That said, 2017 guidance implies only modest year-over-year growth. Further, beyond the South Hedland project, which is on track for COD [commerical operations and development] in mid-2017, there is no other tangible growth at this point. While future growth through TA and dropdowns/acquisitions will likely occur over time, we cannot assign value at this time to speculative growth."
On Tuesday, the Calgary-based company reported adjusted earnings before interest, taxes, depreciation and amortization of $121-million, "well above" Mr. Cabel's projection of $105-million and the consensus expectation of $107-million. Adjusted free cash flow per share of 31 cents topped the analyst's estimate of 21 cents, which he said was driven by the performance of its Canadian Wind, Sarnia and the Australian asset
"NW provided adjusted EBITDA and CAFD [cash available for distribution] guidance [for 2017] of $425–450-million and $235–260-million," said Mr. Cabel. "Based on the midpoint of the ranges, guidance implies growth of 7.5 per cent year over year and 1.0 per cent year over year, respectively. The outperformance in 2016 (driven by favourable conditions) and changes to debt (new project-level financings with amortizing principal payments) temper the year-over-year growth. Our estimates are in line with guidance.
"Beyond South Hedland, we have little visibility on growth. We believe an improved outlook for RNW's parent TA will eventually lead to future growth opportunities, but there is nothing we can assign value to today."
With a "hold" rating, he bumped his target to $14.50 from $14. Consensus is $15.
"We still believe RNW offers a solid and stable yield, but the lack of insight into growth and our view that the shares are close to being fully valued keep us on the sidelines," he said.
In other analyst actions:
Wajax Corp. (WJX-T) was raised to "buy" from "hold" by TD Securities analyst Michael Tupholme. He raised his target to $28 from $26. The analyst average target price is $26.25, according to Bloomberg.
CanWel Building Materials Group Ltd. (CWX-T) was increased to "buy" from "market perform" by Cormark analyst Gavin Fairweather with a target of $6.85 (unchanged). The average is $7.37.
Agellan Commerical Real Investment Trust (ACR.UN-T) was cut to "hold" from "buy" by GMP analyst Jimmy Shan. He maintained his target of $11.75, while the average is $11.91.