Inside the Market’s roundup of some of today’s key analyst actions
Calling CannTrust Holdings Inc. (TRST-T) a “cautionary tale,” Canaccord Genuity analyst Derek Dley lowered his target price for the cannabis company’s stock in the wake of Thursday’s evening management shakeup.
“We note the news does not come as a surprise, given more detail coming to light in recent days regarding senior management’s alleged awareness of the activities causing the company’s non-compliance,” he said in a research note released Friday. "Following the news, we believe it is now more likely than not that Health Canada will suspend CannTrust’s license.
“While we believe CannTrust’s physical assets may still be of value to other Canadian licensed producers, we do not anticipate the company being acquired in the near term given the uncertainty surrounding the penalty expected to be levied by Health Canada. Given that the company may no longer be able to sell its products and is not likely to be taken out by a competitor, we have reduced our target to our estimated value of the cash and physical assets per share.”
Maintaining a "hold" rating for CannTrust shares, he dropped his target to $2.50 from $5. The average target on the Street is currently $5.63, according to Thomson Reuters Eikon data.
“Our target reflects our estimated value per share of CannTrust’s physical assets, specifically excluding inventory and biological assets due to the uncertainty regarding the sale of CannTrust products following Health Canada’s expected decision," the analyst said.
Ahead of the release of its fourth-quarter financial results next week, CIBC World Markets analyst John Zamparo “significantly” reduced his fiscal 2020 and 2021 sales and earnings expectations for Aphria Inc. (APHA-T), leading him to downgrade its stock to “underperformer” from “neutral.”
"While we believe Aphria likely captures a high-single-digit market share, and last month's partnership with PAX Era was a meaningful win, we see more risk than reward in the stock," said Mr. Zamparo, citing "concerns about aggressive Street estimates, potential asset impairment, a leadership void and less robust supply contracts."
He added: "Our estimates are now well below the Street and we believe consensus estimates will come down, placing pressure on the stock. Our revisions are mostly due to slower industry growth than previously contemplated. But we also believe Aphria's supply agreements, namely with Emblem, are likely to be closer to the minimum commitments (which are not disclosed) rather than their full values as previously believed, thus reducing projected wholesale revenues, an important contributor.
“We also perceive there to be a real risk (albeit of unknown probability) of a material writedown of APHA’s Nuuvera/European assets, not dissimilar to that of the LATAM operations last quarter. The Nuuvera deal resulted in $500-million of book value, including $400-million of goodwill. The acquisition was made in January 2018,with near peak relative valuations in the sector.”
Mr. Zamparo slashed his target for Aphria shares to $6.50 from $12. The average on the Street is $15.65.
“We expect discussion of the company’s 90-day plan on next week’s call,” the analyst said. “Aphria has added quality board members and has filled out its management bench somewhat, but we have concerns on the ongoing lack of a full-time CEO. It’s possible this is solved in short-order, but we believe it adds further uncertainty to the stock.”
In response to its second-quarter results, Teck Resources Ltd. (TECK-B-T) remains focused on shareholder returns, according to RBC Dominion Securities analyst Sam Crittenden.
“Teck reinforced its commitment to shareholder returns by adding a policy to return at least 30 per cent of available cash flow, over and above the base level dividend,” the analyst said. “Based on our estimates we believe Teck can generate $2.5-billion in FCF in 2020 and assuming a 30-per-cent payout ratio + the base dividend this implies a potential yield of 5.3 per cent in 2020 (using $160/t coal and $3.00/lb copper). This compares to diversified peers at 5.8 per cent.”
Mr. Crittenden said that 30-per-cent commitment is strategy that “makes sense for miners given regular large capital-intensive investments the companies are required to make to replace & grow production and the volatility in commodity markets.”
He added: "On average the Canadian base metal miners experience more volatility in margins and as a result have a lower dividend yield than that of the overall market."
Mr. Crittenden maintained an "outperform" rating for Teck shares, but he lowered his target price to $47 from $48 due to the company's coal guidance reduction. The average target on the Street is $39.27.
“We continue to like Teck for strong FCF generation which can lead to meaningful shareholder returns, while at the same time providing copper growth,” he said. “Falling commodity prices aren’t helping; however, we believe Teck is already pricing in a lower coal price: $140/t vs. spot at $175/t.”
Elsewhere, Citi analyst Alexander Hacking did not change his "neutral" rating and $30 target.
Mr. Hacking said: “We see relatively attractive valuation and latent FCF potential post-QB2. The stock offers an attractive optionality on copper prices (via QB and NeuvaUnion). Capital allocation has been improved / less risky recently as evidenced by buybacks and selling of QB stake.”
The company's stock slumped 7.7 per cent on Thursday following the release of its second-quarter financial results.
“We were surprised by the negative share price reaction given a relatively in-line quarter and higher sales volume guidance,” said Mr. Wong. “We think investors are currently focused on a lack of visible near-term company-specific catalysts, while uranium prices remain challenged. We believe the share price pull-back presents a good entry-point for long-term investors, but remain on the side-lines until we gain more clarity on timing of uranium recovery.”
Mr. Wong did emphasize the timing of a recovery for uranium prices remains uncertain, but Cameco is taking the “right approach” in challenging conditions.
“We believe Cameco’s decision to keep McArthur off-line and purchase material on the market makes sense given the low priced environment - the strategy protects Cameco’s best asset, leans on the value in the contract portfolio, and removes excess supply from the market,” he said. “Management has been clear that their strategy is focused on building sales with utility end users and meeting these commitments with purchases made in the market at the lowest price possible. Cameco is not acting as an outlet for undisciplined selling, but is taking advantage of the lower prices when available and still earning a margin on the sale.”
“Although Cameco remains challenged by a slowly improving and uncertain uranium market, the company is in a strong financial position with less-than 1 times net debt to EBITDA, significant cash on the balance sheet, and still generating positive cash flow. We believe this provides a strong financial base able to weather market conditions even if they persist longer than expected.”
He maintained a “sector perform” rating and $14 target. The average is $16.01.
Aecon Group Inc. (ARE-T) earned “its place in the sun,” said Raymond James analyst Frederic Bastien, who thinks the construction company’s second half of 2019 will match a “very tough” comp from a year ago.
On Thursday, Aecon released better-than-expected quarterly results, which Mr. Bastien said "crushes" expectations.
“The construction and infrastructure development firm reported adjusted EBITDA of $57-million for the quarter versus our Street-high forecast of $51-million, the consensus of $47-million and the $41-million earned for the prior year period,” he said. "The beat was mostly top-line driven (revenue grew 22 per cent on a like-for-like basis) but margins also played their part. Below the EBITDA line a low tax rate helped offset slightly higher than expected depreciation, amortization and interest expenses. EPS landed at $0.31 as result, comfortably above our target and the analysts’ average estimate of $0.23 and $0.24, respectively.
“The Construction segment exceeded our $41-million EBITDA target to the tune of $3-million on stronger-than-expected pick up in nuclear refurbishment activity at Darlington and incremental contribution from the FinchWest LRT and Gordie Howe Bridge projects. Concessions EBITDA also topped our $20-million forecast by $3-million, due to increased construction activity related to the Bermuda Airport redevelopment, but higher-than-anticipated amortization brought operating profits in-line our segment forecast.”
Mr. Bastien said Aecon is likely to gain from SNC-Lavalin Group Inc.'s (SNC-T) recent problems moving forward.
“We believe SNC-Lavalin’s decision to stop bidding on lump-sum work earlier this week has positive implications for Aecon — at least in the short term," he said. "Of the five major construction pursuits for which we know SNC was shortlisted across Canada,three had it in direct competition with ARE-led consortiums (Vancouver’s Broadway Subway,Edmonton’ s Valley Line West LRT and the On-Corridor Works for the GO Rail Expansion program). None of this guarantees Aecon will secure these complex transit jobs, but with some international firms also treading more carefully after taking significant blows in Canada,there’s suddenly a dearth of contractors that can combine multi-trades, high and low voltage power, and sophisticated control systems under one roof. This gives us confidence ARE can add another big LRT project (or two) to backlog in the next twelve months.”
He maintained a “strong buy” rating for Aecon shares with a $26 target. The average is $23.66.
“We recognize there is no love lost for construction stocks in the wake of a few spectacular E&C blowups,” he said. “But unlike its closest peers Aecon Group is riding strong sectorial trends, keeping its eyes on the ball and delivering consistently solid operating results. Since we believe these considerations and ARE’s strong balance sheet should yield it at the very last a premium valuation, we reaffirm our Strong Buy rating on the stock.”
Elsewhere, Industrial Alliance Securities analyst Neil Linsdell raised his target to $25.50 from $24, keeping a "strong buy" rating.
Mr. Linsdell said: “Aecon reported Q2/19 results that were much better than expected. We also continue to expect further improvements through 2019 despite the headwind from the sale of the Contract Mining business in November 2018, and as Aecon has been more selective on new projects given the near-record backlog.”
Toromont Industries Ltd. (TIH-T) continues to exhibit “best-in-class” execution, however Canaccord Genuity analyst Yuri Lynk thinks its growth is “waning.”
On Wednesday after the bell, the Concord, Ont.-based industrial company reported earnings per share of 95 cents, exceeding the Street's expectation by 6 cents and representing a 14-per-cent year-over-year increase. At the same time, revenue rose just 2 per cent and fell short of the consensus projection by per cent.
“Toromont remains one of the bestrun companies in the capital goods space,” said Mr. Lynk. “Our neutral stance on the stock reflects emerging growth headwinds and limited room for multiple expansion. We are seeing macro uncertainty (trade, interest rates, commodity prices) negatively impact equipment ordering patterns from mining customers. Mining orders dropped 64 per cent year-over-year in Q1/2019 and 50 per cent year-over-year in Q2/2019. Meanwhile, Toromont’s legacy Equipment Group (EG) revenue has more than doubled since the 2009 trough and demand is beginning to wane 10 years into the expansion. All told, we see risk balancing potential reward and wish to remain on the sidelines.”
Mr. Lynk adjusted his 2019 and 2020 EPS projections to $3.49 and $3.85, respectively, from $3.30 and $3.87.
With a “hold” rating (unchanged), he hiked his target to $64 from $62. The average is $69.87.
As rates “keep going lower,” analyst at Raymond James raised their earnings expectations and target prices for Canadian power and energy infrastructure companies in a report previewing second-quarter earnings season on Friday.
“Now, Canadian and US 10-year government debt rates have moved lower over 2Q19 and continued to hover at cyclical lows in recent weeks,providing support for utility and, to a lesser degree, IPP valuations," they said. "We note the regulated utilities we cover (AQN, EMA, FTS, H) have each performed well as of late and are up an average of 18 per cent year-to-date, (vs the TSX up 15 per cent). While we do not take a specific stance on rates, we believe Fortis and Emera are trading materially above the mid-point of their respective trading ranges prompting our neutral stance, however, we acknowledge a continued low rate environment could render this view conservative. Our relatively bullish stance on AQN vs. its peers is primarily of function of the stock’s material discount to U.S. comps which trade at between 20-22 times forward P/E which compares to AQN at just 17.”
Pointing to the expectations for "relatively solid" earnings growth across both the utility and IPP sectors in 2020, the analyst raised their target prices for the following stocks:
Algonquin Power & Utilities Corp. (AQN-N, “strong buy”) to US$15 from US$13. Average: US$12.82.
Atlantica Yield PLC (AY-Q, “outperform”) to US$27 from US$25.50. Average: US$23.93.
Boralex Inc. (BLX-T, “outperform”) to $26 from $25. Average: $23.78.
Capital Power Corp. (CPX-T, “outperform”) to $36 from $35.50. Average: $33.41.
Emera Inc. (EMA-T, “market perform”) to $56 from $50. Average: $55.23.
Fortis Inc. (FTS-T, “market perform”) to $55 from $50. Average: $54.29.
Hydro One Ltd. (H-T, “market perform”) to $25 from $23. Average: $22.43.
Innergex Renewable Energy Inc. (INE-T, “outperform”) to $17.50 from $17. Average: $16.06.
Northland Power Inc. (NPI-T, “strong buy”) to $30.50 from $30. Average: $27.75.
Pattern Energy Group Inc. (PEGI-Q, “outperform”) to US$26 from US$23.50. Average: US$23.58.
TransAlta Renewables Inc. (RNW-T, “market perform”) to $14.50 from $12.50. Average: $13.65.
“A function of industry leading organic growth opportunities, earnings and dividend growth we reiterate Algonquin Power & Utilities as our top pick,” they said. “As 2019 moves on we believe AQN continues to deliver on key initiatives including permitting of 600 MW of wind power in Missouri/Kansas and the Granite Bridge gas storage project. The company has also recently made an attractively valued acquisition of the Bermuda Electric Light Company regulated utility assets. Meanwhile, Brookfield Infrastructure continues to find ways to string large accretive deals together. The latest of those were struck earlier this month when BIP and its institutional partners agreed to buy Genesee & Wyoming (GWR) and invest in a large portfolio of Indian telecom towers in separate transactions. As for Northland ... we believe the company is delivering the greatest IRR-WACC spread among our coverage universe which, in addition to imminent cash flows from the Deutsche Bucht offshore wind project and what we regard as an attractive valuation, supported our recent move to Strong Buy. We also highlight Outperform rated Boralex, Innergex, and Atlantica Yield as names we expect to perform well for the remainder of 2019.”