Inside the Market’s roundup of some of today’s key analyst actions
Though Desjardins Securities analyst Maher Yaghi expects first-quarter results for Canadian telecom companies to display a slowing trend in wireless subscription additions, he cautions it should not be a cause for concern, believing it's been caused by slowing promotional activity.
"This trend in subscriber additions, coupled with recent pressure on pricing, is likely to lead some to question the health of the industry," he said in a research report released Friday. "However, from our perspective, the slowing trend in gross adds is the result of a more rational pricing environment in the industry, even among new entrants. In addition, we believe industry participants are proactively working on improving the economics of their business and are less willing to put up large subsidies for customers unless they can be economically profitable. Hence, while top-line growth is likely to come under some pressure, we believe margins should continue to improve and support healthy profitability."
"Another key ingredient that has been added to the mix is the recent turnaround in long-term interest rates, which have made a U-turn since last year and are now lower. Recall that dividend yields in the sector are highly correlated with long-term government rates. As it stands right now, we do not believe current rates are fully reflected in stock prices; for this to occur, sector valuations would have to creep up by another 5 per cent."
Pointing to current rate levels, Mr. Yaghi raised his target price for stocks in his coverage universe, noting Telus, Shaw and BCE possess the most upside potential.
His changes were:
BCE Inc. (BCE-T, “buy”) to $66 from $63. The average target is $59.72.
"Management continues to have strong controls in place to deliver on the company’s stated 5-per-cent dividend growth model, supporting the industry-leading yield," he said.
Cogeco Communications Inc. (CCA-T, “buy”) to $90 from $87. Average: $91.27.
"Given the significant valuation discount to peers, the potential for more accretive acquisitions in the U.S. and improving organic growth trends, we are maintaining our Buy rating on CCA," he said. "We do not include additional acquisitions in the U.S. in our estimates. We believe that by mid-CY19, the company should be in a financial position to look for additional targets, which could be accretive to our current estimates and valuation."
Quebecor Inc. (QBR-B-T, “hold”) to $36 from $34.50. Average: $34.93.
"Given our view that QBR does not have the scale to generate similar wireless margins vs incumbents, we do not see a fundamental reason for the stock to trade at a sustained premium," said Mr. Yaghi. "We prefer to look for a better entry point before rejoining the bullish crowd."
Rogers Communications Inc. (RCI-B-T, “hold”) to $80 from $74.50. Average: $76.03.
"While EBITDA continues to grow at a decent pace, increasing capex trends are pressuring FCF growth," he said. "We expect somewhat tougher comps for wireless ABPU growth in the back half of the year, with margin expansion becoming somewhat harder to achieve as wireline and wireless competition is expected to intensify. While the company’s fundamentals are strong, we see better value elsewhere in the sector."
Shaw Communications Inc. (SJR-B-T, “buy”) to $33.50 from $32. Average: $30.09.
"Wireline subscriber performance was difficult in FY18, but the company has shown initial signs of improvement after adapting its offer to the competitive landscape," said Mr. Yaghi. "Wireless is now an increasingly larger contributor to consolidated EBITDA and is currently growing at 50 per cent annually due to market share gains and higher ABPU. Indebtedness remains reasonable, which provides the company with flexibility to continue deploying its aggressive wireless strategy.
Telus Corp. (T-T, “buy”) to $56.50 from $53. Average: $52.78.
"TELUS operates industry-leading quality wireline and wireless networks, allowing the company to enjoy decent subscriber and profitability growth," said Mr. Yaghi. "This enables the company to fund its dividend, which is growing at the fastest rate among Canadian large-cap telcos."
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With a leading market share and growth trajectory, Goodfood Market Corp. (FOOD-T) represents an “attractive” acquisition candidate for larger direct and indirect competitors, including grocery store companies, said Canaccord Genuity analyst Raveel Afzaal.
A day after its stock fell over 7 per cent with the release of weaker-than-anticipated quarterly results, Mr. Afzaal initiated coverage of the Montreal-based company with a "speculative buy" rating.
"Goodfood is a 54-per-cent insider owned meal-kit subscription company," he said. "It offers fresh, pre-portioned, raw ingredients to customers through its growing network of local farms and third-party delivery companies. The variety of ingredients coupled with unique and easy-to-follow recipes allows for appealing meals at an average price of $10.70. This is comparable to pricing at downtown grocery stores and significantly better than food delivery companies such as UberEats, but without the hassle of picking groceries and planning meals. As a result, it is rated 4/5 on Facebook.
"[It's] competitively positioned in the under-penetrated and high-growth Canadian market. We estimate 6 per centof urban Canadian households have tried a meal-kit subscription service, compared to 18 per cent in the U.S. Given the U.S. meal-kit market has grown at a (2016-2018) CAGR [compound annual growth rate] of 44 per cent, we expect similar growth rates in Canada over the next few years. Goodfood has grown its net subscriber base at a two-year CAGR of 250 per cent to 159k customers. As a result, it has a leading 39-per-cent market share of the Canadian market."
Touting its “attractive” unit costs, Mr. Afzaal is projecting a rise in net revenue from $146-million in fiscal 2019 to $322-million in 2021 (a CAGR of 49 per cent).
"This conservatively assumes moderate decline in annual net customer adds compared to those factored for F2019 (82k net customers, largely achieved in H1/19)," the analyst said. "Further, its focus on automating its facilities, economies of scale, and new customers becoming an increasingly loyal customer base (lower incentive expense) should continue to drive gross margin improvement. Goodfood appears well capitalized to achieve our forecasts with $57-million of capital availability."
Mr. Afzaal set a target price of $4.50 per share, which falls just below the average on the Street of $4.95.
"We expect Q3/F19 results to show the positive impact of ongoing margin expansion initiatives," he said. "Second, Goodfood's marketing budget is front-end loaded. Hence, we expect Q1/F20 net customer adds to be released in November 2019, which should increase confidence in a major step-up in revenues."
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Though he called it a “great company in tough market conditions,” RBC Dominion Securities Paul Quinn downgraded International Paper Company (IP-N) to “sector perform” from “outperform.”
"Both industry data (year-to-date shipment growth of only 0.8 per cent versus 1.5 per cent in 2018) and major industry players are reporting market weakness," he said.
"Both IP and WestRock have announced extended market downtime in Q119 in response to the weakening demand. Widespread market downtime was evident, as containerboard operating rates have plummeted to 91.3 per cent 2019 year-to-date from the 96-per-cent average seen in Q418. Unsurprisingly, the market softness led to price declines, and for the first time since Q415 both linerboard and medium prices contracted quarter-over-quarter. While the downside move in linerboard was only $10 per ton (most contract revaluation occurs with a more than $20 per tonne decline), barring a demand pick-up, additional price declines may be forthcoming. IP and WRK can hold domestic prices flat in this environment, but at the expense of higher levels of downtime and their associated cost increase."
Mr. Quinn lowered his target for IP shares to US$47 from US$54. The average on the Street is US$53.50.
"We believe IP should trade at the middle of the range relative to large U.S. Paper & Forest Product companies (6.0 times to 8.0 times) – We attribute this to the negative sentiment on the containerboard industry, and 'late-cycle' fears which have deflated sector valuation multiples, partially offset by positive near-term outlook on its printing papers segment," he said.
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Wells Fargo analyst Aaron Rakers downgraded Intel Corp. (INTC-Q) to “market perform” from “outperform” with a target of US$60, rising from US$55. The consensus target is US$54.45.
“Our call is: (1) valuation-driven, (2) reflects a more cautious view on current semi demand data points going into 1Q19 earnings, coupled with Intel’s tough comps thru 2019, (3) driven by our belief that investor sentiment could become more tempered amid increasing visibility into AMD share gain momentum (expect Rome launch late-2Q19; continued Ryzen-based PC ship ramp), and (4) our analysis of Intel’s increasing depreciation expense; GM% headwind,” said Mr. Rakers.
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Paradigm Capital analyst Kevin Krishnaratne initated coverage of Converge Technology Solutions Corp. (CTS-X) with a “buy” rating.
"Converge is pursuing a growth by acquisition strategy to consolidate the regional IT Services market, with plans to buy four to six service providers per year following the seven acquisitions it has completed since its founding," he said. "We believe Converge is well aligned with where IT spending trends are moving, namely its strategy to offer its clients software, hybrid cloud, and managed services, which are higher growth and higher margin and help the company stand out versus traditional value-added resellers who focus more on hardware and compete on price. In our view, Converge’s deep understanding of its clients increasingly complex IT networks that leverage multiple IT vendors and a mix of public and private cloud services should enable it to drive an increasing level of managed services revenue and drive profit upside."
Mr. Krishnaratne set a target of $1.75 per share.
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RBC Dominion Securities analyst Steven Cahall raised Viacom Inc. (VIAB-Q) to “outperform” from “sector perform” with a target of US$36, rising from US$31 and above the consensus of US$34.88.
“Viacom’s DirecTV deal was less contentious than thought, and we think crystallizes its improved standing,” he said. “More importantly we think it paves the way towards merger talks. We see less-than 30-per-cent implied upside on a CBS merger and advise investors to hedge exchange ratio risk by owning both.”
“We’ve previously been bearish on Viacom primarily because of the renewal risk to affiliate revenue. With DirecTV consummated and big distributors likely now at harmonious rates and escalators, we think future risk is lessened, which should help Viacom’s modest multiple expand. We raise our target multiple from 6.6 times NTM [next 12-month] EBITDA to 7.2 times. Our estimates are unchanged.”
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Seeing as a “good alternative” to U.S. legacy airlines, Morgan Stanley analyst analyst Rajeev Lalwani initiated coverage of Air Canada (AC-T) with an “overweight” rating and $46 target. The average on the Street is $42.
Mr. Lalwani thinks Air Canada offers disciplined capacity growth in its markets as well as margin expansion and leading cash flow generation that should fuel buybacks of 50 per cent of the company’s market cap through 2021.
Conversely, seeing limited upside, the analyst initiated coverage of WestJet Airlines Ltd. (WJA-T) with an “underweight” rating as it struggles to support the narrative of international expansion and ultra-low cost carrier (ULCC) growth.
His target price of $18 falls short of the average of $21.11.
He started Bombardier Inc. (BBD-B-T) with an “equal-weight” rating and $3.25 target, which falls below the average of $4.49.
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Upon resuming coverage of the stock following the closing of its previously announced $750-million secondary equity offering, Industrial Alliance Securities analyst Jeremy Rosenfield raised his rating for Northland Power Inc. (NPI-T) to “strong buy” from “buy.”
“Our fundamental view of NPI has not changed with the secondary offering. NPI’s DeBu offshore wind project (269MW) continues to advance as expected and remains on schedule (COD expected in Q4/19) and on budget (€1.4-billion total cost),” he said. “We note that on April 2 the project reached an important construction milestone with the successful installation of the offshore substation. Meanwhile, NPI’s longer-term outlook remains favourable. In Taiwan, permitting is complete and a power purchase agreement (PPA) is in place for Hai Long 2A (300MW, 60-per-cent NPI ownership); PPAs for Hai Long 2B and Hai Long 3 (744MW, 60-per-cent NPI ownership) are expected to be finalized later in 2019, followed by financing, construction, and commercial operations in 2024-26.”
Mr. Rosenfield raised his target by a loonie to $28, which exceeds the current consensus of $26.21.
“In our view, the recent share price underperformance as a result of the discounted secondary offering represents an attractive buying opportunity for long-term investors, with NPI trading at 10 times 2020 P/FCF [price to free cash flow] (excluding Taiwan) (vs. 12 times for IPP peers). NPI offers investors an attractive mix of (1) stable cash flows from contracted power assets, (2) healthy FCF/share growth (5-7 per cent per year, CAGR 2018-23, excluding the Taiwan offshore wind projects), (3) longer-term potential upside from Taiwan, and organic development activity, and (4) an attractive dividend profile (5-per-cent yield, 50-70-per-cent FCF payout over 2018-23).”
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In other analyst actions:
Believing a recent capex rise and proposed Zambian sales tax as well as 2020 free cash flow (FCF) yield estimates make it less attractive than its peers, J.P. Morgan cut First Quantum Minerals Ltd. (FM-T) to “neutral” from “overweight.”
RBC Dominion Securities downgraded KP Tissue Inc. (KPT-T) to “sector perform” from “outperform” with a target of $9, down from $10. The average is $8.67.
UBS analyst Tom Wadewitz downgraded CSX Corp. (CSX-Q) to “neutral” from “buy” with a target of US$80, rising from US$75. The average is US$77.14.
“Given the move up in the stock and OR expectations that reflect a high bar, we believe reward/risk is no longer skewed to the upside and we move to Neutral,” he said.
Cormark Securities analyst David McFadgen dropped his target for Great Canadian Gaming Corp. (GC-T), calling its financial disclosures related to its Greater Toronto Area (GTA) “troubling developments.” With a “reduce” rating, his target dipped to $41 from $44. The average on the Street is $56.80.
David Leeder