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

Canada's Energy Infrastructure & Midstream sector "remains on sale," according to Industrial Alliance Securities analyst Elias Foscolos.

“Overall, we believe that compelling value exists in the sector in that it is trading at near-term lows on a multiple basis and the sector yield is at a historically high spread to the government of Canada 10-year bond yield,” said Mr. Foscolos in a research report released Friday.

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“On an overall basis, we anticipate that EBITDA growth in the sector will be relatively flat in 2019, and any dividend growth, which we expect would be in the mid-low single digits, will be driven by the fact that payout ratios are currently conservative leaving room to increase and will not be driven by EBITDA growth. Despite the run-up in prices since the start of the year, we strongly believe the current risk-return profile of our coverage universe justifies rating all of our stocks with a minimum Buy, with three Strong Buys.”

In the report, Mr. Foscolos upgraded his rating for a pair of stocks while downgraded another. He also reduced his target price for companies in his coverage universe based on changes to his multiple analysis.

Following a year of acquisitions, Superior Plus Corp. (SPB-T) is likely to focus on synergies in 2019, according to Mr. Foscolos, who raised his rating for the Toronto-based company’s stock to “strong buy” from “buy,” citing a projected return of 43 per cent.

“2018 was a very busy year for SPB as it had six tuck-in acquisitions and divested several assets, including the sell-off of all of its wholesale distillate assets in New York for cash proceeds of US$56-million and Pennsylvania for US$16.1-million in Q1/18,” the analyst said. “In July, SPB completed the acquisition of NGL Propane (“NGL”) for US$900-million in order to further expand into the US retail propane market. In addition, SPB completed the acquisition of Porco Energy Corp. in September, United Pacific Energy in October, and Musco Fuel & Propane in November.”

He added: “Despite the current debt level, we do see potential upside as SPB plans to continue engaging in tuck-in acquisition opportunities to grow its propane distribution network. A modest dividend increase is possible. Our outlook of Superior is relatively stable as it continues to grow its market position in propane distribution and synergies still to be realized for both the NGL and Canwest acquisitions.”

Mr. Foscolos lowered his target for Superior Plus shares to $14.50 from $15.50. The average target on the Street is currently $14.77, according to Thomson Reuters Eikon data.

Citing recent price weakness, Mr. Foscolos also raised his rating for Keyera Corp. (KEY-T) to “strong buy” from “buy.”

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"KEY is expected to modestly grow its EBITDA in 2019 to $796-million with further growth in 2020 to $899-million purely based on the commission of organic projects," he said. "We anticipate that a dividend increase, if announced, will be minor as cash taxes will spike before declines as higher depreciating gas projects come on on-line. With a projected 38-per-cent return, we are upgrading KEY."

His target for Keyera shares fell to $37 from $40. The average is currently $39.60.

Conversely, Mr. Foscolos downgraded Pembina Pipeline Corp. (PPL-T) to “buy” from “strong buy” with the expectation of a slower growth in 2019.

"We expect 2019 EBITDA to grow in the mid single-digit range absent of any acquisition," he said. "We expect that PPL will formally sanction its JV PDH/PP plant in the next half-year adding long-term growth CAPEX. As PPL’s payout ratio is very low, a dividend increase is likely but it will be driven by excess room rather than EBITDA growth. The combination of an increased share price and lower target result in our rating downgrade."

His target fell to $54 from $56. The average is $54.50.

Meanwhile, though he feels upside remains in 2019, Mr. Foscolos lowered his target price for Gibson Energy Inc. (GEI-T), which he called the “top performer” in 2018.

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"From an operational standpoint, 2018 is shaping up to be a stellar year in which EBITDA should increase by 50 per cent on a year-over-year basis," he said. "The company continued to divest its non-core assets (including U.S. Environmental Services, Wholesale Propane, and non-core Canadian Environmental Services), while plowing the proceeds into additional infrastructure assets, particularly new tankage at Hardisty, an expansion project at Moose Jaw, and the U.S. Pyote gathering system.

"On a combined operational basis, we expect 2019 EBITDA to decline as increased contribution from Hardisty will not be enough to offset lower wholesale margins resulting from oil differentials that are expected to normalize over the year. Our 2019 EBITDA estimate is below consensus."

Keeping a "buy" rating, his target fell to $25 from $25.50. The average is currently $23.80.

He also lowered his target for Inter Pipeline Ltd. (IPL-T, “strong buy”) to $27 from $31, which falls the $27.44 average.

"We expect IPL’s 2019 EBITDA on an overall basis to be similar to that of 2018," he said. "IPL’s AFFO will decline due to increased interest costs as construction of the Heartland Complex continues. Dividend growth, if it occurs in 2019, will be modest."


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Citi analyst Alexander Hacking expects fourth-quarter results for North American base metals producers to be weaker than the previous quarter due to lower prices.

"We remain broadly cautious on the miners heading into 2019 given slowing global GDP and weaker China macro," he said in a research report released Friday. "Valuations are discounted but the sector needs a macro catalyst to work, in our view (China stimulus, trade war détente and Fed policy). The good news is that miners continue to exhibit good capital discipline and have largely repaired balance sheets (First Quantum Minerals is an outlier)."

Mr. Hacking named First Quantum Minerals Ltd. (FM-T) his top pick in the sector, pointing both its growth profile and free cash flow yield for 2021 and beyond. However, he did emphasize “significant risk remains in Zambia.”

"Results are less important than commentary, in our view, especially update on Zambia tax changes," the analyst said. "Ramp-up of Cobre Panama is more important in a lower copper price environment given high debt levels."

He maintained a "buy - high risk" rating for its stock with a $14 target. The average target on the Street is $20.58.

Citing the macro backdrop and low trading liquidity, Mr. Hacking also downgraded his rating for Nexa Resources SA (NEXA-N, NEXA-T) to “neutral” from “buy” with a target of US$11.50, falling from $18 and below the average of US$17.63.

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After lowering his estimates for all the companies in his coverage universe to account for a drop in prices, Mr. Hacking made several target price changes. They included:

Goldcorp Inc. (GG-N, G-T) to US$10 from US$12 with a “neutral” rating. Average: US$13.75.

Agnico Eagle Mines Ltd. (AEM-N, AEM-T) to US$41 from US$38 with a “neutral” rating. Average: US$48.20.

Pretium Resources Inc. (PVG-N, PVG-T) to US$10 from US$12 with a “buy - high risk” rating. Average: US$14.19.

“Mining equities are generally discounting bearish outcomes with significant rebound potential – but also lots of room for downside if metals prices roll-over hard,” he said. “Sentiment is still bearish although it has improved somewhat starting the new year. The big call is macro and based on the growth outlook for the U.S. and Chinese economies. Citi economists are seeing a slowdown underway, with global GDP decelerating from early 2018. Global GDP is expected to decline to 3.1 per cent in 2019 and 2.9 per cent in 2020 (vs. 3.2 per cent in 2018). There are no floor valuations on metals equities, most every stock we cover has been ‘cheap on spot’ for several months. More relevant is to find a trough in metals prices – 2015 levels would be a very attractive long-term entry point, if we get there, e.g. copper $5,000 per ton, iron ore $50 per ton.”


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The acquisition of Aeroplan and bringing its loyalty program in-house is a “game changer” for Air Canada (AC-T), according to CIBC World Markets analyst Kevin Chiang.

He pointed to five factors in justifying his stance: an improved margin profile that sits "in more line with its U.S. peers;" an improved line of sight in reaching investment grade in 2020 or earlier; reduced seasonality with the potential to generate positive profits in every quarter; improved structural free cash flow generations and its current valuation, noting "AC is trading at 2.5 times our 2019E EBITDAR versus WJA [WestJet] at 3.2 times and the U.S. comps at 4.7 times."

"[The deal] addresses key pushbacks we have heard on our positive thesis on AC over the past few years," said Mr. Chiang. "As the company discloses more information on its loyalty program at its upcoming investor day on Feb. 28, there is a clearer path towards a positive re-rating. We believe AC is a unique story within the Canadian industrial complex offering significant earnings growth potential, a strong balance sheet and FCF profile, a management team that has executed well against its longterm strategy, and a compelling valuation."

With an "outperformer" rating, he raised his target to $42 from $36. The average is currently $37.29.

Elsewhere, TD Securities analyst Tim James reinstated coverage with an "action list buy" rating and $44 target, rising from $36.


Meanwhile, TD Securities Brian Morrison raised his rating for Aimia Inc. (AIM-T) to “speculative buy” from “hold” upon resuming coverage of the stock following the Air Canada deal. His target rose to $5 from $2.50. The average on the Street is $4.25.


Expressing concern about China and the comparable same-store sales performance in that region, Goldman Sachs analyst Karen Holthouse downgraded Starbucks Corp. (SBUX-Q) to “neutral” from “buy.”

“The recent AAPL (Apple) announcement (while potentially also product-driven) cited trade concerns/macro, and MCD (McDonald’s) acknowledged softer trends in the region at a late November event,” she said. “The GS macro team also expects a continued slow down in GDP, at least partially driven by consumption.”

Her target dropped to US$68 from US$75. The average is currently US$68.44.


Expecting a "flat environment" for new construction in the United States through 2020, RBC Dominion Securities analyst Mike Dahl and Michael Eisen downgraded their ratings for a five stocks.

"We continue to expect solid, albeit moderating, growth in home improvement spending," the analysts said in a 2019 outlook note released Friday. "The recent rally in the stocks could continue near-term as investors embrace the Fed pause and potential for the pullback in rates to drive a re-acceleration in housing this spring. However, we’re less convinced this will ultimately materialize and see limits to the upside in builder stocks given significant earnings risks. We remain more positive on building products, but become more selective and generally favor those with high R&R exposure and strong balance sheets such as Fortune Brands Home & Security Inc. (FBHS-N) and Masco Corp (MAS-N)."

The analysts lowered a pair of stocks to “underperform” from “sector perform”:

Mohawk Industries Inc. (MHK-N) with a US$115 target from US$129. Average: U$140.28.

Analysts: "The stock has clearly already been under tremendous pressure over the past year, and lower oil prices would normally help to boost margins and sentiment, but we expect continued elevated competitive pressures and negative mix shifts will negate these potential benefits, and we could also see a quicker pass-back of cost benefits in lower pricing given the demand challenges. Additionally, low cost LVT import competition, which has been taking share from MHK, will benefit in the near-term from the US-China tariff truce, creating the potential for a further build in channel inventories even if higher tariff levels ultimately take effect. This could continue the pressure on MHK’s ability to maintain market share and margin performance, representing incremental risk to estimates."

PulteGroup Inc. (PHM-N) with a US$25 target (unchanged). Average: US$26.87.

Analysts: "PHM has been the best-performing stock in our homebuilder coverage over the last three months (up 21 per cent vs. peer group average up 8 per cent) and we now see PHM’s current trading multiple of 1.6 times TBVS as overextended (peer group avg. 1.4 times) given our expectation for declining earnings and meaningful ROE contraction over the next two years."

Three companies were moved to "sector perform" from "outperform." They are:

Builders FirstSource Inc. (BLDR-Q) with a US$13 target, down from US$18. Average: US$15.82.

Analysts: "We anticipate that the combination of the company’s relatively high exposure to slowing new residential construction (77 per cent of sales) and the material decline in lumber prices (down 47 per cent from recent peak) will drive revenue declines and limit margin expansion in FY’19."

Installed Building Products Inc. (IBP-N) with a US$43 target, down from US$46. Average: US$40.40.

Analysts: "Higher relative exposure to the slowdown in new residential construction activity (77 per cent of revenues) will likely limit the company’s ability to generate meaningful organic growth and in turn will pressure incremental margin performance below the company’s long term targets, representing risk to consensus estimates."

JELD-WEN Holding Inc. (JELD-N) with a US$18 target, down from US$21. Average: US$19.14.

Analysts: "We see incremental risk to estimates from JELD’s exposure to softening new construction (23 per cent of sales) and international markets (48 per cent of sales), which isn’t entirely new but in our view will continue to limit upside potential relative to our broader coverage group. In addition, we don’t anticipate a meaningful re-rating in the multiple until the company can demonstrate consistent progress turning around both margins and organic growth."


In other analyst actions:

Berenberg analyst Richard Hatch upgraded Lucara Diamond Corp. (LUC-T) to “hold” from “sell” with a target of $1.60, down from $1.80. The average is $2.50.

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