Inside the Market’s roundup of some of today’s key analyst actions
Calling it “a premier defensive utility on sale,” Raymond James analyst David Quezada raised his rating for Fortis Inc. (FTS-T) on Friday, emphasizing it possesses a “irreplaceable set of assets with monopoly-like business model and best-in-class diversification.”
“With 99-per-cent regulated earnings spread across 10 jurisdictions in Canada, the U.S., and the Caribbean (96 per cent in NA), we believe Fortis is likely the most diversified utility in North America,” the analyst said in a research note released before the bell. “Further, with 93 per cent of assets in transmission and distribution (i.e. minimal generation) Fortis bears virtually no commodity risk. What’s more, looking back to the most recent severe downturn (‘08-’09) Fortis was able to grow EPS at a 7-per-cent CAGR [compound annual growth rate] between 2007-2009 (EPS was flat year-over-year in 2009). Furthermore, FTS has meaningfully diversified since then adding three utilities in the U.S. (Central Hudson, UNS and ITC) while growing rate base at a 13.4-per-cent CAGR between 2009-2019.”
“Fortis’ $18.8-billion capital program is expected to support 3 and 5 year rate base CAGR’s of 6.5 per cent and 7.2 per cent respectively out to 2024. By our estimates, this equates to 6-7-per-cent EPS growth which is consistent with the company’s 6-per-cent dividend growth guidance— Fortis has increased its dividend a record 46 consecutive years.While we would not suggest this capital plan is immune to change, we note 80 per cent of it is small, low-risk projects and Fortis has a strong track record of exceeding prior capex targets. Moreover, FTS has numerous opportunities not in its current capital plan that could back-fill any changes. Thus, we consider the company’s earnings outlook to be stable going forward.”
Mr. Quezada said Fortis’ valuation currently does not sit at “absolute” lows after a plunge of almost 20 per cent from recent highs, but it’s “attractive both by historical standards and relative to peers, particularly given where bond rates reside.”
That led him to raise his rating to “outperform” from “market perform” with a target price of $58 (unchanged). The average target on the Street is $60.05, according to Thomson Reuters Eikon data.
"We peg FTS’ 2020 estimated P/E [price-to-earnings] at 17.6 times, which compares to NA peers now at an average of 18.1 times and FTS’ recent valuation high of 22 times. “While we acknowledge this is only slightly below the midpoint of the 14-22 times forward P/E historical range, we believe it is an outlier from a historical perspective given that bond rates currently reside at all time lows. The durable negative valuation relationship vs. rates has decoupled in recent weeks but is something we would expect to re-assert itself over time. We estimate a 100 bps move in 10-year bond rates implies a 1 times P/E valuation lift for Fortis, all else equal.”
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With “defensiveness on sale,” CIBC World Markets analyst Mark Petrie raised Empire Company Ltd. (EMP.A-T) to “outperformer” from “neutral,” despite noting the presence of execution risks following the release of its third-quarter financial results.
“Though results were solid, clearly the market is preoccupied by the macro risks presented by the COVID-19 pandemic and range of potential economic fallout,” he said. "We continue to believe grocery stores are relatively well positioned overall given their defensive nature in recessionary environments and their central role in feeding the population under any scenario. Supply chains will be under pressure as various geographies are impacted, and the issues could spread far enough to materially impact store operations, but clearly food supply will be well defended in even the most drastic scenarios. Empire is modestly more exposed in a recession given it has a material discount presence in only Ontario, and still building in B.C. and MB, though it has other levers to support sales growth. It is also worth noting that Empire still grew earnings through the Financial Crisis.
“We continue to believe that Empire carries the most substantial execution risk of any of the grocers, simply as a result of the numerous foundational initiatives it has underway, namely FreshCo West, Farm Boy and Voila. However, management has built credibility in successful execution of its Project Sunrise. And while we believe the remaining goals of closing sales productivity and margin gaps will prove substantially more difficult than internal re-structuring and cost (COGS and SG&A) rationalizations, we also recognize that there are substantial opportunities in sight. We view Farm Boy as relatively low risk, and Voila as a likely top-line driver, with question marks on longer-term profitability. Regardless, we do not believe the market is currently placing any material value on the potential upside.”
Mr. Petrie lowered his target for Empire shares to $30 from $34. The average is $35.39.
“The severe pullback in the market has priced in a recession and more, and we see the risk/reward at Empire as compelling, particularly given its position in the most defensive consumer industry,” he said.
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With its shares having declined over 60 per cent in the last two months, investors are underestimating Lightspeed POS Inc.'s (LSPD-T) “resilience, organic growth prospects and upcoming growth catalysts with [its] Payments and Capital initiative,” according to Raymond James analyst Steven Li.
In the wake of a recent capital raise of $175-million. Mr. Li sees the Montreal-based software company in “a strong position to take advantage of market dislocation,” leading to raise his rating to “outperform” from “market perform" a day after its stock dropped almost 30 per cent to a one-year low.
“[The] majority of LSPD revenues are recurring subscriptions, balanced between NA/Int’l markets, between restaurant/retail,” he said. "So unless its merchants start to go out of business, we should not see a spike in churn and LSPD serves the more established, complex merchants better suited to weather challenges (with sales $500k-$1-million). Payments is the variable revenue stream but is still small enough that at this point it is more upside (as LSPD increases coverage from 40 per cent to eventually 100 per cent) than downside. Importantly, unlike other software companies reliant on direct sales, all of LSPD sales effort are in-bound driven marketing - therefore unaffected by travel restrictions. "
Mr. Li trimmed his target for Lightspeed shares to $35 from $44. The average on the Street is currently $47.56.
“There are very few select names with LSPD’s level of organic growth (up 40 per cent in recent quarters),” he said. “The growth runway is substantial with LSPD at 74k merchants, just 1 per cent of complex SMBs. In addition, Payments expands the potential revenue take from a new subscriber from $100/month (software) to $300/month (software + payments). Plus,management has discussed bringing to market LSPD Capital initiatives."
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National Bank Financial analyst Rupert Merer raised his ratings for several TSX-listed independent power producers, seeing their stocks as safer than most havens.
In a research report released late Thursday, the analyst moved the names in his coverage universe to “outperform” ratings, citing attractive returns and a low-risk profile when compared with the rest of the market.
Mr. Merer believes market interest in climate-friendly infrastructure companies will rebound after COVID-19
“While we can’t call the bottom on valuation, we can highlight the opportunity for investors to target contracted returns of 7-10 per cent,” he said.
Mr. Merer upgraded Algonquin Power & Utilities Corp. (AQN-N, AQN-T) to “outperform” from “sector perform” with a US$14 target, sliding from US$15.50. The average on the Street is US$15.80.
He raised TransAlta Renewables Inc. (RNW-T) to “outperform” from “sector perform” with a $16.50 target, down from $17.50. The average is $16.83.
At the same time, along with TransAlta Renewables, Mr. Merer named the following stocks his top picks in the sector:
Innergex Renewable Energy Inc. (INE-T) with a target of $19.50, falling from $22.50. Average: $21.88.
Northland Power Inc. (NPI-T) with a $30.50 target, down from $33. Average: $33.11
Boralex Inc. (BLX-T) with a target of $28.50, down from $32. Average: $31.06.
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Industrial Alliance Securities analyst Elias Foscolos elected to raise his rating for Tidewater Midstream and Infrastructure Ltd. (TWM-T) in the wake of Thursday’s release of fourth-quarter 2019 financial results that fell in line with his expectations, seeing an acceleration in its deleveraging efforts with the $255-million sale of the Pioneer Pipeline to NOVA Gas Transmission Ltd., a wholly-owned subsidiary of TC Energy Corp.
“Proceeds from the transaction will be used to pay down debt in 2020,” the analyst said. “The lost EBITDA ($8-10-million per annum) from the sale will be replaced with EBITDA generated through new agreements. We believe this will materially reduce TWM’s debt quickly.”
Though he cautioned of the presence of a “few” near-term risks, Mr. Foscolos moved his rating to “speculative buy” from “hold” with a $1.15 target, up from $1.05. The average is $1.62.
Conversely, CIBC World Markets analyst Robert Catellier downgraded Tidewater to "neutral" from "outperformer" with an 85-cent target.
Mr. Catellier said: “In times of market turmoil, relative market performance tends to follow relative credit ratings for the sector. Given its non-investment grade credit rating, TWM could see its share price performance struggle – almost irrespective of valuation. Although there was a reversal in share price performance with reported results and the letter of intent to sell Pioneer pipeline, we worry that this enthusiasm may fade. We hope we are wrong.”
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In reaction the recent decline in equity markets and interest rates as well as the business impact from COVID-19, Desjardins Securities analyst Doug Young lowered his financial expectations for Canadian lifecos on Friday.
For 2020 and 2021, his core estimates slid by an average 5 per cent and 4 per cent, respectively, and he cautioned "if conditions continue to deteriorate, there is further downside risk to our estimates."
With those changes, his target price for shares in the group dropped by 17 per cent.
"While we see value in this space in the long term, significant headwinds remain," he said.
Mr. Young's changes were:
Sun Life Financial Inc. (SLF-T, “buy”) to $61 from $69. Average: $68.11.
Manulife Financial Corp. (MFC-T, “buy”) to $25 from $31. Average: $30.57.
IA Financial Corp. (IAG-T, “buy”) to $63 from $79. Average: $77.
Great-West Lifeco Inc. (GWO-T, “hold”) to $28 from $33. Average: $34.45.
“Our top picks remain SLF and MFC,” he said. “For SLF, we see a few earnings growth catalysts and we like its capital flexibility. For MFC, we like its earnings growth potential longer-term in Asia and GWAM, and its valuation remains compelling.”
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Though its fourth-quarter results met his “modest” expectations, CIBC World Markets analyst Scott Fromson added Neo Performance Materials Inc. (NEO-T) a “speculative” component to his “outperformer” rating to reflect its outlook risk.
“While the market’s focus is on exposure deteriorating macro picture, notably China and automotive, we see significant value at current levels,” he said.
Mr. Fromson reduced his target to $11 from $14, which falls below the $13 average.
“While NEO faces near-term pressures (China, macro/automotive), we see value for long term investors,” he said. “1. NEO is the only non-Chinese company with a license to separate rare earth elements in China, which gives it access to low-cost processing. Vertical integration allows NEO to develop new product in conjunction with customers. NEO has a stable and experienced management team.2. NEO has sufficient production capacity for market share gains. Further, it has a strong financial position for acquisitions, most likely for product lines.3. Multiple long term growth drivers for NEO’s Rare Earths Engineered products. These include EV and increased vehicle electrification within automotive, more stringent environmental standards (emissions and green energy), and ongoing miniaturization of consumer electronics and increased use of industrial automation.”
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In other analyst actions:
* BMO Nesbitt Burns analyst Mark Wilde upgraded Domtar Corp. (UFS-N, UFS-T) to “outperform” from “market perform” with a US$30 target. The average is US$36.91.
"At current valuation levels, the stock is paying a 7.9 per cent dividend yield and the equity offers multiple routes to the upside over the next 12-18 months," he said.
“Valuation looks very inexpensive as a standalone. However, we think Domtar could monetize its Personal Care business in 2020 for $1.04-billion, leaving the Pulp & Paper business valued at $1.2-billion, or 3-times segment EBITDA of $395-million (lowest level in 10+ years).”
* Citing an “uncertain” outlook, BMO’s Troy MacLean dropped American Hotel Income Properties REIT (HOT.UN-T) to “market perform” from “outperform” with a $4 target.
“AHIP has already fallen 48 per cent year-to-date, but given the recent series of events (cancellation of major events, a travel ban between the U.S. and Europe) and the increasingly likelihood of a recession, we are moving our rating,” he said.
“AHIP cut the distribution by 30 per cent this week, which we think was prudent, but given the company’s short-term leases and the uncertain industry outlook, we believe a second distribution cut is possible.”
* After a “tough” fourth quarter, PI Financial analyst David Kwan lowered Baylin Technologies Inc. (BYL-T) to “neutral” from “buy” with a $1 target, down from $3.60 and below the current consensus of $2.90
“The issues that hindered BYL in Q3 and Q4 are expected to persist through 1H FY20 (previously Q1 FY20),” said Mr. Kwan. “The transitory challenges include expenses to build the new factory in Vietnam, weaker demand from several key customers due to changes in their capex plans, and slower progress in addressing legacy issues at Advantech. Combined with the aforementioned headwinds related to COVID-19 (including the pushout in the commercial launch of its new Vietnam facility), BYL looks to be facing a challenging 1H FY20 from a revenue perspective.”
* Tudor Pickering Holt & Co. analyst Jordan McNiven raised Arc Resources Ltd. (ARX-T) to “buy” from “hold”
David Leeder