Inside the Market’s roundup of some of today’s key analyst actions
Companies in the Canadian Pipeline, Power & Utilities group with direct commodity exposure are likely to feel the largest negative impact from the price volatility seen in the fourth quarter, said Canaccord Genuity analysts David Galison and John Berznicki in a research report previewing earnings season.
On the flip side, the analysts predict those with exposure to the U.S. dollar should see a larger positive impact on their results.
“For the Canadian midstream sector, despite the 19.0-per-cent decline in interest rates, the significant decline in crude oil prices (WTI was down 38.0 per cent in Q4/18) weighed on the shares,” the analyst said. “Enbridge was the only stock that generated positive return during the quarter, while AltaGas was the worst performer due to 96-per-cent dividend cut and leverage concerns. In the Power and Utilities sectors, TransAlta Corp. was the worst performer in the quarter likely due to tax-loss selling. On the other hand, Hydro One generated positive return during the quarter after the Avista acquisition was rejected by the regulator. Algonquin, Fortis and Emera also generated positive quarterly share price returns. PIF generated the worst performance in 2018 due to the concerns over the geopolitical risk in Nicaragua, while CPX was the best performer with a return of 8.6 per cent as the company continues to execute on its growth strategy.”
The analysts downgraded a trio of Power and Utilities companies citing recent share price appreciation that has left a total return, including dividend yield, of less than 10 per cent. Those changes were:
Algonquin Power & Utilities Corp. (AQN-T) to “hold” from “buy” with a target of US$11.50 (unchanged). The average on the Street is $15.07, according to Thomson Reuters Eikon data.
Capital Power Corp. (CPX-T) to “hold” from “buy” with a target of $31. The average is $29.82.
TransAlta Renewables Inc. (RNW-T) to “hold” from “buy” with a target of $12. The average is $12.30.
In the report, the analysts also made the following target price changes:
Enbridge Inc. (ENB-T, “buy”) to $53 from $52. Average: $53.59.
Inter Pipeline Ltd. (IPL-T, “buy”) to $26 from $28. Average: $27.20.
Keyera Corp. (KEY-T, “buy”) to $38 from $40. Average: $39.07.
Innergex Renewable Energy Inc. (INE-T, "hold) to $14 from $13.50. Average: $15.19.
In reaction to Thursday’s announcement that it has entered into a definitive agreement to be acquired by Vistra Energy Corp. (VST-N), Raymond James analyst David Quezada downgraded his rating for Crius Energy Trust (KWH.UN-T).
Calling Vistra a "logical" buyer and the $7.57 per trust unit valuation of Crius "reasonable given risks," he lowered the stock to "market perform" from "outperform."
“Having recently completed and integrated the acquisition of Dynegy, Vistra’s generation footprint had expanded to the U.S. Northeast where Crius’ has a large retail footprint (70 per cent of the company’s 1.3 million RCEs),” said Mr. Quezada. “Vistra’s announced strategy is an integrated retail-wholesale model and a slide deck issued by the company noted this transaction improves the company’s generation to load match to 45 per cent while also bringing Crius’ retail marketing capabilities and relatively high margin customer book. The $7.57/sh takeout price equates to a $328-million price tag (plus $108-million assumed debt) and represents a 4.4 times 2019 EV/EBITDA by our estimates. Factoring in expected synergies, Vistra estimates the multiple at 3.6 tims. While ostensibly low we believe these multiples are reasonable considering the headwinds facing Crius’ municipal aggregation customers and regulatory challenges the company has faced. Transaction closing is expected in 2Q19.”
Mr. Quezada said he does not anticipate regulatory obstacles and thinks the probability of a competing bid is low.
His target for Crius units fell to $7.50 from $9. The average target on the Street is $8.21.
"While the takeout price comes below our target we believe the 38-per-cen premium to [Thursday's] close is attractive to unit holders particularly considering challenges facing the municipal aggregationportion of Crius' portfolio," the analyst said. "Moreover, we believe the strategic benefits of the complementary relationship between Crius' retail energy footprint and Vistra's generation assets makes Vistra a logical buyer. While expected improvements in EBITDA guided to by management may have provided upside in the stock over time, we did not see the communicated targets as a slam dunk."
Meanwhile, Desjardins Securities' Bill Cabel moved Crius to "tender" from "buy" with a $7.57 target, down from $9.
Mr. Cabel said: "In our view, the offer is a bit light, but we acknowledge that 2018 was a volatile year of restructuring for the company following lawsuits and unitholder activism in 2017. As a result, there is a lack of institutional ownership and we have seen significant turnover in the unitholder base. We believe that the 38-per-cent take-out premium will prove too attractive to holders and, while not optimal, we believe holders should tender to the offer."
“2019 guidance points to continued steady low-single growth with a potential uptick in wireline and media offsetting a likely downtick in wireless,” he said in a research note in the wake of the release of its third-quarter results, which slightly exceeded his expectations due to higher equipment revenue.
"With management effectively providing 2019 capex and FCF guidance with Q3/18 results, along with the continuation of stable underlying YoY revenue and EBITDA growth rates, there were no meaningful surprises with 2019 guidance. On a segmented basis, we expect a year-over-year uptick in the growth contribution from wireline and media due mainly to an ongoing cyclical tailwind, offset by a likely downtick in the growth contribution from wireless as postpaid net additions and ABPU growth take a step-down from 2017/2018 levels."
After increasing his revenue expectations due to upward revisions to his wireline growth assumptions, Mr. McReynolds raised his target for BCE shars by a loonie to $60 with a "sector perform" rating (unchanged). The average is currently $59.05.
"BCE’s position within the group as a defensive, highly liquid dividend grower and bond proxy, we would expect the stock to remain sensitive to changes in macro expectations (interest rates, economy)," he said. "Notwithstanding macro dynamics, we believe underlying company fundamentals remain intact driven by: (i) mid-single digit wireless EBITDA growth; (ii) steady Internet and television net additions leveraging an expanding FTTH footprint and under-indexed market share; (iii) an improving business market; (iv) easing consolidated capex intensity in 2019E; and (v) further cost efficiencies."
Canaccord Genuity analyst Mark Rothschild raised his target price for shares of Brookfield Property Partners LP (BPY-Q, BPY.UN-T) in reaction the announcement of its intention to launch a Substantial Issuer Bid to repurchase up to $500-million of BPY units and Class A shares of Brookfield Property REIT Inc.
"BPY's unit price performance has been weak, and the recent GGP acquisition led to a further decline in 2018," he said. "While there has been some improvement over the past month, the price remained well below NAV [net asset value]. Although we view BPY as a high-quality portfolio led by a strong management team, in the past there had been little urgency from management to improve the valuation, and we struggled with identifying what could move the unit price materially higher, outside of a major buyback. Therefore, we view BPY's announcements very positively."
Maintaining a “buy” rating, Mr. Rothschild increased his target to US$22.75 from US$20. The average is US$23.06.
"BPY owns an extremely high-quality portfolio of properties and we believe that it is well-positioned to create meaningful value over the long term through the completion of its current active development and redevelopment projects," the analyst said. "While retail sentiment remains negative, management appears to be taking some steps to improve the valuation through a substantial issuer bid. We are raising our target price to US$22.75, which equates to a 10-per-cent discount to NAV. The more modest discount (was 20 per cent previously) reflects our belief that investors should view both the strong financial results as well as the SIB positively. Importantly, management has indicated that it will take advantage of the discount valuation and purchase units, which should lead to an increase in NAV."
In other analyst actions:
UBS analyst Shneur Gershuni cut Enbridge Inc. (ENB-T) to “neutral” from “buy" with a target of $50, which sits below the average on the Street of $53.59.
Mr. Gershuni said: “In our initiation of ENB in early October, we highlighted 3 upcoming catalysts that we did not feel were factored into the stock at the time 1) The simplifications, 2) Upcoming analyst day and 3) Line 3 pipeline project. The simplifications have since closed and the stock has re-rated higher and is now closing in on our C$50 PT. We believe at current levels the stock is pricing in the benefits of simplification and Line 3 coming in on time for 2H19. Hence, we are stepping to the sidelines and downgrading ENB.”
Macquarie analyst Michael Glen lowered Linamar Corp. (LNR-T) to “neutral” from “outperform,” pointing to “escalating concerns” regarding the margin outlook within its powertrain/driveline business. Mr. Glen has a target of $57, which is a loonie below the average.