Inside the Market’s roundup of some of today’s key analyst actions
Allied Properties Real Estate Investment Trust (AP.UN-T) is “well positioned to manage through [an] uncertain environment,” according to Canaccord Genuity analyst Mark Rothschild.
Seeing its portfolio performing adequately through the COVID-19 crisis with its rent collection for April exceeding his expectation, Mr. Rothschild raised his rating for the Toronto-based REIT to “buy” from “hold.”
"Canadian REIT unit prices have come under significant pressure as concern surrounding the impact of COVID-19 weighs on the economy," he said. "While there has been some recovery in the past few weeks, a number of REITs still trade well below prior highs. In our view, this is largely explained by concern that NOI [net operating income] will decline materially and NAVs [net asset values] will need to be adjusted lower. In fact, we recently reduced our NAV estimates for all of the REITs in our coverage.
“However, following Q1/20 results, and including the benefit of management’s commentary on [Thursday’s earnings call, we believe that the ‘risk’ to Allied’s cash flow is likely less severe than we may have assumed.”
For the first quarter, Allied reported funds from operations of 58 cents per unit, up 4 per cent year-over-year and above both Mr. Rothschild's 55-cent projection and the 57-cent consensus on the Street.
“Management disclosed that, for April, Allied collected 90 per cent of total rent due, and agreed to deferrals amounting to 8 per cent of total rent,” he said. “A significant portion of deferred rent was for the REIT’s storefront retail tenants, which represent 7 per cent of the REIT’s gross monthly rent. While it is reasonable to expect rent collection rates to be lower in the next few months, we believe that Allied’s portfolio should remain highly occupied due to the strong location of its portfolio, the unique characteristics of many of its buildings, and the current low vacancy rates in both the downtown Toronto and Montreal office markets.”
“With rental rates having risen steadily in most of Allied’s core markets, particularly Toronto, Montreal and Vancouver, over the past few years, the REIT’s in-place rental rates are generally well below current market rent. This is leading to solid leasing spreads and, in Q1/20, Allied signed leases totalling 111,880 square feet at rental rates, on average, 24.2 per cent higher than expiring rents. This compares to 17.1 per cent in Q4/19 and 19.6 per cent in Q1/19. Going forward, renewing leases at market rental rates should continue to be a driver of cash flow growth, albeit at somewhat more modest growth rates than we had previously assumed.”
After raising his FFO projections for 2020 and 2021, Mr. Rothschild increased his target for Allied Properties units to $51.50 from $50. The average on the Street is $52.64.
“Allied has long been one of Canada’s most successful REITs, and benefits from a strong balance sheet, high-quality management team and a well located and unique portfolio,” he said.
Elsewhere, Industrial Alliance Securities analyst Brad Sturges reduced his target to $55 from $60.50, keeping a "buy" rating.
“Allied has assembled an irreplaceable urban Canadian office real estate footprint. Although construction activity recently has been disrupted and activity has slowed, long-term development, intensification, and value creation strategies may further unlock Allied’s underlying urban land value,” said Mr. Sturges.
In a research note previewing first-quarter earnings season for Canadian insurance companies, Canaccord Genuity analyst Scott Chan said he’s now projecting a 19-per-cent decline in core earnings per share from the fourth quarter of 2019.
That prompted him to drop his full-year 2020 and 2021 EPS forecast by approximately 18 per cent and 16 per cent, respectively.
Mr. Chan said: “We made a number of adjustments to our model amidst COVID-19 that mainly reflects: (1) AUM/AUA declines mainly reflecting equity markets; (2) lower net flows and insurance sales forecast (impacting NBV); (3) further interest rate decreases (e.g. impact on strain, earnings on surplus); (4) credit (e.g. Oil & gas, UK property); (5) investment experience; and (6) removal of dividend growth and NCIB programs. A lower CDN$ in Q1 provides a modest offset. On the positive side, we estimate LICAT ratios benefiting quarter-over-quarter; particularly for MFC which remains our top pick in the sector.”
Pointing to its “attractive” relative valuation, Mr. Chan raised his rating for iA Financial Corp. (IAG-T) to “buy” from “hold” with a $52 target, dropping from $76. The average on the Street is $57.50.
“Our upgrade mainly reflects our total return assumption of 19 per cent and: (1) IAG’s relatively attractive valuation reflecting peer worst 37-per-cent stock decline year-to-date; (2) IAG trades at price-to-book (next 12 months) of 0.8 times and price-to-earnings (NTM) of less than 8 times (20-per-cent discount to 5-year average); (3) have not incorporated U.S.-based IAS vehicle warranty business acquisition into our model that should continue to support above average core EPS growth (more than 5-per-cent EPS accretion targeted by 2022; pre-COVID-19 assumptions); (4) lower market sensitivities currently (higher-quality investment portfolio) vs. GFC time period; (5) ability to pursue bolt-on transactions (e.g. pro-forma solvency ratio above targeted range), and debt capacity (raised $400-million debenture placing them slightly above their 25-per-cent leverage ratio target); and (6) dividend yield of 4.1 per cent and peer low 2020 payout ratio of 32 per cent (vs. 46-per-cent average for Group),” the analyst said.
Mr. Chan also made the following target price change:
- Great-West Lifeco Inc. (GWO-T, “hold”) to $24 from $35. Average: $28.42.
- Manulife Financial Corp. (MFC-T, “buy”) to $24 from $33. Average: $24.20.
- Sun Life Financial Inc. (SLF-T, “hold”) to $50 from $67.50. Average: $55.82.
Though Canadian asset managers suffered a "rough end" to the first quarter, they're likely to benefit from "soaring" markets as the second quarter begins, said Desjardins Securities analyst Gary Ho.
“Share prices for the group decreased 38.7 per cent in 1Q20 but are up sharply off March lows,” he said. “The outlook for the group appears brighter as the panic selling has subsided and equity markets have rallied over the past month, boosting AUM. As a result, we increased our estimates across the group and slightly bumped up our valuation to reflect a more optimistic stance, leading to higher target prices.”
In a research note previewing earnings season, Mr. Ho pointed to three areas of focus: how management is coping with COVID-19, hoping to see stress-test scenarios and sensitivity analysis; iquidity, capital allocation and balance sheet strength, “including a buffer to withstand a correction from today’s levels;” and an update on their net flows outlook and expenses for fiscal 2020.
He made the following target price changes:
- Fiera Capital Corp. (FSZ-T, “buy”) to $11 from $9.50. The average on the Street is $8.67.
- AGF Management Ltd. (AGF.B-T, “buy”) to $5.25 from $4.50. Average: $4.36.
- Sprott Inc. (SII-T, “hold”) to $3.50 from $2.50. Average: $3.19.
- IGM Financial Inc. (IGM-T, “hold”) to $31 from $27. Average: $28.63.
- CI Financial Corp. (CIX-T, “hold”) to $17 from $15. Average: $16.88.
Ahead of the release of its first-quarter results on May 5 before the bell, RBC Dominion Securities analyst Drew McReynolds raised his target price for shares of Thomson Reuters Corp. (TRI-N, TRI-T), seeing it poised to benefit from the “best of both worlds.”
“Despite more limited near-term upside in our view, we believe Thomson Reuters can deliver a degree of capital protection in the event of a prolonged 2008–09 style recession and recovery, yet also deliver capital appreciation should this recession be deep but relatively short-lived with a ‘V-like’ recovery beginning in H2/20,” he said. “Prior economic cycles for Thomson Reuters have shown: (i) a defensive revenue mix; (ii) management’s ability to realize additional cost efficiencies to mitigate incremental revenue pressure; and (iii) the stock typically experiences a reasonably sharp but short-lived period of multiple compression before recovering.”
Mr. McReynolds is projecting revenue and EBITDA for the quarter of US$1.525-billion and US$498-million, respectively, falling narrowly below the consensus on the Street of US$1.546-billion and US$508-million. Adjusted earnings per share of 47 US cents is 2 US cents below the consensus.
He's looking for management commentary on both the direct and indirect impact stemming from the COVID-19 pandemic, emphasizing it possesses a "defensive" asset mix but won't be immune to the economic damage.
“During the 2008–09 recession: (i) organic revenue growth for Legal (including print) troughed at negative 1 per cent annually in 2009 and negatively 3-per-cent quarterly (year-over-year) in Q4/09 and Q1/10; and (ii) organic revenue growth for Tax & Accounting troughed at 3 per cent annually in 2010 and 2-per-cent quarterly (YoY) in Q1/10,” the analyst said. “These three verticals represent 78% of consolidated revenues and 93% of our 'core’ asset value for the company. On a consolidated basis, we forecast a deceleration in organic revenue growth from 4 per cent in 2019 to 1.1 per cent in 2020 (versus current guidance of 4.0–4.5 per cent) and 3.0 per cent in 2021 (with YoY quarterly organic revenue growth reaching a trough of 0.5 per cent in Q3/20). Excluding Global Print and Reuters News, we forecast a deceleration in organic revenue growth from 5 per cent in 2019 to 3.0 per cent in 2020.”
Though he trimmed his 2020, 2021, and 2022 EPS projections to US$1.91, US$2.04 and US$2.40, respectively, from US$2.03, US$2.08 and US$2.41, Mr. McReynolds raised his target for Thomson Reuters shares to US$73 from US$70. The average on the Street is US$74.24.
He kept an “outperform” rating.
On Thursday, the Waterloo, Ont.-based tech company announced several initiatives to deal with the pandemic’s consequences alongside its in-line third-quarter results, including a plan to close nearly half of its offices.
"While FY3Q20 results were mostly better than feared, 4Q20 is likely to see negative organic growth with 20 per cent of OTEX’s customers in the most impacted industries, and the pace of recovery is uncertain," said Mr. Jester. "Cost saving measures underway (mostly benefits FY21) and better than expected initial performance of Carbonite ($110-million sales in 3Q) help partially offset challenges elsewhere. An important driver of value creation at OTEX is needle-moving M&A, and the bar is higher in the current environment (though tuck-ins might pick up)."
Mr. Jester lowered his revenue projections "mostly to reflect pressure in license revenue, but also slower growth in Cloud." That led him to reduce his fourth-quarter earnings per share estimate to 58 US cents from 74 US cents. His full-year 2020, 2021 and 2022 estimates slid to US$2.67, US$3.04 and US$3.34, respectively, from US$2.80, US$3.18 and US$3.41.
Keeping a "neutral" rating, his target for Open Text shares slid to US$41 from US$44. The average on the Street is US$46.
“OTEX is generally well positioned in its core markets, but the acquisition of Carbonite is taking OTEX more down-market, and deeper in security markets, and near-term integration execution is key,” Mr. Jester said. “We think FY21 could present some meaningful potential catalysts for the shares, as OTEX starts to benefit from CARB integration and deleveraging completes.”
In other analyst actions:
* Haywood Securities analyst Neal Gilmer initiated coverage of Rubicon Organics Inc. (ROMJ-CN) with a “buy” rating and $3.75 target. The average is $3.88.
“Rubicon Organics is establishing itself as a producer of super-premium and organic product into Canada’s cannabis market, a niche of the market that is currently underserved in our view,” he said. “Within a landscape of numerous large-scale producers, the Company is targeting consumers that either value the premium offering of top-shelf cannabis or discerning customers that prefer organic products. As witnessed across other industries, there is a definite market segment that is only being pursued by a handful of Canadian producers. With its experienced team in organic cannabis production, along with low-cost production, we believe that Rubicon is emerging as a producer to capture market share in the premium and above market segments.”
* Citi analyst P.J. Juvekar downgraded Dow Inc. (DOW-N) to “neutral” from “buy” with a US$38 target (unchanged). The average is US$39.
“DOW was the first ethylene company to report and it’s clear that U.S. ‘shale supremacy’ has turned into ‘shale normalcy’ as the price of oil has come down significantly," he said. "Also, ethane has recently moved up on fears that NGL production could decline if U.S. oil production drops in basins like the Permian. For DOW, European integrated PE margins are now roughly comparable to the U.S. (10 c/lb). To help balance the market, DOW is idling 10per cent of its PE/elastomer capacity in the Americas. While this move makes sense to us, we take this as a signal that shale normalcy is here to stay for the next few quarters. So, we move to the sidelines on DOW.”
* Citi’s Itay Michaeli resumed coverage of Lyft Inc. (LYFT-Q) with a “buy” rating and US$49 target, down from US$75. The average is US$49.19.
“Though we expect 2020 to prove challenging amid the current crisis, we maintain a positive long-term view of fundamentals, as evidenced by momentum achieved throughout 2019,” he said. “We also continue to see plenty of long-term upside to both TAM & margins from AV, EV, and next-gen ADAS (insurance) deployments. Lyft shares have underperformed peers this year, consensus estimates have reset lower, liquidity appears intact and the Q1 report (May 6th) could add comfort/visibility on key topics. Thus, we believe the risk/reward proposition looks attractive.”