Inside the Market’s roundup of some of today’s key analyst actions
Believing its current valuation is unjustifiable given growth expectations, a pair of equity analysts lowered their ratings for BCE Inc. (BCE-T) on Friday.
Citi analyst Adam Ilkowitz said he continues to like BCE 's operating strategy, “steady” execution and the dividend growth that it provides with “the positive” Canadian telecom market.
However, in the wake of the release of its first-quarter financial results on Thursday, Mr. Ilkowitz downgraded his rating for its shares based on the premium it now trades at relative to its peers and with the view that he cannot increase valuation multiples in the current environment.
"BCE started 2019 strong, taking subscriber share in wireless and retail wireline with revenue and adjusted OIBDA (ex-IFRS 16) growth of 3 per cent/4 per cent, the high end of unchanged 2019 guidance," said Mr. Ilkowitz in a research note released later Thursday. "Management discussed positive underlying momentum being seen across the business, including wireless ABPU [average billing per user], enterprise wireline, and media advertising. BCE confirmed its continued confidence in a network-investment led strategy, including their interest in the upcoming 3.5 GHz spectrum auction relative to not participating in the 600 MHz auction."
"Wireless subscriber activity levels were lower in C1Q, but market growth does not appear to have slowed as much as feared post Rogers results. That said, Canada is near 90-per-cent penetration and customer growth is likely to slow unless there is an uptick in tablet or wearable connections. We continue to like Bell’s investment-led broadband strategy and see significant upside to sell into the FTTH base, which is just 27 per cent penetrated."
Moving BCE shares to "neutral" from "buy," Mr. Ilkowitz maintained a $60 target. The average target on the Street is $60.39, according to Thomson Reuters Eikon data.
"The premium valuation is warranted due to consistency of execution and results, but it’s hard to extend further given the structurally lower growth profile of BCE," he said.
With the stock trading at an above-average premium to its peers, Desjardins Securities’ Maher Yaghi thinks further outperformance “will be more difficult, especially given our earnings growth expectations.”
That led him to drop BCE to "buy" from "hold" with a $65 target, falling from $66.
"Management has done an excellent job in continuing to better position BCE to compete for a larger share of spending in the sector," said Mr. Yaghi. "Cost reductions and significant capital investments in FTTH and wireless have built a protective layer around the company’s assets, which should last for many years. However, with the recent decline in interest rates, valuations in the sector have shifted in search for yield, tilting the valuation of BCE’s stock to a significant premium vs peers.
"BCE’s strong and growing dividend does represent a risk to our call. However, we believe that many of the company’s sources of FCF growth in 2019 may be difficult to replicate in subsequent periods. Indeed, we believe capex intensity is unlikely to decline as we head into a 5G upgrade cycle and the cash tax reduction from the acquisition of MTS and the accelerated amortization program are unlikely to contribute to FCF growth in 2020 and beyond. Moreover, we believe additional acquisitions may not have the same strategic value for BCE vs previous one."
Pointing to the “challenging” environment it faces due to U.S. tariffs and the impact of its overall shipment volumes, Raymond James analyst David Quezada downgraded Tree Island Steel Ltd. (TSL-T) in the wake of a “tough” first quarter.
After the bell on Thursday, the Richmond, B.C.-based company reported earnings before interest, taxes, depreciation and amortization for the quarter of $1.8-million, falling short of Mr. Quezada’s $3.2-million projection. Revenue of $52.9-million was a drop of 20 per cent year-over-year and substantially missed the analyst’s $73-million forecast, due in large part to tariff-related obstacles.
"As apparent in these results, headwinds related to Section 232 tariffs —levied by the U.S. on certain steel and aluminum imports from Canada and Mexico —havehad a material impact on TSL's business," he said. "While we would not claim any particular insight on the issue, news reports indicate Foreign Affairs Minister Chrystia Freeland has been vocal thatthe tariffs must be lifted prior to ratification of a new North American free trade deal. While U.S. lawmakers appear to agree, we do not hazard a view as to when this occurs. We note Canadianparliament has set a June deadline for ratification; as such, there is some potential for this issue tobe resolved relatively soon. Unfortunately, its seems somewhat uncertain whether this deadlineis met, which means TSL could be in for further challenging conditions as 2019 wears on."
Accordingly, Mr. Quezada lowered his rating for its stock to "market perform" from "outperform" with a target of $2.50, down from $3.50. The consensus on the Street is $3.50.
"We believe Tree Island is making the right moves to manage the impact to volumes from U.S. steel tariffs by focusing on price discipline, manufacturing efficiency and a transition to higher value-added products," he said. "That said, we believe a turnaround in results will have to wait until the tariff is resolved. While we would acknowledge that, at current levels, shares of TSL largely reflect this, the impact of tariffs has exceeded our expectations. This prompts a more cautious approach."
Source Energy Services Ltd.'s (SHLE-T) near-term risks “outweigh” its long-term potential, according to AltaCorp Capital analyst Tim Monachello, leading him to downgrade its stock to “sector perform” from “outperform.”
"We continue to believe Source’s position as the only major vertically integrated provider of high-quality Northern White proppant to the Canadian market, along with its long-term supply agreements with some of the largest blue-chip customers in the Montney and Duvernay plays position it to be a mainstay of the Canadian completions logistics supply chain for years to come," said Mr. Monachello. "That said, the potential realization of value for equity holders over the foreseeable future is largely dependent on a rebound in completions activity in order to catalyze increased proppant demand and stronger proppant pricing. We believe elevated levels of uncertainty regarding the appetite for E&P spending over the remainder of 2019 and 2020 imparts significant risk to the ultimate timing and magnitude of a potential rebound in Canadian completions demand, and significantly limits the upside for SHLE equity holders over the foreseeable future."
Following the release of weaker-than-anticipated first-quarter results, the analyst shrunk his financial estimates for Source to reflect lower realized pricing. He's now projecting revenue per metric ton of $132 in 2019 and $131 in 2020, down from $137 and $136, respectively. Overall, his revenue estimate fell by 10 per cent to $402-million in 2019 and 9 per cent to $470-million in 2020. His EBITDA forecast fell by $4-million to $49-million in 2019 and $9-million to $64-million in 2020.
With those changes, he lowered his target for Source shares to $1.40 from $2. The average is currently $1.65.
"Overall, we continue to believe Source has an enviable long-term strategic position as the clear Canadian market leader for proppant supply and logistics; however we believe persistent headwinds and uncertainty facing Canadian field activity will continue to weigh on SHLE’s results and upside for equity holders for the foreseeable future," said Mr. Monachello.
Richards Packaging Income Fund (RPI.UN-T) offers “an attractive investment given the strong balance sheet, low payout ratio, and long history of growth,” said Acumen Capital analyst Jim Byrne.
Emphasizing its the only packaging distributor in North America with a health-care focus, he initiated coverage of the Mississauga-based company with a “buy” rating.
"Since becoming a publicly traded trust in 2004, the company has generated CAGR [compound annual growth rate] revenue growth of 5.3 per cent with an average EBITDA margin over that time frame of more than 11 per cent," he said. "In the past 6 years that growth rate has increased to 8 per cent with an EBITDA margin of 12.4 per cent. Q1/19 financial results were strong with top line growth of 9.8 per cent year-over-year and adjusted EBITDA margins of 14.4 per cent. The company targets 2-4-per-cent annual organic revenue growth going forward."
Mr. Byrne set a target price of $44 per unit.
Following the release of Crew Energy Inc.'s (CR-T) first-quarter results, Raymond James analyst Kurt Molnar admitted: “We are not sure that is what we got with this report.”
Though the company's results met his forecast but fell short of the Street's expectations, Mr. Molnar lowered his rating for its stock to "market perform" from "outperform," believing "potential capex acceleration on the back of these results to be less likely."
Mr. Molnar thinks investors are likely to focus on the results of Crew’s eight new Ultra Rich Condensate wells, which he thinks will likely “disappoint.”
“In the current market, only perfection or better will do in the minds of many investors and we frankly worry the 4-21 condensate ratio may be viewed as a disappointment,” he said. “Couple this with the fact that the bulk of the annual capex for 2019 is already behind us and we suspect that many investors will choose to move on despite the fact that the company reiterated guidance that is largely in-line with our current estimates. This has been a reporting season where you need to offer the market a reason why investors shouldn’t sell.”
His target dipped to $1.75 from $2.20. The average is $1.83.
In other analyst actions:
TD Securities analyst Michael Tupholme cut SNC-Lavalin Group Inc. (SNC-T) to “hold” from “buy” with a target of $38, falling from $45. The average on the Street is $42.82.
National Bank Financial analyst Greg Colman cut Enerflex Ltd. (EFX-T) to “sector perform” from “outperform” with a target of $20.50, down from $22.50. The average is $23.67.
BMO Nesbitt Burns upgraded Maple Leaf Foods Inc. (MFI-T) to “outperform” from “market perform” and hiked its target to $39 from $31. The average on the Street is $36.29.
BMO also raised TMAC Resources Inc. (TMR-T) to “outperform” from “market perform.”
Cormark Securities analyst Brent Watson cut AltaGas Ltd. (ALA-T) to “market perform” from “buy.”