Inside the Market’s roundup of some of today’s key analyst actions
The outlook for Canadian Tire Corporation Ltd. (CTC.A-T) has weakened, according to Canaccord Genuity analyst Derek Dley.
In reaction to the retailer’s first-quarter financial results and the announcement of its $985-million acquisition of Helly Hansen, Mr. Dley downgraded its stock to “hold” from “buy.”
“In our view, the near-term margin outlook for Canadian Tire appears to be challenging, given the expansion of its e-commerce strategy, and elevated distribution centre costs,” he said. “Meanwhile, we think it may take some time for investors to fully digest the potential impact of the Helly Hansen acquisition. This coupled with what we believe is a relatively full valuation, has us compelled to move to the sidelines.”
On Thursday before market open, Canadian Tire announced earnings per share of $1.37, falling short of Mr. Dley’s $1.42 estimate and the consensus on the Street of $1.39. Though it faced weather-related obstacles, same-store growth topped expectations.
With the earnings release, it announced a deal to acquire Norway-based Helly Hansen, which is expected to close in the third quarter and be immediately accretive.
“Over the last three years, the Helly Hansen business has grown substantially, with revenue and EBITDA growing at 12 per cent and 36 per cent CAGRs [compound annual growth rates], respectively, in that time,” said Mr. Dley. “While the global growth prospects for Helly Hansen remain strong, particularly within the United States, we expect Canadian Tire to generate synergies by increasing the penetration of Helly Hansen products within its banners, while achieving cost savings by leveraging Canadian Tire’s sourcing capabilities.
“As well, Canadian Tire announced on its earnings call that it has finalized the national rollout plan for its deliver-to-home initiative, expected to launch in late summer of 2018. As part of this strategy, all Canadian Tire locations will be set up to ship products ordered online directly to consumers. In our view, this should allow for samestore sales growth for the company’s Retail division over the medium term. With that being said, we expect near-term results to be slightly more challenged, particularly in Q2/18 as increased operating expenses related to the Bolton Distribution Centre and the execution of its digital strategy continue to negatively impact EBITDA margins in the near term.”
Though he raised his 2018 and 2019 EPS estimates to $12.04 and $13.04, respectively, from $11.87 and $13.01, Mr. Dley lowered his target for Canadian Tire shares to $175 from $190. The average target on the Street is $189.92, according to Thomson Reuters Eikon data.
Telus Corp. ( T-T ) is still “a strong story,” said CIBC World Markets analyst Robert Bek.
However, in the wake of the release of its quarterly results, he lowered his rating for its stock to “neutral” from “outperformer” based on its current valuation, though he did emphasize the move should not be seen as a sell thesis.
“As of the close on [Thursday], the shares traded at 7.7 times our fiscal 2019 EBITDA estimate,” said Mr. Bek. “This is effectively at parity to peers BCE and Rogers at 7.8 times 2019 estimates. When we upgraded shares last April, we argued that the valuation discount that T had been trading at was not warranted and an opportunity for investors. This thesis has now successfully played out.”
His target for Telus shares remains $50 target, which sits below the average on the Street by 47 cents.
“It is harder to argue for buying at current levels given the name has now entirely closed its valuation discount to peers, which was the crux of our Outperformer thesis for the past year,” said Mr. Bek. “Our $50 price target remains fair, arguing for a Neutral rating, notwithstanding a positive bias for TELUS.”
However, he downgraded his rating for the Toronto-based online gambling company to “hold” from “buy” based on “diminishing” upside potential.
“The start of 2018 was good for TSGI with both revenue and profitability topping expectations,” said Mr. Yaghi. “Growth came from both poker and casino and sportsbook, as well as a favourable FX tailwind and acquisitions. While organic revenue growth remained healthy for the legacy business, it is important to note that a few headwinds are likely to affect reported results later in the year. Firstly, casino revenue growth is likely to continue to decline as underlying quarterly active unique players have shown little growth lately. In addition, FX and potential regulatory changes in Russia could pressure poker revenue growth. Overall, however, we continue to expect positive organic growth for the business for all of 2018.”
On Thursday before market open, the company reported revenue for the quarter of US$393-million, a rise of 24 per cent year over year. The result topped both the consensus estimate on the Street (US$358-million) and Mr. Yaghi’s projection (US$352-million). Adjusted EBITDA of US$175-million also beat the consensus (US$149-million).
“Excluding currency movements and the CrownBet acquisition (which contributed US$11m), organic growth on a constant-currency basis was up 9 per cent, which is still a very strong result, especially given the company did not launch new casino games in new jurisdictions in the quarter,” the analyst said.
Mr. Yaghi said he continues to view the company’s $4.7-billion acquisition of Sky Betting & Gaming from CVC Capital Partners and Sky plc, announced on April 21, positively, and he believes both the rationale and price paid are appropriate.
However, in justifying his downgrade, he said: “Our recommendation also needs to consider the company’s high expected leverage ratio post-closing, which is likely to be near 6 times,” he said. “Given the stock’s diminished potential upside and the firm’s expected leverage, we are moving our recommendation to Hold.”
Mr. Yaghi did raise his target price for Stars Group shares to $48 from $45. The average on the Street is $46.83.
Citing a swifter turnaround in the performance of its Transportation segment, Acumen Capital analyst Brian Pow upgraded Cervus Equipment Corp. (CERV-T) to “buy” from “speculative buy.”
On Wednesday, the Calgary-based company, which operates operates 62 heavy equipment dealerships, reported first-quarter revenue of $248.7-million, up 7.6 per cent year over year and exceeding the projections of both Mr. Pow ($225.6-million) and the Street ($241-million). Earnings per share of a 1-cent loss also beat expectations (losses of 25 cents and 6 cents, respectively).
“The Q1/18 results benefited from strong new equipment sales and service for the AG [Agriculture] segment and noticeable improvement for the Transportation segment,” he said.
“The outlook for CERV’s AG segment remains positive and will likely help drive good performance for the balance of 2018. The Q1/18 results are an early indication that CERV is making good progress with the Transportation Segment’s Ontario geography, and we are cautiously optimistic that the financial performance of the Transportation segment will continue showing signs of improvement.”
Mr. Pow raised his target price for Cervus shares to $15.75 from $15. The average is $17.07.
WSP Global Inc. (WSP-T) is currently “fairly valued,” according to Desjardins Securities analyst Benoit Poirier, who downgraded its stock believing future margin improvement is already reflected in its price.
On Thursday before market open, the Montreal-based engineering consulting firm reported first-quarter results that Mr. Poirier deemed “decent.”
Adjusted EBITDA of $134-million was in line with the consensus projection ($133-million) and topped Mr. Poirier’s estimate ($127-million). Revenue of $1.47-billion also met both expectations ($1.468-billion and $1.468-billion, respectively), while earnings per share of 66 cents beat both estimates (60 cents and 63 cents).
“WSP reported 1Q18 results which were mostly in line with expectations,” the analyst said. “Management also reiterated its 2018 guidance, as it expects gradual improvement in EBITDA margin toward its target of 11.0 per cent (we expect 10.7 per cent). As a result, although we believe long-term fundamentals remain intact, we are downgrading the stock … due to recent share price appreciation and the modest potential upside vs our target price (6.6 per cent excluding dividend).
Moving the stock to “hold” from “buy,” Mr. Poirier increased his target to $70 from $66. The analyst consensus is $65.55.
“Although long-term fundamentals remain intact as the strong balance sheet should fuel both organic growth and M&A, we are taking a cautious stance in the short term in light of recent share price performance (up 37 per cent from 52-week low) and fair valuation vs its pure-play engineering peers,” he said.
Elsewhere, Laurentian Bank Securities analyst Mona Nazir said WSP continues to deliver consistently quarter over quarter, and warrants a premium valuation. That led her to raise her target to $73 from $65 with a “buy” rating (unchanged).
“Net/net comparing the company’s track record and quarterly performance vs. peers, the key takeaway is that WSP is outperforming and a premium valuation multiple is merited,” the analyst said. “4.6-per-cent net revenue organic growth (over a challenging comp period; 10.1-per-cent organic growth in Q1/17) compared to SNC & IBG revenue contraction while STN had 2.6-per-cent net revenue organic growth. The conference call was surprisingly straightforward and lack of detailed questions, to us, is an illustration that things have been relatively smooth sailing for the company. Looking at the E&C landscape, we continue to like the pure play company for their acquisition integration track record, margin expansion and mid-single digit organic growth.”
While he acknowledges “great progress is being made” at its Mother Lode project in Nevada, Industrial Alliance Securities analyst George Topping downgraded his rating for Corvus Gold Inc. (KOR-T) in reaction to a 90-per-cent jump in share price since March.
“Drilling at Mother Lode has been successful in demonstrating the likelihood of a typical large Nevada style open-pit mine,” said Mr. Topping. “However, the stock has run far ahead of other gold stocks and, while within the range on a resource multiple basis, is at the upper end. While we expect future drilling to ‘backfill’ the current share price, this carries higher risk.”
Mr. Topping said the company’s plan for a listing on the New York Stock Exchange could attract additional funds flow, noting it would be one of a small group of small-cap gold stocks listed stateside.
He also suggested Corvus would be a good acquisition target for a senior production.
“We note that Kinross (K-T), Barrick Newmont (ABX-T) and Coeur Mining (CDE-N) all have expertise in high volume, low grade operations, several with grades lower than those at Corvus,” he said. “For example, Newmont’s Phoenix mine process 0.84 grams per ton milled and 0.25 g/t heap leach while Kinross’ Fort Know processes 0.96 g/t milled and 0.25 g/t heap leach.”
Lowering the stock to “speculative buy” from “buy,” Mr. Topping raised his target by a loonie to $3.50. The average is
“To date, Corvus’ management has created outstanding returns for shareholders through exploration,” he said. “While we expect this to continue, the ‘easy’ money has been made. Higher gold prices, exploration, and an expected 2018 U.S. listing should assist driving funds flow in Corvus. Our expected resource of 1.5MOZ plus 2MOz upside translates to a resource multiple of $69 per ounce, but not by much, compared to the peer average of $50 per ounce.”
Its first-quarter results bolstered Clarus Securities analyst Nana Sangmuah’s confidence in Asanko Gold Corp. (AKG-T), leading him to upgrade his rating to “buy” from “speculative buy.”
“Q1/18 showed a strong beat to our estimates and consensus driven by lower operating costs that were positively impacted by a lower operating strip ratio and unit cost savings from a record throughput during the quarter,” said Mr. Sangmuah. “The operational outperformance in the quarter has further strengthened our confidence in the optimized mine plan that estimates production of 253,000 ounces at US$860/oz AISC [all-in sustaining costs] over the next five years. In the near-term, we expect continued improvement in the operating performance supported by improvement in Nkran grades and ore yields as the Company progresses towards completion of Cut 2 pushback in H1/18 as part of the optimized mine plan as well as further unit cost savings from the commissioning of the secondary crusher in Q3/18. Overall, our outlook for the Company is positive based on an improving operational outlook, strengthened balance sheet and the support of GFI, a highly experienced and deep pocketed strategic investor.”
Hee raised his target for Asanko shares to $3 from $2.40. The average is $2.
“In our view, the current valuation of the stock that trades at a 60-per-cent discount to peers does not reflect the positive outlook of the story,” said Mr. Sangmuah.
CIBC’s Paul Holden downgraded CI Financial Corp. (CIX-T) to “neutral” from “outperformer” with a target of $30, down from $32. The average is $28.78.
“CIX reported a disappointing Q1 with FCF and earnings coming in below our estimates,” said Mr. Holden. “The variance was due to higher-than-forecast non-commission expenses, and the company guided to a 4% increase in SG&A in 2018. Given this outlook for expenses, combined with the outlook for continued net redemptions and fee compression, we have to assume that profit margins will erode through the remainder of 2018.”
In other analyst actions:
TD Securities analyst Sean Steuart downgraded KP Tissue Inc. (KPT-T) to “hold” from “buy” with a $12 target, falling from $15.50. The average is $12.92.
National Bank of Canada analyst Dan Payne lowered Chinook Energy Inc. (CKE-T) to “sector perform” from “outperform” with a target of 25 cents, falling from 30 cents. The average is 24 cents.
Comark Securities analyst Gavin Fairweather lowered Quarterhill Inc. (QTRH-T) to “market perform” from “buy” with a target of $2.10, falling from $3 and below the average of $2.98.