Inside the Market’s roundup of some of today’s key analyst actions
Following the release of its fourth-quarter financial results, Mr. Ezzat expects Montreal-based digital solutions firm to exhibit “more weakness over the upcoming quarters” and projects its stock to be range bound, with “solid execution needed to resurface value.”
Accordingly, he lowered his rating to “hold” from “buy”
“The company’s results continue to reflect top line headwinds caused by major customers in Canada as well as weakness in the company’s legacy Oracle business (part of the Edgewater acquisition),” he said. “Perplexingly, margins tumbled sequentially despite a full quarter contribution of high-margin tuck-in Travercent (closed December 13, 2019). Going into the quarter, we forecasted no organic growth and expected the Askida (closed February 1, 2020) and Travercent to add $6.0-million in revenues and $1.7-million in gross margin. Revenues increased $6.9-million but GM was up a mere $0.8-million quarter-over-quarter.”
Mr. Ezzat cut his target for Alithya shares to $2.75 from $4.75. The average on the Street is $3.71.
Elsewhere, Desjardins Securities analyst Maher Yaghi said he’s still waiting for signs of a turnaround in organic growth.
“ALYA reported in-line revenue in a quarter (ended March 31) in which the impact from COVID-19 was limited, according to management,” he said. “The organic decline was similar to that in the previous quarter, but was still weak, in our view. Adjusted EBITDA missed expectations as efficiencies are taking more time to materialize than we anticipated.
“We would become more bullish on the stock pending improvement in the underlying organic growth rates as this would put a floor under the stock price.”
Keeping a “hold” rating for its shares, he cut his target by a loonie to $3.75.
“We believe ALYA’s business model should enable it to continue to find suitable M&A targets to grow in the longer term,” the analyst said. “However, improved organic growth rates are key for the stock to begin to improve, and hence execution will be important in the next few quarters to put a floor under the stock price.”
Scotia Capital analyst Konark Gupta thinks investors should be intrigued by Jim Pattison’s decision to increase his ownership stake in Westshore Terminals Investment Corp. (WTE-T), suggesting it could lead toward a privatization move.
According to the company's latest SEDAR filing, the billionaire interest raised his stake to 36.59 per cent from 34.99 per cent by acquiring more than 1 million shares on June 19.
"Mr. Pattison's stake has steadily risen since 2011 when it was just 13.99 per cent," said Mr. Gupta. "Notably, his stake has doubled in the past five years alone, coinciding with a greater than 50-per-cent drop in stock's value amidst a deterioration in the seaborne coal market conditions, bankruptcies in the U.S. thermal coal market, WTE's single-largest capital project worth $240-million (2014-2019), and the ongoing uncertainty in
WTE’s largest contract (Teck at 19 Mt or 62 per cent of 2020 estimated throughput). Recall, Teck has already announced its intentions to move an undisclosed amount of coal to competing terminals on the west coast (Neptune and Ridley) from 2021 onward and has yet to finalize a new contract with WTE upon the expiry of the existing one (March 31, 2021).
"As a result of the Teck overhang, in our opinion, WTE is currently trading at a mere 5.5 timesEV/EBITDA, based on our 2020 estimated EBITDA, at the low end of its 10-year range of 5-17 times (average 11 times). Another interesting recent development was that Mr. Pattison's effort to privatize Canfor (CFP-T) failed last year, which likely leaves him with some dry powder for potentially WTE."
Though he said its too early to "jump to any conclusion just yet," Mr. Gupta thinks the probability of Mr. Pattison attempting to privatize WTE is increasing.
“While it is difficult to pin down a take-private bid price, we note that WTE shares have recently peaked at $24 per share (November 2019),” the analyst said. “Coincidentally, Mr. Pattison could also afford to pay $24 per share for the remaining 63.41-per-cent stake that he doesn’t own, if he deploys the $1-billion capital that was previously intended for Canfor. However, his $16 per share offer for Canfor was at an 82-per-cent premium, which would imply $29 per share for WTE when applied to the current share price. Further, WTE’s 10-year average EV/EBITDA multiple of 11 times would imply a valuation range of $23 per share at the low end (on our 2022E EBITDA) to $36 per share at the high end (on 2019 EBITDA). Our sensitivity analysis, based on annual throughput and margins, suggests a best-case valuation range of $31 to $37 per share. At this time, we believe a potential take-private offer range of $24 to $29 per share could be the most likely outcome for WTE.”
Given this possibility, Mr. Gupta said the risk-reward proposition for investors is “even more attractive,” leading him to raise his target to $20.50 from $19 with a “sector outperform” rating. The average is currently $20.30.
Desjardins Securities analyst Michael Markidis said he’s “realistically optimistic” after hosting meetings between Summit Industrial Income REIT (SMU.UN-T) and institutional investors last week.
"All requests for rent relief have been dealt with, the secured lending market has improved materially and acquisition opportunities are gradually starting to resurface," he said.
Mr. Markidis noted Summit’s occupancy has improved slightly since the onset of the COVID-19 pandemic, and its tenants have not failed or given back space. He expects rent collection in June to mirror May results.
Also seeing “good news” from its 50-per-cent interest in development lands in Guelph, Ont., where the first of two planned phases is nearing completion, he raised his 2020 and 2021 funds from operations per unit projections to 63 cents each, up from 62 cents and 61 cents, respectively.
Maintaining a “buy” rating, Mr. Markidis hiked his target to $12 from $11.50. The average on the Street is $11.97.
Walmart Inc. (WMT-N) offers best-in-class consistency in an uncertainty retail environment, according to UBS analyst Michael Lasser.
He raised its rating for the U.S. giant, seeing it entering an era of amplified earnings growth driven by an enhanced productivity loop, increased e-commerce scale, and accelerated tech deployment.
“It’s improved execution & successfully changed the narrative of its story from that of a mature brick & mortar retailer to being a viable #2 in eComm,” said Mr. Lasser.
Also seeing it benefiting from traction in advertising and success in key markets, like India, he moved the Walmart shares to “buy” from “neutral” with a US$135 target, rising from US$130 but 39 US cents below the current consensus.
RBC Dominion Securities analyst Kate Fitzsimons said she’s “incrementally positive on the longer-term story” around Ralph Lauren Corp. (RL-N) following virtual meetings with its executive team last week, believing its brand is “leveraging the crisis to accelerate tenets of its strategic plan - namely digital, reassessing its wholesale/direct footprint, and driving greater organizational agility.”
Ms. Fitzsimons said president and CEO Patrice Lovet emphasized the New York-based fashion company is using the COVID-19 pandemic to "come out stronger" ahead of "a watershed moment" in consumer confidence as stores reopen.
“With a weakened competitive set (J. Crew, Brooks Brothers headlines), Louvet expressed confidence the brand can be net share gainers post-COVID,” she said. “With the prior fiscla 2023 $7-billion sales target including $500-million in incremental digital sales, the pedal is being pressed on digital growth (14 per cent of sales) admist COVID across the ecosystem between ralphlauren.com, digital pure-play, wholesale.com, and (early stages) social commerce. Ralphlauren.com is viewed as the largest opportunity, with the team looking to elevate the .com business through improved storytelling, highly controlled promotions, and leaning into AI driven personalization and segmentation work seeing very strong results in Europe (and just rolling out in early days in North America/Asia). The growth in digital is in direct correlation with ongoing brand perception work across marketing, messaging, use of influencers, philanthropy and so on. A full, end to end omnichannel is the end goal, with BOSS/BOPIS/Clienteling/ mobile checkout in-stores all rolled out in North America and in progress elsewhere.”
Seeing a better-than-previously anticipated recovery in its business, Ms. Fitzsimons raised her 2021 and 2022 earnings per share estimates to US$1 and US$5.88, respectively, from 17 US cents and US$4.18.
Keeping a "sector perform" rating for Ralph Lauren shares, she raised her target to US$82 from US$77. The average on the Street is US$91.29.
“While we remain believers given a strong management team and strong balance sheet, RL’s turnaround is indeed seeing temporary setbacks into FY21 associated with COVID-19, as management remains committed to the AUR story while industry-wide inventory and margins pressure continues,” said Ms. Fitzsimons. " Longer-term, with North American wholesale at 25 per cent of the business, our greater concern is on health of the channel coming out on the other side of COVID-19. That being said, with a best-in-class management team and strong balance sheet, we expect RL has the levers to make it through near-term volatility.”
In other analyst actions:
* Seeing both its Athleta brand and real estate holdings as underappreciated by the Street, Wells Fargo analyst Ike Boruchow raised Gap Inc. (GPS-N) to “overweight” from “underweight” and hiked his target to US$19 from US$8. The average on the Street is US$10.24.
“Even though athleisure has clearly accelerated due to the pandemic, this has not translated into a value appreciation for the Athleta brand within Gap,” he said.
* Stifel analyst Scott Devitt raised his target for shares of Peloton Interactive Inc. (PTON-Q) to a Street-high of US$62 from US$55 previously, keeping a “buy” rating. The average is US$52.
“As we near the end of the June quarter, we are incrementally positive on Peloton’s current momentum and long-term opportunity as the leader in the rapidly growing connected fitness category,” he said. “Shifting consumer behavior, gym closures / social contact avoidance, and steady demand from word-of-mouth have the potential to fuel multiple quarters of holiday-like demand in our view while also pulling forward the margin expansion path by two to three years in our expectations.”