Inside the Market’s roundup of some of today’s key analyst actions
After displaying “solid” sales growth in the second quarter and amid the evidence of early success with supplier negotiations, Desjardins Securities analyst Keith Howlett upgraded his rating for shares of Empire Company Ltd. (EMP.A-T) to “buy” from “hold.”
On Thursday, shares of the parent company of the Sobeys supermarket chain jumped 10.68 per cent after reporting quarterly earnings per share of 40 cents, exceeding the projections of both Mr. Howlett (34 cents) and the consensus on the Street (32 cents). Same-store sales growth, excluding fuel and pharmacy, rose to 3 per cent, versus internal inflation at 1.3 per cent.
"All regions posted improvement, led by Quebec, FreshCo, Safeway and Sobeys Ontario," the analyst said. "Progress in repairing customer goodwill in western Canada appears to be commencing earlier than we expected, primarily from better and consistent execution. While the results were assisted by a reversal of impairment of assets ($12.7-million), a real estate gain ($4.7-million) and significantly lower management incentive compensation, the trend is positive. Note the minimum wage headwind in 2H FY19 has been reduced by $20-million."
"Management delivered the targeted $100-million in SGA expense reductions in FY18, and has again reaffirmed the target of $400-million of savings from procurement across FY19 and FY20. We are now placing a much higher probability of realizing the $400-million, given that management has recently concluded negotiations with vendors representing more than 25 per cent (exact percentage not specified) of purchases. Management continues to expect the run-rate procurement savings to be $150-million exiting FY19, with an incremental $250-million exiting FY20. The first $150-million of savings will only begin to be gradually phased in over the last four months of FY19."
Mr. Howlett also emphasized his view that the industry backdrop is improving for Empire, noting Walmart Canada is no longer increasing store count and has already converted most of its discount stores to supercentres.
"Store conversions to supercentres in Ontario are essentially complete, while there are a handful of stores still to do in Quebec and western Canada," he said. "Atlantic Canada is the current area of focus, as it was the last region to be tackled. None of the major grocers, other than Overwaitea, is actively increasing square footage. Overwaitea has been adding new stores selectively in Alberta, Saskatchewan and Manitoba. Costco has reverted to its typical pace of 1–3 net new stores annually. The modest pace of industry square footage growth (estimated at less than 1 per cent by industry participants) scombined with modest price inflation represents an improving environment for grocers."
Incorporating both the quarterly results and the impact of the recently closed acquisition of Ontario-based grocer Farm Boy, Mr. Howlett raised his 2019 and 2020 EPS projections for Empire to $1.63 and $2.13, respectively, from $1.52 and $1.88.
Moving the stock to "buy" from "hold," his target for its shares jumped to $32 from $27. The average on the Street is $31.50, according to Thomson Reuters Eikon data.
"Empire management is halfway through a crowded three-year (FY18–20) agenda to turn the business around. Actions have been taken to address short-term, medium-term and long-term issues. The near-term benefits should be clearly visible by 1Q FY20, when the benefits of the negotiations with the first group of suppliers is fully reflected in operating results. There will be minimal benefit from these negotiations in 3Q FY19, and a modest benefit in 4Q FY19."
Elsewhere, CIBC World Markets analyst Mark Petrie upgraded the stock to "outperformer" from "neutral" with a $33 target, rising from $27.
Mr. Petrie said: “After a somewhat wild Q1, Empire struck a better balance of top-line growth and margin investment in Q2, accelerating tonnage momentum while dialing back GM% investment. We expect GM% pressure to continue but moderate, while Sunrise COGS benefits will begin at the end of next quarter and leave room for selective investment in a market that remains intensely competitive.
"Execution risk remains, even if healthy Q2 results put us somewhat at ease. But in isolation, we are reasonably comfortable with each pillar of Empire’s plans. The most substantial operating risks of Sunrise are in the past, and we don’t expect past assortment mistakes to be repeated in the upcoming category resets. Freshco 2.0 is a step forward, and though profitability will take time in the West, a discount presence will be a strategic asset. Farm Boy came at a steep price, but can be leveraged across the business. Last, while we remain uncertain about the economics of the Ocado investment, we believe the market share opportunity is substantial over time and see that platform as another long-term asset.”
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Citing a “sharp” 34-per-cent drop in its stock following the release of third-quarter results on Sept. 6 and a “relatively steady” fourth quarter, Canaccord Genuity analyst Aravinda Galappatthige raised his rating for Transcontinental Inc. (TCL.A-T, TCL.B-T) to “buy” from “hold.”
Shares of the Montreal-based newspaper publishing and marketing company jumped 6.35 per cent on Thursday after quarterly results. Adjusted EBITDA of $162.2-million and earnings per share of 99 cents both topped the projections of Mr. Galappatthige ($149.1-million and 75 cents) and the Street ($145-million and 77 cents).
With the results, the analyst hiked his fiscal 2019 EPS projection to $2.92 from $2.26.
He maintained a $28 target for the stock, which falls 13 cents short of the current consensus.
"The upside to our target is a meaningful 36 per cent," he said. "We believe that with 40 per cent of our projected corporate EBITDA coming from packaging and the combination of future M&A and organic growth moving this metric further towards the packaging segment, TCL’s share price should enjoy a period of re-rating over time. Furthermore, the synergistic savings from the integration of Coveris ($20-million in 24 months) and upside from an enhanced sales structure within offers an opportunity to drive EBITDA growth from this division."
"Our upgrade is further supported by the underlying FCF yield of 14 per cent in fiscal 2019. For a business with a reasonable balance sheet and relatively steady underlying EBITDA (excluding recent noise around Hearst), we feel that this is a compelling valuation. Furthermore, TCL offers an attractive dividend yield of 4.1 per cent with the prospect of continued annual dividend growth around the 10 per cent."
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After finally receiving “some visibility” on AltaGas Ltd.'s (ALA-T) turnaround plan, Canaccord Genuity’s David Galison raised his rating for its stock to “buy” from “hold.”
Investors applauded the release of the company's 2019 financial outlook, sending its shares up 9.69 per cent in Thursday trading. The scheme, which includes a 56-per-cent reduction to its annual dividend (to 96 cents per share from $2.19) and additional asset sales of approximately $1.5-$2.0-billion in 2019, shed light on its path following the $6-billion acquisition of WGL Holdings.
"While we view the guidance as largely in line with our previous outlook, we are upgrading the shares ... as we now have more confidence in our forward outlook," said Mr. Galison. "In addition, we view the investment risk/reward as favourable, considering the significant decline in the shares since the acquisition [of WGL Holdings] was announced (down 58.6 per cent). Much of the recent decline was due to heightened uncertainty on earnings power and dividend levels post-acquisition as well as the plan forward for repairing the balance sheet."
Mr. Galison lowered his target price for AltaGas shares to $19 from $20, which is below the average on the Street of $20.29.
Meanwhile, BMO Nesbitt Burns analyst Ben Pham lowered his target to $17 from $20, maintaining a "buy" rating.
Mr. Pham said: “While we see the dividend re-set and further planned asset sales as a directional positive, we believe the shares could continue to trade below our re-cut net asset value of $15-20 (after factoring in 10% holdco discount) given continued credit rating scrutiny and the big re-set in growth expectations and shareholder value destruction.”
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Industrial Alliance Securities analyst Jeremy Rosenfield lowered his rating for AltaGas Canada Inc. (ACI-T) to “hold” from “buy” based on recent share price appreciation to his price target.
"ACI’s shares have climbed almost 16 per cent since the company’s initial public offering (IPO) on Oct. 25, 2018, at $14.50," he said. "The sharp rise has outpaced peers in the Canadian Utility sector (up 7 per cent on average since that time), as well as the broader S&P/TSX Composite Index (down 1 per cent)."
“Despite the price appreciation, our fundamental outlook for ACI has not changed since the IPO or our initiation of coverage. We continue to expect ACI to achieve 5-per-cent average annual rate base growth over the next five years, with 4-6-per-cent average annual EPS and FFO/share growth, and similar dividend growth over the same time period.”
He maintained a target price of $16.50. The average on the Street is 8 cents higher.
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Feeling fiscal 2019 and 2020 expectations for Alamos Gold Inc. (AGI-T, AGI-N) are “too optimistic” given a slowdown in development activities at its Kirazli project in Turkey, Desjardins Securities analyst Josh Wolfson downgraded his rating for its stock to “hold” from “buy.”
"The local press is reporting that Alamos has reduced its direct and contractor employees at the company’s Kirazlı project," he said. "Alamos outlines that these activities are related to reduced expected development activity ahead of the winter season. However, the company had previously reported in early November that it was in the process of finalizing its mining services and earthworks contracts. Key to advancing construction activities is securing Kirazlı’s local operating permit from the General Directorate of Mining Affairs (MIGEM), which remains outstanding."
"Alamos has outlined that securing the Kirazlı operating permit by early spring would allow the company to maintain its existing 2H20 start-up schedule. In our view, operating permit timelines are uncertain, while employee retrenchment and a lag in earthworks/mining services contracts are indicative of potential delays to its start-up targets. Turkey accounts for 23 per cent of our NAV and we note that absent this production, corporate output is expected to decline in 2019/20."
Citing the issues in Turkey as well as "outstanding uncertainties" with the ramp-up of its Young-Davidson mine in Ontario, Mr. Wolfson lowered his target for the stock to $5.50 from $7.50. The average is currently $9.32.
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“Taking a cautious stance pending clarity on the path forward,” Canaccord Genuity analyst Rahul Paul downgraded Detour Gold Corp. (DGC-T) following a shareholder vote brought the dismissal of five of nine board members, including both chief executive officer Michael Kenyon and chairman Alex Morrison.
"We acknowledge the need for change following the disappointing performance of the former board and management, but believe change will take time (more than 1 year), particularly for a large and complex operation such as Detour Lake," he said. "In the interim, we are concerned that the lack of continuity and leadership could have negative implications on operational/financial performance. We see value in the shares longer term, but recommend a cautious stance pending more clarity on the path forward."
Though he thinks the new board, led by chairman Jim Gowans, is "strong" and includes "seasoned executives that bring to the table an attractive combination of operating, financial, capital markets and social/environmental experience," Mr. Paul lowered his rating for Detour shares to "hold" from "buy."
“Lack of continuity is a concern, with only one member of the new board, Mr. Andre Falzon, has been with Detour for more than a year (appointed in 2013),” said the analyst. "In addition, with the resignation of Michael Kenyon, Detour is now without a CEO (search expected to commence shortly). The COO, Frazer Bourchier joined the company only in early 2018, and has yet to receive the support of Paulson and/or the new board. Additional corporate/asset level turnover is also a concern, which could pose challenges as Detour Lake enters a crucial (development-focused) period marked by lower production, higher costs and lower margins, while trying to implement additional measures to improve productivity and profitability. In addition, discussions with key stakeholder, the Moose Cree First Nation have yet to culminate in an agreement.
"We believe a sale of the company is unlikely in the near term. Although a formal sale process may commence (this was one of the demands put forth by dissident shareholders), we do not believe many companies have the resources necessary to acquire and integrate a large complex operation such as Detour Lake. In addition, potential acquirers may not be willing to pay a meaningful premium considering the high costs, low margins and limited FCF in the next two years. Even in the event of an acquisition we believe the premium will likely be low, suggesting limited upside. On the other hand, the looming prospect of further changes in ownership / leadership may only serve to worsen morale at Detour Lake, further delaying the turnaround."
Mr. Paul dropped his target for Detour shares to $12.50 from $18. The average on the Street is currently $15.97.
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Several equity analysts raised their target price for shares of Wheaton Precious Metals Corp. (WPM-T, WPM-N) following the announcement late Thursday of a settlement in its long-standing dispute with the Canada Revenue Agency.
Under the agreement, foreign income on earnings generated by Wheaton International will not be subject to tax in Canada.
"In our view, this is a significant win for Wheaton Precious and for the streaming industry at large and removes a meaningful overhang on Wheaton's shares that dates back to 2012," said Canaccord Genuity's Carey MacRury. "As a result of the settlement and the application of non-capital losses, Wheaton does not anticipate any additional cash taxes will arise."
Mr. MacRury raised his target for Wheaton shares to $41 from $38.50, keeping a "buy" rating. The average target on the Street is $37.28.
"With the positive CRA settlement, the broader implication for the streaming industry is that offshore stream pricing will not need to adjust to reflect Canadian taxes," he said. "As a result, we believe the offshore streaming model will retain its competitiveness as a source of project funding versus traditional equity or debt funding."
Elsewhere, Barclays analyst Matthew Murphy raised its target for the miner’s U.S.-listed shares to US$22 from US$21 with an “overweight” rating, seeing the agreement as a “significant positive” as it removes a tax overhang at a low cost and allows investors and management to focus on WPM’s “attractive” valuation.
David Leeder