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

Investors are not “paying much, if anything” for Sun Life Financial Inc.’s (SLF-T, SLF-N) foray into India with joint venture partner Aditya Birla Capital, according to Desjardins Securities analyst Doug Young, calling it “buried treasure.”

Toronto-based Sun Life currently owns a 49-cent-stakes in both a life insurance entity, Aditya Birla Sun Life Insurance, and an asset manager, Aditya Birla SunLife Asset Management Company.

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“In our view, the market attributes no value to SLF’s stakes in ABSLI or ABSLAMC,” said Mr. Young in a research note. “However, these entities are worth $2.00–2.50 per SLF share based on where comparable entities trade.

Citing its large population and fastest-growing economy, the analyst believes India’s demographics are “favourable” for the life insurance and wealth management industries, noting the penetration rates in both markets “remain very low.”

“After many tough years, we believe the insurance market could be at an inflection point,” said Mr. Young. “Combined with product mix changes and a pivot toward bancassurance, ABSLI could show steady margin improvement over the next few years.

“ABSLAMC is a top 3 asset manager in a fast-growing, concentrated and consolidating space. For perspective, ABSLAMC’s after-tax profit increased 3.0 times from FY13–17. And based on FY18 results and forecasts from analysts covering ABC, this momentum is not expected to abate over the next three years. Moreover, this is an operation that has been generating ROEs [return on equities] of 23–30 per cent over the past four years.”

Keeping a “buy” rating for its shares, Mr. Young increased his target price for Sun Life to $60 from $58. The average target is currently $58.08, according to Bloomberg data.

“Some investors believe SLF trades at a rich valuation relative to peers, a view we disagree with,” he said. “If we remove $4 per share in excess holdco cash, SLF trades at 10.1 times our 2019 EPS estimate versus 8.8 times for MFC, 10.0 times for GWO and 9.4 times for IAG. Given 30 per cent of earnings comes from MFS — a higher valuation-multiple business — this premium makes sense, in our view. In addition, SLF does not have exposure to higher-risk U.S. business like long-term care insurance, which has weighed on MFC’s valuation.”


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Calling its $8.4-billion acquisition of WGL Holdings Inc. (WGL-N) “an incremental positive,” CIBC World Markets analyst Robert Catellier upgraded AltaGas Ltd. (ALA-T) to “outperform” from “neutral.”

“Our confidence in the funding strategy has increased enough to raise our rating,” he said.

“The D.C. PSC conditionally approved AltaGas’ acquisition of WGL. While the conditions were not disclosed at the time of writing, given the five-day acceptance period, we expect the conditions to relate to monitoring of progress towards commitments made as part of the settlement agreement and/or financial stability monitoring. We expect these conditions to be accepted and the merger to close relatively quickly thereafter. The company’s attention will then turn to the funding plan to pay down the bridge loan that will be used to close the acquisition. With the market’s heightened sensitivity to funding risk, continuing execution of the funding plan will be key to moving the shares. We expect the company to move quickly in this regard, building on its recent success in selling the Northwest Hydro assets.”

Mr. Catellier maintained a $32 target. The average is $28.19.

“ALA shares have materially lagged since the acquisition of WGL was announced(Jan. 25, 2017), down 11 per cent vs. pipeline and midstream peers down 4 per cent,” he said. “We had expected the stock to lag peers during the regulatory review process, based on the experiences of prior utility M&A transactions; however, we have been surprised by the depth and duration of the underperformance. We attribute this in a large part to the risk associated with the funding plan to repay the bridge loan, but also believe the high proportion of utility assets in the business mix may challenge classification of the stock—neither midstream nor utility. On average, pipeline and midstream shares trade at 22.4 times our 2019 earnings estimate compared to utility shares trading at 16 times earnings and ALA shares at 18.2 times. While we believe the business mix should normalize over time consistent with the company’s objectives, the targeted weighting could imply a modestly higher P/E multiple over time based on a sum-of-the-parts valuation, but the onus is on management to achieve that mix.”


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Despite exhibiting growth in its wireless segment in the third quarter, Shaw Communications Inc. (SJR.B-T, SJR-N) is “not a good bargain yet,” said Desjardins Securities analyst Maher Yaghi.

On Thursday, Shaw reported earnings before interest, taxes, depreciation and amortization (EBITDA) for the quarter of $547-million, meeting the Street’s projection of $543-million.

Wireless net additions of 46,659 were deemed “strong” by Mr. Yaghi, who called average revenue per user (ARPU) growth for the segment of 7.5 per cent year over year “the real surprise” of the quarter. He had expected a 5.8-per-cent increase.

“SJR reported results that fit directly with the company’s transition path from wireline to wireless,” he said. “Indeed, wireline subscribers were disappointing while wireless net additions continued to improve. There were no surprises reported on the financial front. In our view, SJR does not warrant the highest valuation in the industry given the heavy proportion of earnings from wireline and the operational risk in wireless.”

With the results, Mr. Yaghi raised his fiscal 2018 and 2019 earnings per share projections to $1.25 and $1.37, respectively, from $1.18 and $1.30.

He kept a “hold” rating for Shaw shares with a target price of $31, rising from $30.50 and above the consensus of $29.31.

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“We do not believe SJR offers a compelling buying opportunity, as the valuation is not attractive enough to outweigh the current organic decline in cable,” said Mr. Yaghi. “We are supportive of the wireless venture, but we estimate its contribution to EBITDA growth will remain modest over the medium term as wireline pressures results. We would need to see improved consolidated financial performance before becoming bullish on the name.”

Elsewhere, RBC Dominion Securities’ Drew McReynolds lowered his target to $29 from $30, maintaining an “outperform” rating.

“We view underlying Q3/18 results as slightly below expectations with incremental wireless momentum offsetting weaker consumer revenue growth and RGUs [revenue generating units],” said Mr. McReynolds. “Following modest downward revisions to consumer revenue growth assumptions and the value of the Corus stake, our target price decreases.”


Calling fiscal 2019 “the year of the category resets” as it continues its three-year transformation project, dubbed Project Sunrise, Raymond James analyst Kenric Tyghe raised his financial expectations and target price for shares of Empire Company Ltd. (EMP.A-T) in response to Thursday’s release of its fourth-quarter 2018 results.

The Stellarton, N.S.-based company, which owns the Sobeys supermarket chain, reported adjusted earnings per share for the period of 35 cents, which included a 6-cent gain from a lower tax rate and real estate divestitures. The Street had projected 29 cents.

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Sales increased 1.5 per cent to $5.886-billion, topping the consensus of $5.871-billion, whuile same-store sales was essentially flat.

“The effectively in-line quarter reflected weaker than expected SSS [same-store sales] (excluding fuel) growth (despite positive Food SSS) on a weaker performance in related businesses (namely pharmacy on the twin headwinds of drug reform and the tough comp of Air Miles acceptance in Alberta which were banned on appeal on Sept. 22, 2017),” said Mr. Tyghe. “The modest internal food inflation (on Food CPI of 0.9%) reflected what was an aggressively promotional backdrop and the drag of planned store closures, which appear to have been managed effectively in the quarter. We believe that the SG&A performance (in the context of industry headwinds) was better than it appears at first blush.

“F2019 (and the next phase of Project Sunrise) is the year of the category resets, which is an intricate and time consuming exercise and is why the majority of the benefits are expected to be realized in the back-half of the year. We expect that gross in year Project Sunrise savings (at 30% of target total savings through 2020 of $500-million) will be allocated roughly 35 – 40 per cent to COGS and 60 – 65 per cent to SG&A. The Project Sunrise savings will be partially offset by the minimum wage and drug reform headwinds.”

Mr. Tyghe increased his 2019 and 2020 EPS estimates to $1.67 and $1.97, respectively, from $1.56 and $1.87.

With a “market perform” rating (unchanged), he raised his target for Empire shares to $28 from $26. The average is currently $29.05.

Elsewhere, though he reduced his fiscal 2019 EPS projection to $1.56 from $1.63, Desjardins Securities’ Keith Howlett kept a “hold” rating and $27 target.

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Mr. Howlett said: “Empire continues, in our view, to be passing through the period of highest risk as its employees adjust to new operational roles within a streamlined national structure with 800 fewer office employees. Risk should normalize by 4Q FY19. Very low food price inflation/deflation and greater-than-usual competitive intensity create a near-term headwind to driving internal operational improvement to the bottom line. This was evident in 4Q FY18 results. Management is seeking, as an offset, to resuscitate sales growth with more urgency. We expect this will prove very challenging before the consumer proposition has been modified.”


In other analyst actions:

TD Securities analyst Aaron MacNeil upgraded Source Energy Services Ltd. (SHLE-T) to “buy” from “hold” and raised his target by a loonie to $7. The average is $9.35.

GMP analyst Ingrid Rico initiated coverage of Maverix Metals Inc. (MMX-X) with a “buy” rating and $2.40 target, exceeding the consensus by 6 cents.

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