Skip to main content

The Aubrey Falls power-generating station is owned by Brookfield Renewable Energy Group,

Inside the Market's roundup of some of today's key analyst actions

Brookfield Renewable Partners LP (BEP-N, BEP.UN-T) remains a "solid" long-term investment, according to BMO Nesbitt Burns analyst Ben Pham.

However, he downgraded his rating for the Bermuda-based utility to "market perform" from "outperform" based on price appreciation.

"In early 2016, BEP shares suffered from a lack of appreciation of their growth profile, primarily due to weak renewable resource conditions, F/X headwinds, and lower-than-expected pricing conditions as gas plumbed new lows," said Mr. Pham. "Doubt also lingered over renewable growth in the context of low oil prices and expiring tax credits. Our BEP thesis has been that the units would lift as production returned to long-term averages (as it has in past cycles) and acquisitions surprised to the upside. We believe this thesis has effectively played out, with the stock up about 34 per cent since the beginning of 2016 (versus the utility sector's 25 per cent) and 11 per cent year to date (versus the sector's 8.5 per cent) on the back of improved financial results and accretive acquisitions (Isagen, Terraform)."

In the wake of the "strong" performance of its stock, Mr. Pham said Brookfield's valuation has jumped from a discount in early 2016 to a premium currently.

"While we believe a premium valuation is warranted given the high proportion of hydro and quality management, we see the shares now as fairly valued on a relative basis," he said.

Mr. Pham maintained a price target of $33 per unit. The analyst consensus target is currently $32.50, according to Thomson Reuters data.

"We continue to view Brookfield Renewable as a core holding for investors seeking exposure to the long-term renewable power growth cycle, where $250-billion-plus is being invested each year," the analyst said. "And we are still optimistic on pricing upside on the merchant U.S. NE hydro assets but see that as more of a late-decade tailwind on the phase-out of coal. Asset quality is strong, and we like the above-average dividend yield (5.7 per cent). Thus, we would revisit our rating if: 1) the shares were to pull back materially, or 2) we saw material upside in our 2018 forecasts, due to additional acquisitions that could be announced."

=====

Citing the federal government's plan to reduce branded drug prices by late 2018, Desjardins Securities analyst Keith Howlett upgraded Jean Coutu Group PJC Inc. (PJC.A-T) to "hold" from "sell."

"As had been recently signalled, the federal Minister of Health plans to make changes to regulations under the Patented Medicines Prices Review Board (PMPRB) Act with, as one objective, lowering branded drug prices in Canada by late CY18," said Mr. Howlett. "As generic drug reimbursement prices are generally established as a percentage of branded drug cost, this will also reduce (all factors constant) generic drug prices in Canada. Our view is that this reduces the necessity of the Quebec Minister of Health negotiating the toughest bargain possible at this time with generic drug manufacturers. Our revised assumption is that generic drug prices will be reduced by 25 per cent (previously 35 per cent) in Quebec, coincident with the cap of 15 per cent being reimposed on professional allowances (currently uncapped)."

Based on his expectation for change, Mr. Howlett raised his fiscal 2018 and 2019 earnings per share projections for Jean Coutu to 99 cents and $1.09, respectively, from 95 cents and $1.02.

His target price for the stock rose by a loonie to $21. Consensus is $21.35.

=====

Citing "continued" weaker performance from its Kearl oil sands mining project and the potential for headwinds in Alberta's diesel market over the next year, CIBC World Markets analyst Arthur Grayfer downgraded Imperial Oil Ltd. (IMO-T) to "neutral" from "outperform."

"Admittedly we are late in our rating downgrade for Imperial given a string of quarterly consensus misses, but a lack of visibility for near-term material improvement at Kearl diminishes the visibility for relative outperformance, and poses a risk to the company's premium valuation," said Mr. Grayfer. "We estimate Imperial trades at 10.6 times 2018 strip EV/DACF [enterprise value to debt-adjusted cash flow] compared to the large cap group average of 8.2 times. Imperial's valuation has an inherent level of 'trust us' in it, and we worry that the weaker-than-expected performance at Kearl and poor communication around Cold Lake performance could tarnish the premium. Beyond that, we see headwinds to downstream margins in Alberta with the start-up of the Redwater refinery later this year, which could materially affect downstream cash flow.

"While we see the visibility for a meaningful share buyback likely starting later this year (potentially 3 per cent or 4 per cent in 2018 and 2019), which has been something that has made us pause our downgrade for some time, after adjusting our performance expectations for Kearl and Cold Lake, the all-in adjusted growth doesn't stack up to its peers. Growth on a debt-adjusted per share basis (DAPS) is expected to be 8 per cent for Imperial over 2017 to 2019 (we could be conservative with our 2018 downstream cash flow, which would boost it by 1 per cent), compared to the group average of 10 per cent but with a lower yield than some of its peers. As such, while we are downgrading the stock in advance of a potentially substantial buyback program, we feel less confident that the buyback will be enough to drive outperformance relative to its peers."

Mr. Grayfer's target for Imperial Oil stock fell to $45 from $50. Consensus is $45.26.

=====

In reaction to a 9-per-cent drop in its share price following the release of fourth-quarter 2017 results on May 18, Industrial Alliance Securities analyst Elias Foscolos upgraded Computer Modelling Group Ltd. (CMG-T).

Citing "negative" price movement, his rating for the Calgary-based computer software technology company, which services the oil and gas industry, jumped to "buy" from "hold."

CMG's quarterly results largely met the analyst's expectations. Revenue of $19.1-million was in line with Mr. Foscolos's projection of $19.1-million and ahead of the Street's estimate of $18-million.

"Q4/F17 current deferred revenue of $27-million (U.S) was at an all-time high," he said. "Historically, this was higher than the previous high in Q3/F14 of $26.7-million, which contributed to NTM Core Software revenue of $57.0-million. Therefore, we believe the record high current deferred revenue result positions CMG for a strong F2018."

Deeming the results "neutral" despite the negative market reaction, Mr. Foscolos maintained his financial forecast for the company and a $10.50 target for its shares. Consensus is $9.46.

"Based on the latest closing price, our unchanged $10.50 target now represents a potential 13-per-cent one-year return (including dividends), which precipitates an upgrade in our rating," he said.

=====

Despite delays to its much-anticipated Red Dead Redemption 2 game, BMO Nesbitt Burns analyst Gerrick Johnson raised his target for Take-Two Interactive Software Inc. (TTWO-Q) based on its "strong" fourth-quarter 2017 financial results and "solid" outlook.

"Take-Two benefits from positive video game industry tailwinds, including growth in mobile games and the transition of physical to digital, offering higher margins and the opportunity for incremental add-on sales and multi-player online services," said Mr. Johnson. "The company's strategy to be one of the most creative and innovative companies in the industry has been successful. And even where TTWO may miss on gameplay, the company is a leader in developing quality storytelling and fantastic cinematic qualities. These abilities can be seen in the longevity of its games and continued recurring revenue it generates."

Though the New York-based company's quarterly results exceeded projections, its stock fell more than 10 per cent in post-market trading on Monday after it announced a delay to its sequel in the Red Dead Redemption, which is now expected to be released in the 2019 fiscal year. The game was expected to be one of the top releases of the 2017 calendar year after the first edition of the game sold 15 million units.

"We do not view such a delay negatively, especially with recurring revenue continuing to roll in from GTA Online and NBA2K, as the company is known to sacrifice release dates for the sake of quality," the analyst said. "But before we had the opportunity to recommend buying the weakness, the company reported a solid 4Q beat before the open the next morning (68 cents versus a 57-cent estimate). The company also issued what we think is impressive guidance for FY2018, despite now having no new non-sports releases in the year (EPS of $1.40-1.65 U.S. on sales of $1.42-1.52-billion), sending the stock 5.5 per cent higher on the trading day."

"While this guidance is significantly below our prior estimates (consensus of $2.78 on sales of $2.2 billion), we note that the company, by reporting $2.11 for the 2017 fiscal year, exceeded the midpoint of its initial FY2017 EPS guidance of $1.00-1.25 by more than 85 per cent. Should the company achieve such outperformance in FY2018, the full-year number could be as high as $2.80. We are not expecting such outperformance and are modeling a FY2018 EPS estimate of $1.80."

While his fiscal 2018 EPS figure fell to $1.80 from $3.20, Mr. Johnson's 2019 projection rose to $4.70 from $3.60.

With an "outperform" rating (unchanged), his target for Take-Two shares jumped to $87 from $64. Consensus is $68.88.

"Initial comments on FY2019 indicate what could be a record year, with management alluding to net sales of $2.5-billion and net operating cash of $700-million, driven by Red Dead Redemption 2 and a 'highly anticipated new title' from one of 2K's biggest franchises—which we believe to be Borderlands 3," said Mr. Johnson. "We note that it was not long ago that a record year could not have been contemplated without a new release of Grand Theft Auto."

Elsewhere, Credit Suisse analyst Stephen Ju increased his target to $71 from $60 with an unchanged "neutral" rating.

Mr. Ju said: "The top/bottom line beat vs consensus due to a confluence of 1) GTA V surpassing 80mm units, 2) better than expected recurrent spending from incremental content releases for GTA Online, and 3) the NBA2k's ongoing outperformance (selling 8mm units to date). More importantly TTWO also announced the delay of Red Dead Redemption into FY19 along with a 2k game which we presume to be BioShock. This is unlikely to sway investment opinions as giving the dev team additional time is invariably better for the franchise vs rushing a shipping date. As we have noted before, the set of circumstances that may change our stance may be: 1) incremental distribution agreements for online versions of Rockstar franchises (GTA or otherwise) outside the current Western markets, 2) better-than-expected monetization of existing console/PC users via microtransactions. We maintain our Neutral rating on balanced risk/reward."

=====

RBC Dominion Securities analyst Steve Arthur is expecting CAE Inc. (CAE-T, CAE-N) to report "solid" fourth-quarter financial results in a "seasonally strong" period.

The Quebec-based company, which provides training for the civil aviation, defence and security, and health care markets, is scheduled to reported quarterly results on May 31.

"CAE has delivered several quarters with positive trends in Civil orders and margins, lower capital spending, and record-level Military orders," said Mr. Arthur. "In response, the shares continue to trade higher and are now at/ above A&D peer levels. We continue to like the business model, market positioning, and execution."

"We expect continued year-over-year growth in all segments, supported by strong backlog in both the Civil and Military segments at the end of FQ3/17 and solid order flow. The Civil segment announced 50 FFS [full-flight simulator] orders for the year, well ahead of the '40–42' initially expected."

Mr. Arthur is projecting revenue of $736-million, EBITDA of $175-million and earnings per share of 29 cents. The consensus estimates are $744-million, $172-million and 29 cents.

"Civil margins remain the key profitability driver – watch for F2018E guidance, as well as further commentary around the segment's longer-term trajectory: We expect continued year-over-year improvement in training network utilization to drive Civil segment margins higher," he said. "The simulator network utilization rate has historically been the highest in the fourth fiscal quarter (76 per cent in both FQ4/15 and FQ4/16). We look for a rate in the high-70-per-cent range this quarter."

With a "sector perform" rating, he raised his target for the stock to $22 from $20. Consensus is $21.66.

"CAE shares have increased materially in the last year on the strength of several quarters of solid operating performance, record level military backlog, and strong FFS orders," he said. "CAE has historically traded at a slight premium valuation to peers, reflecting its leading market position, focus on improving ROIC [return on invested capital, and solid earnings growth trajectory. Currently, CAE trades at 10.1 times calendar 2018 estimate enterprise value/EBITDA and 19.9 times calendar 2018 estimate price/earnings, roughly in line with U.S. Aerospace and Defense peers (10.5 times C2018E EV/EBITDA and 18.2 times C2018E P/E)."

=====

U.S. steel equities have underperformed the market "significantly" since a February peak, said Credit Suisse analyst Andrew Woodworth.

He noted his steel index has declined 23 per cent from those highs, versus a 2-per-cent rise in the S&P 500.

"U.S. steel equities are now trading at the lowest EV/EBITDA [enterprise value to earnings before interest, taxes, depreciation and amortization] multiple in the past several years at 5.9 times (1 year forward) and in our view reflect a major shift from a highly inflationary outlook at the start of 2017 to a deflationary set up for the rest of 2017," said Mr. Woodworth. "While the market is also concerned on automotive, we believe the recovery in energy / construction as well as trade support structurally changing the fair value arbitrage into the U.S. as key positives. We estimate the recovery in energy and construction markets could increase U.S. HRC demand by 1.2mt over the next 18 months driving U.S. downstream HRC rolling utilization rates above the critical level of 85 per cent."

In a research note released Wednesday, Mr. Woodworth upgraded his rating for the sector to "overweight" from "neutral."

"Our cautious steel thesis since we downgraded the sector to neutral in January has played out with iron ore prices correcting, Chinese HRC prices reverting to more normalized levels, and U.S. sheet prices correcting down below $600 (U.S.) per ton," he said. "We forecast HRC to bottom near $580 per ton this summer, roughly in line with our initial 2017 outlook. However, we now forecast prices to recover by late 3Q as demand trends remain strong, inventories are low, and trade dynamics (Section 232) are structurally limiting import flows despite attractive arb spreads."

Coinciding with his sector rating change, Mr. Woodworth upgraded United States Steel Corp. (X-N) to "outperform" from "neutral" with a $29 (U.S.) target, up from $25. Consensus is $28.25.

"We believe 2017 will reflect below mid-cycle earnings for X owing to substantial headwinds from operational challenges, impacts from the revitalization program, and continued losses in Tubular," he said. "We believe the market should value X based on SOTP framework as the Tubular division should reflect multiples closer to pure play comps and USSE should reflect premium valuation for acquisition potential."

He also raised Steel Dynamics Inc. (STLD-Q) to "outperform" from "neutral" with a $43 (U.S.) target, up from $36. Consensus is $43.38.

"We believe the market underestimates normalized earnings power for STLD, which should become evident by 2H-17 as the new paint line is fully optimized and the engineered bar markets recover," said Mr. Woodworth. "We are significantly increasing our medium term EBITDA forecasts for STLD to account for our stronger domestic steel price deck and more substantive margin benefit from STLD's efforts to upgrade its product mix. Trade support should yield higher through the cycle metal spreads and we view STLD as the most capital efficient U.S. steel company."

Mr. Woodworth also bumped Nucor Corp. (NUE-N) to "outperform" from "neutral" with a $68 (U.S.) target, up from $56. Consensus is $43.38.

"our two key concerns on the stock of weak fundamentals in long products and excess HRC exposure as fading," the analyst said. "Nucor has the most exposure to late cycle construction and infrastructure markets and is uniquely positioned in the U.S. plate market, where fundamentals have strengthened sharply. The eventual recovery in infrastructure spending should drive meaningfully higher EBITDA performance for Nucor's long product and plate segments, which account for 50 per cent of total shipments. Furthermore, Nucor continues to upgrade its product mix through capital investment and is set to realize a step function change in HRC rolling utilization by virtue of captive pull through from its aggressive acquisition push into hollow structural tubing."

=====

In other analyst actions:

Banco BTG Pactual SA analyst Daniel Guardiola upgraded Canacol Energy Ltd. (CNE-T) to "buy" from "neutral" with a $5 target. The analyst average price target is $5.46, according to Bloomberg data.

Follow related authors and topics

Authors and topics you follow will be added to your personal news feed in Following.

Interact with The Globe