Inside the Market’s roundup of some of today’s key analyst actions
“The song remains the same” for Brookfield Asset Management (BAM.A-T, BAM-N) and its family of publicly traded subsidaries, said Industrial Alliance Securities analyst Naji Baydoun following Thursday’s Investor Day event.
“Both [Brookfield Infrastructure Partners L.P. and Brookfield Renewable Partners L.P.] reiterated their organic growth targets for high single-digit average annual funds from operations per share growth, primarily driven by their respective (1) secured capital backlogs and development pipelines, and (2) embedded inflation indexation, as well as (3) upside related to GDP growth at BIP, and (4) recontracting and cost reduction initiatives at BEP,” he said.
In a research note released Friday, Mr. Baydoun said M&A activity continues to “represent a kicker to growth,” noting both Brookfield Infrastructure and Brookfield Renewable are seeking opportunities that could further enhance their growth outlook. He said both companies continue to target annual total shareholder returns of 12-15 per cent via both capital appreciation and dividend growth.
“At BIP, management is targeting US$2-billion-plus of annual capital deployment towards M&A over the next three to five years across a wide range of infrastructure assets, with a particular focus on data infrastructure,” he said. “Meanwhile, BEP management is targeting US$0.8-1.0-billion of annual capital deployment towards M&A over the next five years (up from US$0.8-billion previously), with a particular focus on opportunities in solar energy. Given BIP and BEP’s (1) proven acquisition track records, and (2) substantial access to liquidity, we believe that both companies are likely to continue successfully sourcing and executing on large-scale M&A transactions, which would represent further upside catalysts (although timing remains uncertain).”
Despite the near-term financial outlooks for both falling in line with his expectations, Mr. Baydoun lowered his rating for shares of Brookfield Infrastructure (BIP.UN-T) to “buy” from “strong,” citing “strong” share price appreciation since a mid-March upgrade and seeing limited upside to his target.
“We have adjusted our financial estimates/valuation to incorporate recent growth and financing initiatives. BIP remains a well-diversified vehicle for investors to play the broader long-term infrastructure investment theme, with (1) access to a global infrastructure platform (ownership in more than US$50-billion of assets), (2) defensive regulated/contracted cash flows (95 per cent of FFO), (3) visible cash flow growth (6-9 per cent per year, CAGR [compound annual growth rate] 2019-24), and (4) an attractive income profile (4.0-per-cent yield, 60-70-per-cent FFO payout, and a 5-9 per cent per year dividend growth target),” he said. “We continue to see BIP as a standout growth vehicle for long-term shareholders in the current macro-economic context.”
He maintained a US$50 target for Brookfield units. The average on the Street is currently US$49.22, according to Refinitiv.
Mr. Baydoun kept a “hold” rating and US$47 target for Brookfield Renewable Partners (BEP.UN-T). The average is US$49.72.
“BEP offers investors (1) a high-quality global renewable power investment platform (ownership interests in 19GW of installed capacity), (2) a high degree of contracted cash flows (70-90 per cent through 2024, 15-year weighted average contract term), (3) a long-term organic and M&A-based growth strategy (2.4GW under construction and 1.2GW under development, and 18GW of prospects), and (4) an attractive income profile (4-per-cent yield, 90-per-cent 2020 estimated FFO payout, and a 5-9 per cent per year dividend growth target),” the analyst said. “We continue to see BEP as a premium brand in the sector, supported by premium value hydro assets. However, we believe that the current growth outlook is largely priced into the shares at this time; given the limited upside to our price target, we would wait for a better entry point or further strategic developments before accumulating the shares”
Elsewhere, RBC Dominion Securities analyst Geoffrey Kwan raised his target for shares of Brookfield Business Partners LP (BBU-N, BBU-UN-T) to US$42 from US$39, keeping an “outperform” rating. The average is US$40.
Mr. Kwan said: “BBU’s Investor Day did a good job going into greater detail about: (1) how their portfolio performed during the COVID-19 lockdowns; (2) providing color on their active deal pipeline (could be positive for the unit price and our valuation as we do not ascribe any value to potential new investments); and (3) Clarios, their largest investment. We maintain our Outperform rating and believe that BBU is an attractive long-term principal investing story given its strong investment track record and that the units should offer significant valuation upside from NAV growth and a narrowing of the significant discount to NAV.”
Mr. Saric said: “While major themes/key takeaways were mostly consistent with prior year, our key takeaway was the attractive multi-faceted growth outlook which appears contrary to the discounted trading price.”
H2O Innovation Inc. (HEO-X) growth outlook appears “robust,” according to Industrial Alliance Securities Naji Baydoun, who thinks “the best is yet to come.”
On Thursday, the Quebec City-based company reported fourth-quarter financial results that exceeding his expectations and capped off “another strong year,” said Mr. Baydoun, leading him to raise his rating for its stock to “buy” from “speculative buy.”
H2O reported revenue of $36-million and EBITDA of $4.8-million, topping the projections of both the analyst ($33.7-million and $2.4-million) and the Street ($32.7-million and $2.4-million).
“The long-term growth outlook for HEO remains strong, and we continue to forecast high single-digit average annual revenue and adjusted funds from operations per share growth through fiscal 2025, driven by (1) HEO’s more than $125-million order backlog, (2) recently completed acquisitions (Genesys and GUS), and (3) an improving profitability profile,” said Mr. Baydoun.
“In recent years, management has taken several strategic steps that have meaningfully transformed the Company’s business profile; these initiatives have (1) increased recurring revenues (providing more stability to the overall portfolio), (2) accelerated growth, and (3) substantially improved profitability. We believe that HEO has now achieved several important milestones that set up the Company for continued success (greater than 80-per-cent recurring revenues, more than $10-million in annual EBITDA, and 9-10-per-cent Adj. EBITDA margins). In our view, HEO is well-positioned to continue capitalizing on growth opportunities in the water infrastructure sector; the Company’s healthy balance sheet should allow HEO to continue pursuing M&A opportunities, which could further improve the outlook. We see further near-term upside in the shares as the Company continues to execute on its growth strategy.”
Seeing its US$2.75-million acquisition of Gulf Utility Service Inc. in July providing “further support to the overall outlook,” Mr. Baydoun raised his target price for H2O shares to $2.25 from $2. The average is $2.06.
Meanwhile, Desjardins Securities analyst Frederic Tremblay increased his target to $2.50 from $2 with a “buy” rating (unchanged).
“Stronger-than-expected results reinforced our constructive stance on HEO as benefits from recent actions in all three segments are unfolding faster and in a more meaningful way than we had anticipated,” said Mr. Tremblay. “With a broad product and service offering in the essential water industry and a strong balance sheet, HEO’s derisked business is both resilient and positioned for revenue and earnings growth in a fragmented market with macro tailwinds.”
In a research report released Friday, he initiated coverage of the Vancouver-based royalty company with a “buy” rating.
“Since Sandstorm’s first acquisition in FY09, the company has accumulated a comprehensive portfolio of roughly 200 royalties and streams on assets in varying developmental stages,” he said. "Sandstorm maintains royalties and streams on 24 producing assets ... The firm currently has access to a $225-million credit facility and an uncommitted $75-million accordion, which is expected to provide readily available capital for further acquisitions. We note that a majority of the 24 producing projects are precious and base metal focused. In turn, we highlight the company’s strong leverage to rising gold and silver prices, as Sandstorm expects its gold equivalent ounce (GEO) production to reach roughly 125,000 GEOs in FY24, compared with less than 64,000 GEOs in FY19.
“In short, Sandstorm’s exposure to metal prices through its growing production profile offers a unique investment strategy with a substantial reduction in its risk profile. The company expects to greatly increase its access to gold ounces (oz) with the onset of mining operations at the Hod Maden project, which we expect to drive near-, mid-, and long-term value for the company.”
Mr. Ihle set a target of US$14 per share. The current average on the Street is US$10.
Stock of Calgary-based cannabis producer Sundial Growers Inc. (SNDL-Q) has “flown under the radar,” according to ATB Capital Markets analyst David Kideckel.
Seeing its recreational cannabis sales as comparable to better-known larger Canadian producers and “ample scope” for improving profitability, he initiated coverage with a “sector perform” rating.
“Sundial’s track record of Canadian recreational cannabis sales is impressive,” he said. “Based on the most recently reported quarter of several Canadian LPs, we believe that Sundial is among the top 10 LPs [licensed producers] in terms of Canadian recreational cannabis gross sales, and among the top 5 LPs in terms of vape sales in Ontario, Alberta, and British Columbia. The Company’s recreational cannabis market share increased to 4.5% in Q2/20 from 3.0 per cent in Q1/20. Sustainable market share is a critical factor in determining whether an LP will succeed over the long term in Canada. To date, Sundial has executed well on that metric.”
“We believe that Sundial’s adj. gross margin may increase significantly over the mid-to-long-term. Our view is driven by Sundial’s ongoing change in revenue mix from wholesale to sales to provincial boards, as well as the Company’s move to in-house extraction. In addition, Sundial’s new management has taken tangible and effective steps to optimize asset utilization and lower the Company’s cost structure, providing further tailwinds to Sundial’s margin outlook.”
Mr. Kideckel set a target price of 40 US cents for Sundial shares. The average target is currently 63 US cents.
“Our view on Sundial is driven by the following factors: 1) large addressable market; 2) track record of gaining market share in Canada; 3) scope to improve profitability leading to positive free cash flow; and 4) attractive valuation relative to peers,” he said. “However, we remain neutral on the stock as we need more visibility on the Company’s ability to improve profitability given the near-term headwinds affecting the Canadian cannabis industry. If Sundial maintains or improves its market share and achieves positive free cash flow, we believe there is significant room for valuation multiple expansion.”
WELL Health Technologies Corp. (WELL-T) is set for “exponential” growth as its hybrid model gains “critical mass,” said Desjardins Securities analyst David Newman following a virtual non-deal roadshow with CEO Hamed Shahbazi on Thursday.
“We believe WELL could be at an inflection point in its growth trajectory, driven by (1) over 10 potential deals (LOIs) that could lead to a step-change in run-rate revenue to $100-million by 1Q21, two years ahead of our forecast, (2) the addition of new allied health and billing/back-office segments, and (3) the launch of its pioneering app exchange,” he said.
Keeping a “buy” rating for Vancouver-based company’s shares, he increased his target to $9.50 from $7. The average is $7.28.
CIBC World Markets analyst Alex Hunchak initiated coverage of a trio of junior gold developers with “outperformer” ratings on Friday.
* Marathon Gold Corp. (MOZ-T) with an “outperformer” rating and $4 target. The average on the Street is $3.22.
“A 2020 pre-feasibility study (PFS) for the Valentine Gold project highlighted annual production of 175,000 ounces over its first nine years of mine life at a sub-US$750 per ounce all-in sustaining cost (AISC), and with just $272-million in pre-production capex, the project delivers strong economics at gold prices well below today’s spot price,” he said. “We expect MOZ will re-rate from its current 0.5 times P/NAV [price to net asset value] multiple and close the valuation gap relative to the junior producers at 0.8 times as it progresses towards first production. Moreover, we believe the project’s size, advanced development stage, and location in a tier-1 jurisdiction combine to render Marathon Gold an enticing M&A target.”
* Great Bear Resources Ltd. (GBR-X) with a $22.75 target. Average: $21.58.
“Great Bear represents one of the industry’s most exciting new gold discoveries,” he said. “With the potential to host nearly 10Moz in the Red Lake area, we expect the company’s Dixie project will command significant interest as an M&A target and could drive a takeout valuation of more than $30 per share. We expect the 110-kilometre drill program planned for 2020 will generate positive news flow through exploration and infill drilling, and move the project towards a maiden resource at Dixie in 2021.”
* Probe Metals Inc. (PRB-X) with a $2.70 target. Average: $3.23.
“Probe Metals' current 3.4Moz resource base in the Val-d’Or region represents an attractive development project in a tier-1 jurisdiction, with near-term upside driven by continued potential resource growth,” he said. “Longer term, Probe Metals' Val-d’Or East project could represent a stand-alone operation or the project could be acquired by neighbouring producers looking to extend or expand milling operations with additional ore sources. On an EV/oz basis, the company trades at $40 per ounce, a discount to the larger explorer and developer group at $120 per ounce, and we expect drill results and the delivery of an expanded resource in H1/21 will act as meaningful catalysts for the company over the next 12 to 18 months.”
In other analyst actions:
* Touting the “amazing” infrastructure and low pre-production capex at its Premier-Red Mountain Gold Project in northwestern British Columbia’s Golden Triangle, Raymond James analyst Craig Stanley initiated coverage of Ascot Resources Ltd. (AOT-T) with a “strong buy” rating and $1.75 target. The average on the Street is $2.05.
* Alliance Global Partners started Trulieve Cannabis Corp. (TRUL-CN) with a “buy” rating and $40 target. The average on the Street is $44.