Inside the Market’s roundup of some of today’s key analyst actions
Fairfax India Holdings Corp.'s (FIH-U-T) are “well levered to participate in better economic activity across India,” said RBC Dominion Securities analyst Mark Dwelle, who views the re-election of Prime Minister Narendra Modi as a “positive development” for it.
“Mr. Modi has adopted pro-business policies aimed at expanding India’s local economy and India’s global stature. Fairfax India’s investments (IIFL, the BIAL airport, financial services companies, manufacturing) should all stand to benefit in our opinion,” he said. “India’s economy has been on a roll (the RBI is forecasting GDP growth in excess of 7 per cent for 2019), representing a tailwind for most of Fairfax India’s businesses.”
On May 2, Fairfax reported a first-quarter net loss of 34 US cents a share, which Mr. Dwelle attributed to both US$41-million in unrealized and realized investment losses as well as the weakening of the rupee versus the greenback.
“We are revising our 2019 EPS estimate to a loss of $0.70 (from a loss of $0.40/share), which incorporates the higher-than-anticipated Q1 loss into our full-year estimate,” he said. “Our 2020 loss per share estimate now moves to $0.45 (from $0.38) due mostly to lower interest & dividend income forecasts. We note that our quarterly EPS estimates don’t forecast unrealized or realized gains/losses (which can be a material part of GAAP earnings).”
With those changes, Mr. Dwelle raised his target for Fairfax India shares to US$18 from US$17, keeping an “outperform” rating. The average on the Street is US$16.83.
“The company has already demonstrated the ability to create value from these holdings through access to long-term capital and other business relationships and we would anticipate this will continue. We believe our price target is consistent with our Outperform rating,” he said. “Investors should have a fairly long-term approach in considering an investment in FIH as valuation depends inherently on the monetization of these investments.”
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Following a second quarter that saw most of its key operating segments “miss the mark,” Credit Suisse analyst Mike Rizvanovic is expecting a “challenging” second half to the fiscal year for National Bank of Canada (NA-T).
"With no near-term catalyst on the horizon, we believe the rest of F19 could be challenging from a growth perspective, particularly with NA having reported negative operating leverage for 3 consecutive quarters," he said. "We see further downside risk to revenue growth through F2020 as credit growth in Canadian P&C Banking moderates."
On Thursday, the bank reported earnings per share of $1.51, a cent above Mr. Rizvanovic's projection but 2 cents below the consensus projection on the Street.
Pointing to “further deceleration in Canadian P&C Banking and weaker growth in Financial Markets,” he lowered his 2020 EPS projection by 1 per cent and dropped his target for the stock to $64 from $65, keeping a “neutral” rating. The average on the Street is $66.27.
“NA traded at a very modest 2-per-cent discount to peers as of May 29 (on forward price-to-earnings based on next 12-month EPS consensus), significantly below its historical average discount of 11 per cent,” he said. “While we believe a smaller discount is justified by NA’s favorable exposure within Canada, we see limited relative upside for the stock. We value NA using a PE multiple of 9.9 times on our F2020 estimated EPS (we apply a 6-per-cent discount vs peers).”
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BRP Inc. (DOO-T) “left double behind and delivered another solid quarter,” said Desjardins Securities analyst Benoit Poirier.
On Thursday before the bell, the recreational vehicle maker reported first-quarter results deemed "robust" by the analyst, pointing to support from all its business segments.
Revenue of $1.334-billion was up 17 per cent year-over-year and ahead of the $1.255-billion projection of both Mr. Poirier and the Street. Normalized fully diluted earnings per share of 54 cent topped the analyst's forecast by 2 cents and the consensus estimate by a penny.
“While retail sales have been negatively impacted by a cold and wet spring season in the northern U.S. and Canada, BRP posted solid retail sales growth of 17 per cent in 1Q,” said Mr. Poirier. “As a result, the company increased its normalized EPS guidance to $3.55–3.75 from $3.50–3.70), supported by stronger growth expectations for each reporting segment. BRP still expects to generate most of its FY20 normalized net income in 2H compared with the seasonal distribution in FY19, as solid momentum with SSV and the Ryker in 1H will be offset by higher investment in operating expenses (ie marketing efforts and various IT projects). BRP also reiterated its capex guidance of $360–370-million (we expected $363-million) as management continues to increase capacity at Juarez 2, invest in digital and IT systems, and maintain a high R&D envelope. Interestingly, current normalized EPS guidance does not include any share repurchases or the announced substantial issuer bid.”
With the results and increased guidance, Mr. Poirier raised his EPS projections for fiscal 2020 and 2021 to $3.67 and $3.85, respectively, from $3.59 and $3.81.
He maintained a “buy” rating and $65 target for BRP shares. The average on the Street is $54.45.
“Overall, we are pleased with management’s decision to implement a substantial issuer bid as it will allow BRP to benefit from the disconnect between its fundamentals and its valuation while maintaining a solid balance sheet,” said Mr. Poirier. “We still see sizeable catalysts ahead, including the substantial issuer bid (not currently reflected in our numbers) and the introduction of compelling new products. Therefore, we continue to see additional upside in the stock and recommend investors revisit the story and buy the shares.”
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Nexus Real Estate Investment Trust (NXR.UN-X) possesses an “attractive yield backed by stable and growing cash flow,” according to Industrial Alliance Securities analyst Brad Sturges, who also emphasized its discount valuation and potentially above-average net asset value growth profile.
On Wednesday, the Oakville-based owner of Canadian industrial real estate properties reported first-quarter results that exceeded Mr. Sturges's expectations and remained stable year-over-year.
“Nexus is well positioned to execute its internal and external growth strategies, due to: the REIT’s fairly stable operating cash flow base that reflects its relatively limited near-term lease expiry profile and high average occupancy; its fully internalized asset and property management trust structure; and Nexus’ sturdy capital structure that reflects below-average financial leverage and AFFO payout ratios employed in comparison to its small capitalization diversified commercial REIT peers,” said Mr. Sturges. "Nexus is anticipated to be an active net acquirer of commercial property in 2019, and beyond, benefitting from potential access to capital, and from a possible acquisition pipeline. In terms of internal growth expectations, we are forecasting Nexus to generate moderate SP-NOI [same-property net operating income] growth in 2019 of 1 per cent year-over-year, reflecting positive spreads on executed lease renewals, contractual rent escalation clauses, and relatively stable average same-property occupancy year-over-year.
“The REIT continues to build on an impressive track record of creatively sourcing acquisition opportunities without accessing the public equity capital markets. Additionally, Nexus’ strategic partnership with TriWest Capital Partners (TriWest) and RFA Capital (RFA) may provide the REIT with access to a possible acquisition pipeline in Canadian commercial properties over the next few years. As such, we expect Nexus to be active net acquirers of Canadian commercial property in the next 12 months, and beyond.”
Mr. Sturges maintained a "strong buy" rating and $2.30 target. The average on the Street is 8 cents higher.
“Our Strong Buy rating is based on the REIT’s attractive yield and discount valuation, its relatively stable cash flow profile, above-average internal and external growth prospects driven by the stabilization of its redevelopment properties and expected continued execution of its acquisition growth strategy, and its fully internalized management structure that aligns senior management with unitholders,” the analyst said. “The REIT’s investment risks or constraints would include high portfolio geographic concentration in Alberta and Quebec, a challenging operating environment for retail property landlords, particularly for those with greater exposure to enclosed malls, and low unit liquidity risks.”
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Polaris Infrastructure Inc. (PIF-T) is poised to deliver diversification beyond its primary jurisdiction of Nicaragua, according to Raymond James analyst David Quezada, which he sees as an “important catalyst.”
“Despite volatility in shares of PIF related to unrest in Nicaragua, the company has continued to drive improved performance and cash flow supported by the 2018 drilling campaign which added 10MW and $10-million in EBITDA as well as recent M&A which is expected to add a further $8-million,” he said. "We highlight that with new projects under construction in Peru acquired as part of the Union Energy transaction (8 de Agosto and El Carmen), we believe PIF will see a 17-per-cent increase in run rate CAFD to $32-million pet year, or 12 per cent on a per share basis representing a 3-year CAGR of 14 per cent. Meanwhile on an EBITDA basis, we believe these projects will bring the company to a $70-million EBITDA run rate by 2020 representing an 11.8-per-cent CAGR from 2017′s $50-million . Looking ahead, with the additional $25-million provided by a recent offering of convertible debentures, we believe PIF maintains adequate dry powder to deliver on further M&A in the near future. We do not yet reflect this raise in our model as we await the corresponding potential transaction.
“As indicated in the press release at the time of the convert raise,Polaris intends to pursue further development opportunities in Latin America including Peru, among other potential jurisdictions. Similar to the acquisition of Union Energy, we believe Polaris can find attractively priced, accretive projects (Union Energy was 10-per-cent accretive to cash flow per share) in these regions with acceptable development risks and attractive PPA terms. Notably,construction remains on schedule and budget for the two construction projects in Peru which,once complete, will bring Peru to ~20% of cash flow.”
Emphasizing its “steep” discount to peers, Mr. Quezada maintained an “outperform” rating and $25 target, which falls 60 cents short of the consensus.
“Currently trading at 5.4 times 2019 estimated EV/EBITDA, PIF represents a significant discount to the renewable peer group at roughly 12 times," he said. "Given the uncertainty in Nicaragua, we acknowledge some degree of discount is warranted. However, we believe the magnitude is excessive particularly considering the progress the company continues to make to diversification efforts, as well as strong cash flow growth. Moreover, we understand operations at the San Jacinto project in Nicaragua proceed uninterrupted as do payments under the PPA. Finally, we note PIF’s current dividend of $0.60/share represents a 5.6-per-cent yield and implies a conservative 30-per-cent payout ratio.”
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Citing macro trends and “tough” second-quarter comps, National Bank Financial analyst Maxim Sytchev thinks investors should “wait to load up” on shares of Toromont Industries Ltd. (TIH-T).
“Whenever Toromont shares decline on the back of a macro event or a specific quarter, the default setting is BTD – ‘buy the dip’ (after all, this is the stock that went up 11.3 times in value since 2000 and 1.3 times since mid-2014),” he said. “We have profitably exploited this strategy in the past. Post the disappointment of Q1/19, we were compelled to do the same, especially as the shares weakened to such an extent (down 15 per cent from intermittent peak) that the RSI stood in the most oversold territory in 10 years.”
However, Mr. Sytchev said end-market exposure requires patient timing, noting: “1) The upcoming Q2/19 is facing a tough comparison in Q2/18; 2) Early 2019 Ontario / Quebec construction trends point to an intermittent lull in spending; commentary from engineering/architecture companies in addition to provincial / Federal infighting points to further delays; this of course should be mitigated in the medium term by the sheer size of transit commitments, but we can have an impasse until the Federal elections in October 2019; 3) Despite commodities relevant to Toromont (i.e., gold and iron ore) being in more than healthy spot levels (especially the latter), when looking at immediate capex plans for the companies operating within TIH geographies, the pace of spending is actually facing a decline (albeit the steepness is less pronounced than the same exercise yielded several months ago).”
Maintaining a "sector perform" rating for the stock, he lowered his target to $65 from $70. The average on the Street is currently $68.
“Street estimates of $1.021-billion/$146.3-million for Q2/19 revenue/EBITDA appear aggressive to us,” said Mr. Sytchev. “In our view, imputed expectation does not properly account for the tough comparators in Q2/18 (while 2020 estimates are too high given the spending trends). We lowered our revenue forecast to $959-million which we believe is more representative of the slower project ramp-up on both mining and construction sides particularly in Ontario. We continue to expect healthy EBITDA margins for the remaining 2019 (and 2020) as growing Product Support contribution should be margin-accretive. We bring down the numbers on more cautious near-term outlook for the company’s end markets."
David Leeder