Inside the Market's roundup of some of today's key analyst actions
Dollarama Inc. (DOL-T) shares have risen significantly in price over the past several weeks "for no apparent fundamental reason," said BMO Nesbitt Burns analyst Peter Sklar.
"We believe the stock could see significantly lower levels going forward, providing for more favourable opportunities to purchase the name," he said.
Calling the discount retailer "currently overvalued," with a valuation of almost 23 times his forward EBITDA estimate, Mr. Sklar downgraded his rating to "market perform" from "outperform."
"Part of the recent appreciation could be attributable to investors' desire to insulate the Consumer portion of their portfolios from the much-discussed 'Amazon effect,'" he said.
Mr. Sklar made the move ahead of the release of the company's third-quarter financial results on Dec. 6.
"We believe the key results that could impact the stock are same-store-sales (SSS), earnings per share, and initial guidance for fiscal 2019, which we anticipate will also be provided with the earnings results," he said. "However, we believe there is only a limited opportunity to report an upside potential that could justify the recent price appreciation, as we are already anticipating that Q3/18 will be a strong quarter (our SSS estimate is 5 per cent), and the company's guidance has historically been relatively benign."
He maintained a price target of $155 for Dollarama shares. The analyst average price target is currently $151.13, according to Thomson Reuters data.
Wal-Mart Stores Inc. (WMT-N) currently sits in the midst of a multi-year investment cycle that will continue to suppress earnings growth, according to RBC Dominion Securities analyst Scot Ciccarelli.
He believes the resulting changes will improve the U.S. retail giant's long-term strategic positioning and will lead it to become a "true" competitor to Amazon.com Inc. (AMZN-N). With investors increasingly viewing the company as a "Consumer Staple," Mr. Ciccarelli said Wal-Mart may continue to re-rate to the upside.
Though he acknowledged its stock seems expensive, Mr. Ciccarelli upgraded his rating to "sector perform" from "underperform" as the "narrative continues to shift."
"When we rolled out coverage in May 2016, our rating was driven by multiple concerns, including: (1) that Walmart's famed productivity loop (drive prices lower to gain incremental share) had entered the phase of diminishing returns (i.e., at Walmart's size, it gets increasingly difficult to drive incremental unit share with price cuts); (2) that competition will continue to mount, as it battles Amazon across all product fronts, and as pressures in the Grocery business (approximately 56 per cent of sales) intensify, due to increased pricing pressure from both legacy grocers as well as Aldi and Lidl (fierce low-price competitors); and (3) finally, that increased competitive pressures and accelerated investments (prices, stores/labor, e-commerce/IT) forced the company into a multiyear investment cycle that would suppress profit growth for several years," he said. "We still think these profit growth challenges remain."
"Why are we upgrading? We believe our investment thesis on profit growth has largely been accurate. However, we also recognize the significant changes that Walmart has made to its business, including a significantly better store environment (Clean, Fast and Friendly scores and improved labor model) and vast improvements to its e-commerce capabilities (50-percent-plus growth this year), leading to 13 consecutive quarters of positive comps/12 quarters of positive traffic. These changes have led to a meaningful re-rating in WMT shares (16 times forward 12-month earnings to 21 times). Yes, EBIT $s are still down nearly 20 per cent over the last 4 years, and earnings growth in the near/mid-term will likely be minimal, but much like Amazon, we believe Walmart is playing the long game (sacrificing current profits to improve its 'Terminal Value') and is now being rewarded for it by the investment community."
Mr. Ciccarelli maintains his belief that Wal-Mart will find it difficult to outperform other stocks in the sector with better growth-to-valuation profiles, but he thinks investors are seeing as more reasonably valued than other Consumer Staples peers. It's also inexpensive compared to Amazon with a price-to-earnings multiple of approximately 21 times versus 145 times, which he believes could cause a further re-rating moving forward.
The analyst raised his target price for Wal-Mart shares to $96 (U.S.) from $92 after moving his forward price-to-earnings target to 21 times from 20 times "based on improved comp trends, a change in market view and the long-term potential for higher sales to translate to better profit growth."
The average price target on the Street is currently $100.47.
"While we pointed out above that WMT shares appear to be expensive relative to many 'retail' peers on a growth-adjusted basis, it looks to be more reasonable versus the Consumer Staples subset," said the analyst. "To be fair, we don't think that 'Walmart'; inspires the same level of customer loyalty as Coca-Cola, Colgate Toothpaste or Pampers. However, on a pure valuation basis, the stock is at the lower-end of its Consumer Staples peers. Further, we believe that WMT has generally been 'under-owned' by many investors for years, given the broad e-commerce challenges to the retail space (and Walmart's company-specific challenges) and it is a large part of the Consumer Staples index ( 5 per cent), which has caused many index-benchmarked investors to chase the stock. As a result, we believe that more investors shifting towards using the Consumer Staples comparison 'lens' rather than a pure retail point-of-view has helped propel WMT shares."
Though Bank of Nova Scotia's (BNS-T, BNS-N) fourth-quarter financial results fell below his expectations, RBC Dominion Securities analyst Darko Mihelic raised his target price for its shares, citing "good growth in International P&C, a good acquisition on the horizon, and further room for all bank efficiency improvement."
On Tuesday prior to market open, the bank reported adjusted earnings per share of $1.65 for the quarter, in line with Mr. Mihelic's estimate and a penny below the consensus expectation. However, he noted that result included a gain of almost 5 cents from the sale of its HollisWealth independent adviser network. Taking that away, the result missed projections.
Mr. Mihelic pointed to capital markets results as the prime contributor to the "weaker" results. Earnings for that segment of $391-million fell below his $414-million projection and represented a 15-per-cent drop year over year, due primarily to a revenue decline and "deterioration" in efficiency.
"Trading revenues declined on both a quarter-over-quarter and year-over-year basis largely due to lower interest rate and credit trading results," the analyst said. "We forecast a decline in earnings in this business next year of 12 per cent year over year, as we assume more normalized trading revenues as well as slightly weaker efficiency."
Elsewhere, Mr. Mihelic called the results of the bank's international personal and commercial segment "decent," Canadian P&C "okay" and credit "better than our forecast."
He said the bank's $2.9-million acquisition of Banco Bilbao Vizcaya Argentaria, S.A.'s (BBVA) shares in its Chilean banking operation, BBVA Chile, which was announced with the results, potentially "meaningfully accretive."
"If completed, the transaction is expected to impact BNS's CET1 capital position by 100 basis points," said Mr. Mihelic. "Under Chilean law or the Said family's tag-along rights, the Said family has the right to sell its shares of BBVA Chile on the same basis to BNS. BNS expects to the Said family to settle on a decision by fiscal Q1/18, and if the transaction moves forward, it expects the deal to close during the summer of 2018. BNS's CET1 capital ratio would be impacted by 135 basis points if the transaction is completed and the Said family sells all of its shares. BNS indicated that it would finance the potential transaction with excess capital. We previously explored BNS's potential acquisition of BBVA Chile … Our original view was that BNS might need to issue equity for the deal; however, it appears that BNS is willing to pay all cash for this transaction—we have refreshed our calculations assuming an all-cash deal, which results in higher potential EPS accretion. Our estimates do not assume any potential synergies between BNS Chile and BBVA Chile."
Mr. Mihelic did not change his 2018 and 2019 core EPS estimates of $6.70 and $7.15, respectively, based on the results and acquisitions.
"Moderately lower forecast revenues were largely offset by lower expenses and provisions for credit losses (PCL)," he said. "We have also removed our buyback assumption in our model given BNS's potential acquisition of BBVA Chile."
He maintained an "outperform" rating for Scotiabank shares with a target of $91, rising from $87. The analyst average target is $89.67.
"We continue to value BNS using a target multiple of 12.5 times, but we now value the stock on our 2019 core EPS estimate," he said. "We have also included an additional $2 per share in our valuation, which we believe is a conservative reflection of BNS's excess capital position and its potential acquisition of BBVA Chile. We currently expect that BNS will have approximately $4 per share of excess capital in one year's time; however, there are several factors that could impact our EPS and capital estimates for BNS. If BNS successfully acquires BBVA Chile (in either scenario of its acquiring a 68-per-cent interest or a full 100-per-cent interest), BNS would likely not be in a position of excess capital in one year's time. However, our current estimates have also not factored in the potential EPS accretion from an acquisition of BBVA Chile—we estimate that an acquisition of the full 100-per-cent interest could add $0.15 per share to our 2019 core EPS, even without considering synergies. Applying our current target multiple on this accretion estimate would roughly equate to $2 per share in value."
Elsewhere, Canaccord Genuity analyst Scott Chan hiked his target by a loonie to $93 with a "buy" rating (unchanged).
Mr. Chan said: "Canadian banking results remained solid, with earnings up 7 per cent year over year, mostly supported by higher volume, margin expansion and positive operating leverage. Management provided a strong outlook across all three segments and the company maintained their medium-term EPS growth target of 5-10 per cent. We are introducing 2019 EPS estimate of $7.64 (8 per cent year over year), which is at the higher end of the range."
Desjardins Securities analyst Doug Young lowered his 2018 and 2019 EPS estimates to $6.80 and $7.34, respectively, from $6.87 and $7.50, calling the quarterly results "slightly negative" and cautioning the BBVA Chile acquisition is not a "done deal."
He kept a "buy" rating and $89 target.
"We like the momentum at BNS's international banking division (a key part of the story), along with management's clear focus on achieving expense-reduction targets," he said.
Though he sees a "clear path" for Neptune Technologies & Bioressources Inc. (NEPT-T, NEPT-Q) to shift its oil extraction facility in Sherbrooke, Que., to cannabis oil production, Echelon Wealth Partners analyst Douglas Loe downgraded his rating for its stock to "hold" from "buy" based on valuation concerns.
He made the move in the wake of the company's investor forum in New York on Tuesday, which focus on the shift for the facility that was previously used to produce krill oil for its Neptune NKO brand. The company could move to cannabis oil production by the third quarter of 2018 based on Health Canada approval.
"The firm spend some time describing a few relevant details on cannabinoid pharmacology and on projections for future cannabis oil demand, and we will assume that investors that are following this industry closely will be familiar with those elements," he said. "But we were encouraged to hear that Neptune is already well-advanced on its license application under Health Canada's Access to Cannabis for Medical Purposes Regulations (ACMPR) program to produce cannabis oil for medical and nutritional supplement markets, projecting that Sherbrooke could go commercial on this initiative by late FQ219 (CQ318) and this timeline seems reasonable to us and actually about a quarter earlier than our model previously assumed."
The Sherbrooke transition will allow it to "aggressively" pursue the cannabis oil market, according to Mr. Loe.
"We remain somewhat ambivalent about divesture of a business that was core to Neptune's original raison d'etre and in an industry that it effectively created back in the early 2000's based on patents that it in-licensed from the University of Sherbrooke at that time (patents that were sufficiently strong to trigger court-imposed annuities from Neptune's peers that of course are now divested)," he said.
"But on balance, we endorsed the divestiture as a way to mitigate business risk that the krill oil nutritional supplement industry was facing (even acquirer Aker BioMarine had seen some mixed financial data for its Superba krill oil brand in recent quarters), as a way to non-dilutively reduce increasingly burdensome long-term debt while reducing effective interest expense in the process, and thus to provide new capital to fund growth opportunities like the medical cannabis oil production initiative just described. We see no reason why Neptune and its operational team in Sherbrooke cannot demonstrate industry-leading acumen in cannabis oil production just as deftly as they demonstrated corresponding expertise in NKO production. But the divestiture certainly altered the firm's corporate personality and so we are pleased to see the firm provide tangible details to capital markets on how its 'life-after-krill' will evolve in future quarters."
He raised his price target for Neptune shares to $2.20 from $1.50.
Mr. Loe is currently the lone analyst covering the stock, according to Thomson Reuters.
"With NEPT shares up 121 per cent since late August of 2017, consistent with our BUY rating during that time, we do believe that capital markets are valuing NEPT as a level consistent with our evaluation of fair market value for the stock, as quantified by our revised PT. Accordingly, and solely as a valuation call, we are shifting our rating on NEPT to a HOLD," he said.
"As stated though, we do see the Neptune glass as more half-full than half-empty, with abundant clinical/regulatory/partnership milestones on the horizon both for Acasti Pharma and for Neptune itself. For Acasti, we are watching for the firm to formally convert its in-process Chinese pharmaceutical CaPre development alliance into a tangible cash-contributing deal, and for its 500-patient six-month Phase III hypertriglyceridemia trial to commence patient enrollment by FQ418. And for Neptune, we will be monitoring progress on its Health Canada cannabis oil production license and on new business relationships that could establish firm distribution channels for Sherbrooke-produced oil and thus reduce business risk to our cannabis oil revenue projections in F2019-F2021."
Alimentation Couche-Tard Inc.'s (ATD.B-T) recent major acquisitions are likely to drive near-term impressive earnings growth, said Desjardins Securities analyst Keith Howlett.
On Tuesday, the Laval-based company reported second-quarter 2018 adjusted diluted earnings per share of 80 cents (U.S.), exceeding the projections of both Mr. Howlett (73 cents) and the Street (71 cents). It was a jump of 37.9 per cent year over year, "well ahead" of the consensus expectation of 22 per cent.
"Underlying internal sales growth was weak, but margin management was good," he said. "The CST acquisition is generating synergies ahead of schedule, despite a stumble in integrating operations in Quebec (Ultramar/Esso/Couche-Tard). The contribution of acquisitions will provide management 12–18 months to reignite internal sales.
"After less than four months of ownership, run-rate synergies from CST Brands are $84-million (U.S.). Synergies are being realized ahead of schedule, and management is confident of achieving its three-year target of $150–200-million."
Mr. Howlett also emphasized "strong" fuel margins across its major markets, particularly in the U.S. South of the border, fuel margins were 24.7 cents per U.S. gallon, versus 19.9 cents a year ago.
Based on the results, Mr. Howlett raised his 2018 EPS estimate to $2.80 from $2.71. His 2019 projection increased 7 cents to $3.07.
Keeping a "buy" rating for the stock, his target rose to $78 from $72. The average is $78.25.
"Couche-Tard's strong earnings growth is being driven by major acquisitions completed over the last 15 months in the U.S., Canada and Europe, and unusually high fuel margins, particularly in the U.S.," he said. "The contribution of acquisitions over the next 18 months should be able, on its own, to drive attractive EPS growth. Management has successfully evolved its retail product offerings over the last 35 years and continues to seek new opportunities. For example, management lobbied (unsuccessfully) to distribute beer and wine in Ontario, and is investigating its options for the retail distribution of cannabis with various provincial authorities."
Meanwhile, calling the quarter results "strong," Canaccord Genuity analyst Derek Dley raised his target to $74 from $72 with a "buy" rating (unchanged).
Mr. Dley said: "The company provided an update to the integration process of CST Brands. Not only is Couche-Tard close to reversing the trend of negative traffic growth, the company is well ahead of its initial synergy targets. After only 4 months, Couche-Tard has generated a run-rate of $84-million in annualized cost reductions, leaving the company ahead of target, and well positioned to meet or exceed its 3-year target of $150-200-million in synergies. To-date, roughly 2/3rds of the synergies have come in the form of SG&A reductions, and 1/3rd from better procurement terms.
"We estimate that pro-forma the acquisition of Holiday, which is scheduled to close during Q3/F18, Couche-Tard's balance sheet remains flexible with pro-forma adjusted net debt/EBITDAR of 3.2 times, below the company's comfort range of 3.4-3.6 times."
Mountain Province Diamonds Inc.'s (MPVD-T, MPVD-N) proposed debt refinancing is a "satisfactory way to resolve what was becoming an onerous debt facility which has weighed on sentiment," said RBC Dominion Securities analyst Richard Hatch.
On Nov. 24, the Toronto-based company announced it has received a extension of the waiver for the funding of the remaining reserve accounts under its project lending facility. It also said it intends to offer $325-million (U.S.) in aggregate principal amount of senior secured second lien notes and has secured a new $50-million revolving credit agreement.
"We believe the market had been looking for a resolution this time around and our initial view was one of disappointment that a reserve account resolution, coupled with a debt profile rescope, was pushed out once more," the analyst said. "Alongside high scheduled principal repayments for fiscal 2018 and fiscal 2019 ($94-million U.S. and $101-million respectively), the existing facility was tying up cash in the form of reserve account funding requirements (a further $215-million Canadian was required by end-March in addition to the existing $111-million held in reserve accounts).
"The move to refinance debt is positive: Given the challenges with the structure of the existing facility, we view the decisive action by management to refinance its existing debt with (i) a $325-million 2022 senior secured note and (ii) a $50-million RCF [revolving credit agreement] as a positive. This will allow Mountain Province to in turn unlock $111-million currently held in reserve accounts and use this cash to fund increased capex at Gahcho Kue due to elevated waste stripping and repay outstanding commitments to De Beers ($48.5-million). While a pricing range has not been provided (this is expected to be released once the issue has closed), we have estimated a cost of debt."
Maintaining a "sector perform" rating for its stock, Mr. Hatch lowered his target to $3.70 from $4.40. The average target is $4.50.
"We believe that the proposed refinance of debt will provide MPVD with the financial flexibility to improve its financial position (we calculate average FCF of $1139million per year for fiscal 2018-2020) and potentially place it in a position to consider shareholder returns (likely from FY18)," he said. "This is encouraging; even if we assume that the current price discount persists until 2021 (when 5034 is expected to be mined out), we believe that MPVD will remain free cash flow positive, generating $37-million per year in FY18-20. We continue to seek clarity on the outlook for Gahcho Kue prices; a technical report in H1/18E should help here. We adjust our model to reflect increased waste stripping, capex and D&A, the revised mine plan, and assume the debt is refinanced; as a result, our NAV reduces to $3.88 per share."
The completion of the mining license ratification process for Euro Sun Mining Inc.'s (ESM-T) Rovina Valley project is imminent, according to Cantor Fitzgerald analyst Mike Kozak.
He believes Euro Sun will re-rate "materially high" upon approval, adding "now is the time to buy."
Mr. Kozak initiated coverage of the Toronto-based company's stock with a "buy" rating.
"Rovina Valley is Europe's largest copper resource and second largest gold resource," the analyst said. "Located in the 'Golden Quadrilateral' in West-Central Romania, recently the country's National Agency for Mineral Resources ("NAMR") officially endorsed the project and initiated the ratification process related to the mining license."
"The mining license at Rovina Valley was originally granted to the project's previous owner in May 2015, but has only recently (Aug. 3, 2017) begun the process of ratification … The completion of the process we believe is achievable in the next 30-60 days, at which point the Rovina Valley concessions will officially be designated as land for exploitation as opposed to just exploration. When this occurs, Euro Sun will be the first non-state-owned entity to have a ratified Mining License. This would be the single most important and positive de-risking event in the company's history."
He set a price target for the stock of $2.10.
"Our initial target … represents our best estimate as to where the stock should trade over the very short term, immediately upon completion of the mining license ratification process," said Mr. Kozak. "We believe this is achievable within the next 30-60 days. Over the medium term, and longer-term, as the project continues to de-risk, we expect the stock to trade materially higher than our initial target. We believe that Euro Sun Mining represents an excellent 'catalyst driven' near-term trade, and also a compelling 'buy and hold' investment over the medium and longer terms."
GMP Securities' Ian Parkinson is the only other analyst to currently cover the stock, according to Thomson Reuters. He has a "buy" rating for Euro Sun without a specified target.
In reaction to a recent drop in share price, Domino's Pizza Inc. (DPZ-N) was raised to "buy" from "neutral" by Nomura Instinet analyst Mark Kalinowski, who believes the stock is now attractively valued.
"As Domino's continues to grow, we believe that this is placing more competitive pressure on local and regional international pizza chains," he said. "These chains simply lack the scale and resources to effectively compete with Domino's as digital ordering has become increasingly important to customers ordering pizza for delivery (or takeout)."
He maintained a price target of $201 (U.S.). The average target is $213.88.
"Domino's trades at a discount ... even though the company offers up meaningfully better worldwide unit growth and the likelihood of better same-store sales growth than YUM," he wrote.
In other analyst actions:
Morgan Stanley analyst David Risinger raised Allergan PLC (AGN-N) to "overweight" from "equalweight" based on what he perceives to be an attractive risk-reward proposition. His target price for its stock is $200 (U.S.). The average target on the Street is $229.90.
Stifel analyst Kevin Cassidy downgraded Qualcomm Inc. (QCOM-Q) to "hold" from "buy" while raising his target to $75 (U.S.) from $65. The average is $64.75.