Inside the Market’s roundup of some of today’s key analyst actions
The recent go-private bid for Rocky Mountain Dealerships Inc. (RME-T) undervalues the Calgary-based company and is likely to face increased opposition moving forward, according to Raymond James analyst Bryan Fast, who senses “a high level of dissatisfaction” with the offer price.
On Nov. 2, a numbered company controlled by chairman Matthew Campbell and chief executive Garrett Ganden announced it has agreed to pay $7 each for the shares they don’t currently own.
“In light of our upgrade of Rocky’s shares on July 29, we were not surprised to see a go-private bid emerge for the company on Nov. 2,” said Mr. Fast. “That said, even though the offer is 61 per cent above the price at which we raised our rating to Outperform, we still believe that $7 per share understates the intrinsic value of the business. The release of the information circular and recent commentary from one of the largest shareholders provides support to our view that the offer price is too light. This, combined with our discussions with other shareholders, leads us to believe there will be considerable dissent against this go-private transaction on Dec. 17, 2020.
“Indeed, at least two of the largest shareholders, representing 17 per cent of shares outstanding have openly expressed that they will not support the deal at the current valuation. We maintain our view that the offer is opportunistic and long term shareholders should require valuations higher than the current $7 per share for any bid to be successful.”
In a research note released Friday, Mr. Fast also emphasized a recovery in the agriculture sector is underway, which will have a positive impact on dealers, including Rocky Mountain.
“For example, AEM’s October data reveals year-to-date farm tractor sales are up 10 per cent year-over-year despite navigating through a pandemic,” he said. " In addition, industry bellwether John Deere reported knockout results this week indicating ‘Higher crop prices and improved fundamentals are leading to renewed optimism in the agricultural sector and improving demand for farm equipment’. The deal is presented at an opportune time for the acquiring group as we enter the early innings of an up cycle. We upgraded both RME and CERV on this basis and expect fundamentals to continue to solidify.”
Maintaining an “outperform” rating for Rocky Mountain shares, Mr. Fast raised his target to $8.50 from $7. The average target on the Street is $7.17, according to Refinitiv data.
“We contest that should the deal not win shareholder approval, and absent of a superior bid, that the downside in the stock is limited,” he said. “Relative share price performance of peers CERV and Titan shows the gradual improvement in sentiment towards the stocks. CERV has outperformed both RME and Titan since the deal was announced as investors seek exposure to improving fundamentals of ag equipment dealers. If the proposed acquisition had never been tabled, we argue that Rocky could have seen similar share price appreciation over this time frame and could be trading at current levels or higher.”
Desjardins Securities’ Michael Markidis thinks Nova Scotia’s implementation of a temporary cap on residential rent increases of 2 per cent will weigh on Killam Apartment Real Estate Investment Trust (KMP.UN-T).
The analyst estimates the REIT brings in 30-35 per cent of its total revenue from that province.
“Revisions to our forecast, which assume the temporary measure remains in place through 1H21, are not material,” he said. “That said, heightened regulatory uncertainty may temper investor sentiment.”
After lowering his 2021 funds from operations per unit by a penny to $1.03, Mr. Markidis reduced his target price for Killam units to $19 from $19.50, keeping a “hold” rating. The average is $20.64.
Touting its “attractive” financial position in a “rapidly growing market with limited competition,” Paradigm Capital analyst Daniel Rosenberg initiated coverage of Pivotree Inc. (PVT-X) with a “buy” recommendation on Friday.
“Pivotree provides end-to-end commerce solutions to enterprise customers,” he said. “The company is differentiated in its deep domain expertise and capabilities in providing managed turnkey commerce solutions. Pivotree is growing rapidly and is well positioned as a differentiated provider of commerce solutions with a large addressable market and limited competition. Its approach is valued by clients and is reflected in the company’s attractive margin profile as well as through the many brand names who entrust their omnichannel commerce infrastructure to the company. Pivotree’s large and growing base of over 170 customers worldwide includes leading brands like Electrolux, Vitamix, Manulife, Canon and Herschel, to name a few. We believe Pivotree is an attractive investment opportunity offering investors exposure to e-commerce trends, with the potential to accelerate growth through M&A.”
Mr. Rosenberg said the Toronto-based firm, which began trading on the TSX on Oct. 30, benefits from a “unique” business model and “differentiated” capabilities.
“Pivotree’s breadth of expertise in leading commerce technologies is a new and differentiated business model,” he said. “The approach limits Pivotree’s direct competition and offers more flexibility and choice in choosing technology solutions for its clients. Pivotree’s capabilities also extend to tailoring solutions to a client’s needs, all of which are highly valued by Pivotree’s customers, and translates into an attractive margin profile for the company at 50 per cent-plus gross margin.”
He set a target price of $13.75 for its shares. The average is $14.75.
Avante Logixx Inc.’s (XX-X) financial performance is beginning to “track to management’s vision” and its shares may follow, said Canaccord Genuity analyst Doug Taylor following better-than-anticipated fourth-quarter results.
On Wednesday, the Toronto-based security company reported revenue and EBITDA of $23.2-million and $2.2-million, respectively, exceeding Mr. Taylor’s estimates of $20.0-million and $0.8-million. He said the beat was driven by better organic growth and fixed cost absorption as the company exits a reinvestment phase.
“The primary question following a strong quarterly print like Avante’s Q2 is whether the newly established profit level is sustainable,” he said. “We point to several items of note: 1) 80 per cent-plus of Avante’s revenue comes from recurring, contractual agreements with high predictability; 2) the pandemic is producing, at worst, a mixed impact and could be argued as a slight positive; 3) the company targets 10-per-cent organic growth and 10-per-cent EBITDA margins (leaving upside to current estimates); and 4) capex is primarily maintenance-related, which is improving conversion of EBITDA to FCF.”
Keeping a “buy” rating, Mr. Taylor raised his target for Avante Logixx shares to $2.50 from $1.50. The average is $2.25.
“We see [Wednesday’s] results establishing a new, higher baseline for profitability going forward,” he said. “Against that backdrop, we believe that Avante shares are very inexpensive, now trading at 5.7 times our NTM [next 12-month] EBITDA on our revised estimates. In addition, we see new compensation plans established with the quarter, along with active insider buying as of late, as further aligning the management team with shareholders. We believe that continued execution, reinforcing this new profit level, will lead the shares higher.”
Elsewhere, Acumen Capital’s Nick Corcoran raised his target to $2.60 from $2 with a “buy” rating.
“The Q2/FY21 results demonstrated the potential of the business to generate EBITDA as it grows through organic growth and acquisitions,” said Mr. Corcoran. “We continue to believe that XX is on track with its strategic goals.”
Deere & Co. (DE-N) is “very well positioned” for an imminent rebound in the demand for farm equipment, said RBC Dominion Securities analyst Seth Weber in response to better-than-expected fourth-quarter results and encouraging outlook.
“Deere [was down] 1.9 per cent [on Wednesday] (S&P down 0.2 per cent) despite big upside 4Q20 revenue/EPS and above-consensus FY21 that we see as indicative of significant operating/platform initiatives that have structurally changed the company for the better (e.g., smart industrial model, more technology/precision solutions, leaner org) and remain underway,” he said.
On Wednesday, the U.S. equipment giant reported earnings per share for the fourth quarter of US$2.39, up from US$2.27 during the same period a year ago and ahead of the projections of both Mr. Weber (90 US cents) and the Street (US$1.49). It also estimates 2021 net income of US$3.6-4.0-billion, topping the consensus forecast of US$3.37-billion.
“With reduced new/used equipment inventory (Ag & Turf and Construction), Deere is well positioned for a farm equipment rebound that we believe is just getting started. After several tough years and now seven years off the last equipment peak, U.S. farmer sentiment is improving, with crop prices up/inventories down, potential for normal trade, and used equipment prices up,” the analyst said. “In addition, Deere is seeing good demand for precision ag solutions, with new technology/innovation ongoing, with potential for some cross-over to C&F [Construction & Forestry]. Even with the anticipated A&T upturn in FY21, DE estimates the N. America high-HP equipment market will be just 90 per cent mid-cycle, with typical peak 120 per cent.”
Mr. Weber hiked his 2021 and 2022 earnings per share projections to US$12.50 and US$14.55, respectively, from US$10.30 and US$12.40.
Keeping an “outperform” rating for Deere shares, he raised his target to US$280 from US$252. The average on the Street is US$276.71.
In other analyst actions:
* CIBC World Markets analyst Anita Soni trimmed the firm’s target for Equinox Gold Corp. (EQX-T) to $19 from $19.50, keeping a “neutral” rating, after assuming coverage of the stock. The average target is $22.83.
“Equinox has successfully transitioned from developer to multi-asset producer, and with the merger with Leagold now complete, we expect the following headwinds to slow the potential re-rate: (1) potential large block trades; (2) gold hedges; and (3) portfolio rationalization details (4) Los Filos Blockade,” said Ms. Soni.
* BMO Nesbitt Burns analyst Rene Cartier raised his target for Copper Mountain Mining Corp. (CMMC-T) to $1.60 from $1.40 with an “outperform” rating, while National Bank’s Don DeMarco raised his target to $1.65 from $1.50 with a “sector perform” recommendation. The average is $1.50.
* Cormark Securities lowered Cuda Oil and Gas Inc. (CUDA-X) to “market perform” from “buy.”