Inside the Market’s roundup of some of today’s key analyst actions
With its turmoil “largely in the rear-view,” Raymond James analyst David Quezada feels shares of Hydro One Ltd. (H-T) are now “attractively valued.”
On Thursday before the bell, the utility reported adjusted earnings per share of 52 cents, exceeding Mr. Quezada's forecast by a penny and the consensus projection on the Street by 6 cents.
“This was up significantly from 1Q18′s 35-cents per share EPS as catch up revenues from the company’s distribution rate order, favorable weather, and lower taxes each provided a lift while the Distribution rate order itself also boosted revenues in that segment,” he said. “OM&A costs (adjusted for costs related to the termination of the Avista merger) came in modestly higher year-over-year due to the higher project write offs related to Lake Superior Link, higher vegetation coverage and increased emergency power restoration costs, partially offset by lower call center costs. Hydro One also boosted its dividend by 5 per cent to 97 cents per share on an annualized basis representing a 4.4-per-cent yield based on the current share price. We believe these strong results showcase the earnings growth Hydro One can deliver as it transitions to incentive based rates.”
Though Mr. Quezada said he still has some concerns about the company's governance and potential government interference, he feels those risks are "largely" reflected in Hydro One's share price.
“With a favorable distribution rate filing now in the books ($650-800-million annual capex supporting a 5.0-per-cent rate base CAGR, 9-per-cent allowed ROE and 40-per-cent equity thickness), focus turns to the Transmission 3 year customer incentive rate application. The company’s transmission rate filing was submitted in Mar-19 and relates to the period of 2020-2022 (with 2019 representing a one year inflationary adjustment). The three year filing includes total investments of $5-billion, 40-per-cent equity thickness and 9-per-cent cost of equity. This filing would see the Tx rate base reach $13.9-billion by 2022 (a 5.6-per-cent CAGR) and a decision is expected in 4Q19. On a consolidated basis, with 5-per-cent rate base growth and the ongoing transition to an incentive rate making framework we believe Hydro One is well positioned for solid earnings growth going forward.”
With a "market perform" rating, Mr. Quezada raised his target to $23 from $20 to reflect "our view of improved stability among senior management." The average target is currently $21.14.
"Our Market Perform rating on Hydro One balances attractive regulatory outlook, the resolution of much of the management turnover, and an attractive relative valuation against continued concerns regarding governance given interference by the provincial government," he said.
Canadian Tire Corp Ltd.'s (CTC.A-T) first quarter was “a tale of comps and cards,” according to Raymond James analyst Kenric Tyghe.
On Thursday before the bell, the retailer reported adjusted earnings per share of $1.21, falling below what Mr. Tyghe called a "noisy" consensus expectation of $1.38.
Despite the miss, he called the company’s 6.1-per-cent comparable same-store sales growth “surprisingly strong.”
"It's worth noting that the combination of (i) lower year-over-year gain from sales of non-strategic real estate, (ii) the sell down of CTC's interest in the REIT from 86 per cent to 76 per cent, and (iii) higher net financing costs primarily on the Helly Hansen acquisition, net of tax rate benefits and lower option expenses, represented a 29-cent drag," he said. "While we expected the quarter to be impacted by weather, the specific impact in quarter (which resulted in comparable sales growth well in excess of retail revenue growth), was a negative surprise.
"Essentially, the dealers were primed for a Dec-2018 start to winter (following winter Dec-2017 start), which only materialized in much of the country in Feb-2019. So while dealers had sufficient inventory (on the carryover from Dec-2018) to put up big comparable sales growth numbers, it did not drive revenue for CTR retail revenues (as dealers did not have to reorder to support their massive Feb-2019). While this dynamic is part of the normal cycle with dealers, the extreme nature of the weather swings (and that spring didn't show), created a more pronounced (and negative) impact. This impact is also reflected in retail gross margins, which declined despite improved product margin at CTR (and the positive inclusion of Helly Hansen), the true up of the margin sharing agreement with dealers, compounded by freight headwinds and investments in price to defend share at Sport Chek (where competitive intensity in key categories continues to increase)."
Mr. Tyghe said a key positive was the penetration of the company's Triangle Rewards loyalty program, and "the stickiness it's driving, and the insights it's providing."
"While CTR's high-value customers represent 25 per cent of the active 3.5 million member base, they generate 62 per cent of the sales attached to Triangle Rewards (71 per cent of high-value customers shop at least two of CTC's banners, and spend roughly 5x more than the average customer). They are also the early adopter and biggest customers of the deliver to home initiative. While CTFS delivered strong earnings growth of 15.8 per cent and GAAR growth to 9.3 per cent, we believe that management's stated shift (on its 2.1 million active accounts) to growing engagement, is incrementally positive."
Though he lowered his 2019 and 2020 earnings per share projections to $12.56 and $14.24, respectively, from $13.28 and $14.31, Mr. Tyghe raised his target for Canadian Tire shares to $178 from $175. The average is currently $175.55.
He maintained an "outperform" rating.
Elsewhere, Desjardins Securities' Keith Howlett increased his target to $185 from $180 with a "buy" rating.
Mr. Howlett said: "Canadian Tire reported very strong sales at the retail level in 1Q19, while EPS fell short of expectations due to the timing of wholesale shipments to dealers as well as temporary gross margin headwinds. Canadian Tire same-store sales grew 7.1 per cent, while revenue (a proxy for shipments to dealers) declined by 2.7 per cent. Gross margin rate of retail operations declined by 126 basis points (excluding Helly Hansen) but should rebound in 2Q. Financial services posted record 1Q EBT. Helly Hansen integration is on track.”
Citing an “unpleasant Kinder Surprise,” Credit Suisse analyst Andrew Kuske downgraded Kinder Morgan Canada Ltd. (KML-T) to “underperform” from “neutral."
“Kinder Morgan Canada (KML) announced the completion of the strategic review and a decision to ‘remain a stand-alone public entity,’” he said. “Needless to write, that outcome should be viewed as extremely disappointing and, in our view, evidence that sufficient bids for the totality of KML were not made in the view of the board. In our view, KML now faces two overhangs: (1) inferred from the lack of a transaction is the bids were too low that exerts likely downward pressure on the stock; and, (2) KML potential use of the pristine balance sheet to acquire something (other than KML shares) is another aspect of uncertainty. With these issues, we downgrade the stock.”
Mr. Kuske lowered his target to $14 from $16. The average is $24.39.
“We have long viewed KML’s prime asset as being the balance sheet at 1.3 times debt/EBTIDA,” he said. “Under reasonable scenarios, KML has likely more than $1-billion of incremental debt capacity. That could be interesting for deployment, but also uncertain. Versus capital market peers, KML lacks a meaningful capital growth program with visibility. Substantial share purchases are possible along with increased dividend payouts, but the fundamental reality of the asset base looks to focus on M&A with KML as a standalone entity.”
Elsewhere, CIBC World Markets’ Robert Catellier cut the stock to “underperformer” from “neutral” with a target of $13, falling from $15.
“Conclusion of the strategic review without a sale will likely be very poor for sentiment,” said Mr. Catellier. “With modest dividend yield and growth prospects vs. the peer group, KML will likely experience a long period of adjustment to this event. Surprisingly, a stock buyback was not announced at the same time, despite no material leverage.”
Optiva Inc.'s (OPT-T) top-line decline may extend into 2020, said Canaccord Genuity analyst Robert Young.
Despite reporting an in-line quarter on Wednesday, Mr. Young downgraded his rating for the Toronto-based software provider, formerly known as Redknee Solutions Inc., to “sell” from “hold,” noting several updates that accompanied its results lowered his confidence in both the timing and magnitude of its turnaround.
“Management loosened its previously communicated revenue run rate $90-120-million goalposts, extending the floor to $75-million on risk of further customer churn,” he said. “We have become more conservative with our estimates for revenue and believe it is difficult to predict when the top line will bottom. Management also highlighted the potential for a capital raise (likely debt, not to exceed $25-million), which suggests the company is serious about its commitment to spend $100-million. building out its cloud platform. We believe this extends the risk into and beyond F2020 making it difficult to recommend the stock at this time.”
After lowering his revenue expectations, Mr. Young downgraded the stock and dropped his target to $38 from $45. The average is now $56.70.
"Since the company’s share consolidation, the stock has been less volatile and has traded rangebound on thin volumes," he said. "However, we expect shares to trickle downward throughout the year, absent any meaningful announcements. Significant cloud wins, a turnaround in top-line growth or margin expansion from our current NTM [next 12-month] EBITDA margin estimate of 10 per cent would be catalysts for a more positive view."
DIRTT Environmental Solutions Ltd. (DRT-T) is likely to face “more profit pressures during this transition year,” said Industrial Alliance Securities analyst Neil Linsdell.
On Wednesday after market close, the Calgary-based company reported first-quarter revenue of $86.3-million, ahead of Mr. Linsdell’s $84.8-million forecast but below the consensus projection on the Street of $86.7-million. It was an increase of 6.9 per cent year-over-year, which he attributed to increased penetration in the health-care sector as well as higher U.S. sales. Adjusted EBITDA of $9.3-million missed the analyst’s $10.3-million estimate and the $10.8-million consensus.
"With a mostly changed, and beefed up, senior management team, DIRTT is finalizing restructuring efforts and establishing a platform for sustainable growth that will also deliver strong profitability and cash generation," said Mr. Linsdell. "Management is planning to present its three- to five-year strategic plan in Q3; although we do not expect any dramatic changes to the existing business plan, we do anticipate more insight into efficiency improvements, capacity additions, and a more focused sales & marketing strategy, towards scaling operations to support growth initiatives. We expect this plan to also establish a roadmap towards a higher growth rate into 2020."
Keeping a "hold" rating for its stock, Mr. Linsdell reduced his target to $8.50 from $9.50. The average on the Street is $10.04.
"With ongoing manufacturing issues and increased costs through the remainder of 2019, we remain cautious and await finalization of the Company’s strategic plan," he said. "In the interim, with the current share price being close to our target price, we maintain our Hold rating."
Pointing to “impressive” free cash flow visibility, CIBC World Markets analyst David Popowich raised Crescent Point Energy Corp. (CPG-T) to “outperformer” from “neutral."
“We believe Q1/19 results and a solid Q2 guide have de-risked Crescent Point’s free cash flow visibility enough to justify a more bullish stance," he said.
He maintained a $7.50 target, which falls 16 cents short of the consensus.
“Although the stock has admittedly rebounded from its recent lows, Crescent Point’s implied return to target is similar to other Outperformer-rated stocks in our coverage universe, even though our target multiple of 3.7 times 2020 EV/DACF is a full 1.3-times turn discount to the peer group,” said Mr. Popowich. “Success on the asset sale front over the next few months (which could also mean having the discipline to walk away from unattractive offers), could further supplement the free cash flow outlook, and/or the case for multiple expansion.”
In a separate note, Mr. Linsdell lowered his target for shares of Intertape Polymer Group Ltd. (ITP-T) after its first-quarter results fell short of his expectations.
"Over the past few quarters, headwinds have impacted margins, such as (i) the acquisitions of lower margin businesses (before synergies, Polyair and Maiweave were 10 per cent, Cantech was 12 per cent), (ii) the ramp up of new/expanded operations, and (iii) inflationary cost pressures," he said. "However, as we progress through 2019, we expect a number of these pressures to revert as management shifts its focus to execution, ramping up new lines, cost improvements, and cross selling."
"ITP has successfully completed the commissioning of the Capstone project and the construction of the Powerband project in India, providing better price competitiveness. We expect a continued focus on the integration of recent acquisitions to produce both revenue and cost synergies, as freed up cash flow is used to pay down the debt as CAPEX normalizes."
With a "buy" rating, his target dipped by a loonie to $25, which exceeds the consensus of $22.71.
"TP trades at 7.8 times 2019 estimated enterprise value-to-adjusted EBITDA and 12.9 times P/E, a discount to peers at 9.7 times and 18.2 times, respectively,” he said. “We expect this valuation gap to tighten as recent investments and ongoing cost saving initiatives significantly contribute in 2019, and as increasing FCF (with two years of heavy investment winding down) allows the Company to reduce debt.”
Following the release of in-line first-quarter results, Raymond James analyst David Quezada reaffirmed Algonquin Power & Utilities Corp. (AQN-N, AQN-T) as his top power and utilities sector pick, pointing to a combination of “best in class organic growth opportunities, strong returns on capital and valuation discount to the NA utility peer group.”
“Key to our bullish thesis on AQN is the company’s $7.5-billion 5-year capital program which we believe will drive sector leading rate base, EPS and dividend growth,” he said. “Among the most important elements of this program are $1.1-billion in Midwest regulated wind investments, the $0.4-billion Granite Bridge project, and 9.8-per-cent stake in the Wataynikaneyap transmission project (Ontario). Per the 1Q19 release AQN’s regulated wind investment continues to progress with the Arkansas Public Commission issuing an order allowing commencement of construction leaving receipt of the Certificate of Convenience and Necessity in Missouri (expected 2Q19) the final material hurdle. AQN also sports a sizable pipeline of renewable power projects totaling just cover 200 MW in Canada and a further 800 MW in the U.S.”
He maintained a “strong buy” and US$13 target, which falls below the average of US$11.46.
Lake Street Capital analyst Robert Brown upgraded Westport Fuel Systems Inc. (WPRT-T), believing the Street is “giving little credit” to its High Pressure Direct Injection (HPDI) business.
"We are raising our rating to BUY given signs of strength in the HPDI ramp with Volvo and solid execution which provides increased confidence that the management transition has gone smoothly," said Mr. Brown. "The outcome of the FCPA investigation remains a risk and Westport spend $1.8-million in the quarter on legal fees, but fundamentals appear to be improving and 2019 should be an inflection year for Westport when the Volvo HPDI program shows meaningful traction and the Weichai HPDI engine launches. Management noted that both were tracking well. Further, macro tailwinds are increasing with new regulations in the EU to require a 30 per cent in CO2 emissions by 2030."
Moving the stock to "buy" from "hold," he maintained a $5 target, which is the current consensus.
“We see meaningful long-term value as the company is in a strong position with the critical enabling technology for the transportation industry to shift to natural gas from diesel fuel,” said Mr. Brown. “The company has multiple partnerships with engine OEMs (Cummins, Volvo, Weichai, Caterpillar, Daimler, and one other), a clear technology advantage with its HPDI product, the dominant engine in the refuse and transit markets, a leading position in the light-duty alt-fuel system market, and a 12-liter engine offered in at least nine truck models from five different truck manufacturers. We see this large-scale transition accelerating and think it will drive a tipping point in demand for Westport Fuel Systems.”
Following the release of first-quarter results that was “soft even by Q1 standards,” Echelon Wealth Partners analyst Doug Loe downgraded Medical Facilities Corp. (DR-T), despite believing a “seasonal recovery should be forthcoming.”
“Medical Facilities reported FQ119 financial data for the March-end period that, as we expected, were sequentially soft as FQ1 results always are after seasonally strong FQ4, but results were still below our expectations even with modest baseline expectations, mostly through operating income underperformance at two specific surgical hospitals, IN-based Unity Medical Hospital and OK-based Oklahoma Spine,” he said, moving the stock to “hold” from “buy.” “Distributable cash was below actual pay-out, and thus generating a pay-out ratio above 100 per cent (166 per cent, in fact) for the first time since FQ114.”
Mr. Loe dropped his target for the stock to $14 from $18.25. The average is $16.55.
“We believe it is prudent to transiently shift our rating to HOLD at least until FQ219 financial data are in the public domain, with most of the adjustment to our valuation and PT derivation driven by multiple compression as ascribed to our F2020 adjusted AFFO, adjusted EPS, and adjusted EBITDA forecasts, or more specifically, to the proportion of those financial metrics ascribed to common shareholders and not to physician owners of Medical Facilities’ hospital portfolio,” the analyst said.
In other analyst actions:
BMO Nesbitt Burns raised Lundin Mining Corp. (LUN-T) to “outperform” from “market perform."
BMO cut Hudbay Minerals Inc. (HBM-T) to “market perform” from “outperform.”
TD Securities analyst Derek Lessard cut Pizza Pizza Royalty Corp. (PZA-T) to “hold” from “buy” with an $11 target, falling from $11.50, which is the current consensus.
TD Securities’ Meaghen Annett lowered Aritzia Inc. (ATZ-T) to “hold” from “buy” with a $19 target, down from $21. The average is now $22.75.