Inside the Market’s roundup of some of today’s key analyst actions
After the release of better-than-expected second-quarter financial results on Friday, Industrial Alliance Securities analyst Naji Baydoun thinks Brookfield Renewable Partners L.P.‘s (BEP.UN-T, BEP-N) long-term outlook remains “favourable.”
However, seeing limited upside to his target price for its stock, he lowered his rating to “hold” from “buy.”
“We continue to forecast high-single-digit average annual FFO [funds from operations] per share growth (in line with the company’s 6-11-per-cent average annual FFO growth target), supporting continued dividend growth, albeit likely closer to the lower end of the company’s 5-9-per-cent average annual dividend growth target in order to drive down the payout ratio over time,” Mr. Baydoun said. “However, we believe that the current growth outlook is largely priced in at this time; given the more limited upside to our price target, we would wait for a better entry point before accumulating the shares further.”
For the quarter, Brookfield reported proportionate adjusted EBITDA and FFO per share of US$396-million and 75 US cents. Both exceeded Mr. Baydoun’s forecast (US$388-million and 69 US cents) as well as the consensus projections on the Street (US$390-million and 66 US cents). He attributed the results to “strong” contributions from its Solar segment as well as realized gains on dispositions.
“BEP’s organic growth outlook has ticked up, with 2.4GW of under-construction and 1.2GW of advanced-stage projects (up from 2.2GW combined previously),” he said. " The largest addition to BEP’s organic growth projects is a 1.2GW solar project in Brazil (Hubble), which is expected to add US$15-million per year to FFO once completed (COD targeted for H1/23). Overall, BEP’s growth pipeline continues to support 3-5-per-cent average annual organic growth.”
“In July 2020, BEP closed the previously announced acquisition of the remaining minority interest in TerraForm Power (TERP-Q) that was not owned by the Company and co-investors. BEP’s US$3.4-billion of pro forma liquidity provides the Company with substantial firepower to pursue further strategic acquisitions, which could improve the overall outlook (not included in estimates/valuation at this time).”
Mr. Baydoun raised his target for Brookfield units to US$47 from US$46. The average on the Street is us$51.72.
“Our target is based on a combination of (1) our DCF model (US$47.00), and (2) relative valuation based on 25 times 2021 estimated P/FCF [price to free cash flow] (US$47.00),” the analyst said. “We continue to like BEP’s (1) high-quality global renewable power platform (19GW), (2) high degree of contracted cash flows (70-90 per cent through 2024), (3) long-term organic and M&A-based growth strategy (2.4GW under construction, 1.2GW under development, and 14GW of prospects), and (4) attractive income characteristics (4-per-cent yield and a 5-9 per cent per year dividend growth target).”
Elsewhere, RBC Dominion Securities analyst Nelson Ng increased his target to US$47 from US$43 with a "sector perform" rating.
“We believe Brookfield Renewable should remain a core renewable holding as management continues to demonstrate that it can deploy capital organically and through M&A at attractive returns,” said Mr. Ng.
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After its results from an “active” second quarter blew past his projections, RBC Dominion Securities analyst Geoffrey Kwan thinks Brookfield Business Partners L.P. (BBU-N, BBB.UN-T) has the potential to become core holding if its investment track record continues.
“Q2/20 results were solidly ahead of our forecast, but one of the nuggets that came out of BBU’s Q2/20 results was the disclosure that the market downturn allowed them to buy shares in high quality businesses at significant discounts to BBU’s view of intrinsic value with these investments increasing by more than 80 per cent generating an unrealized gain of US$165-million,” he said. “These investments were in companies BBU has been monitoring for a long time ... and could possibly lead to future significant investments/acquisitions. In addition to other recent investments (e.g., Superior Plus), we think this demonstrates BBU’s willingness to tactically try to take advantage of market dislocations to make attractive (and sometimes contrarian) investments that could drive significant NAV [net asset value] growth.”
Brookfield reported EBITDA of US$286-million for the quarter, ahead of Mr. Kwan’s US$229-million estimate. He said the beat was driven by its largest investments, including Westinghouse, Altera, BrandSafway, Multiplex, HealthScope and GrafTech.
Mr. Kwan also emphasized all its businesses were experiencing up-ticks in activity by the end of the quarter and the company saying it sees potential for large-scale capitalization opportunities for businesses with limited access to capital.
“We believe investors should not focus on a specific quarter’s financial metrics as they can vary significantly quarter-to-quarter and year-over-year, which makes accurately forecasting a specific quarter’s financial results difficult,” he added. “The reasons for this primarily reflect: (1) the nature of BBU’s financial disclosure, although we note BBU enhanced disclosures in Q2/19 providing Company EBITDA data for some of its largest investments; (2) little to no publicly available financial information for many of BBU’s investments; (3) the frequency with which BBU makes new investments and monetizations; and (4) many of BBU’s investments are cyclical and/or were purchased during periods of financial difficulty for the acquired company, which can lead to significant changes in financial results in a given quarter. Consequently, we think investors should focus on normalized trends in financial performance and also commentary regarding financial performance at BBU’s various investments.”
After raising its 2020 and 2021 earnings expectations, Mr. Kwan increased his target to US$39 from US$35. The average is US$38.80.
“We reiterate our Outperform [rating] and see valuation upside driven by potentially more than 30-per-cent NAV [net asset value] growth with further potential upside from a narrowing of the current 10-per-cent discount to NAV (our 12-month price target assumes no change in the discount to NAV),” he said.
“We believe that the significant capital deployment over the last couple of years, combined with BBU’s strong investment performance track record, could generate attractive NAV growth at BBU, which helps drive our positive view on the stock.”
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Equity analysts on the Street applauded Sun Life Financial Inc.‘s (SLF-T) second-quarter earnings beat in research notes released Monday.
Canaccord Genuity’s Scott Chan raised his target for Sun Life shares to $58 from $55 with a “hold” rating. The current average on the Street is $57.11.
“SLF reported a solid core EPS beat mainly driven by higher expected profits resulting from widespread growth,” said Mr. Chan. “The firm delivered core earnings growth across all segments (except Asia), which was negatively impacted by unfavorable credit experience and lower AFS [available-for-sale] gains. As a result, we have raised our 2021 EPS forecast by 6 per cent, mainly from higher expected profits and better AUM [assets under management] trends (e.g. MFS AUM up 5 per cent in July/20) leading to an increase in our target price ... We maintain our HOLD rating as we continue to monitor headwinds related to: (1) URR [ultimate reinvestment rate] change assumption industry-wide; (2) uncertain impact on some long-term assumptions (e.g. mortality); and (3) unfavorable credit experience due to the pandemic.”
Desjardins Securities’ Doug Young moved his target to $61 from $59 with a “buy” rating.
“We are comforted by SLF’s execution and strong capital position,” he said.
Elsewhere, CIBC World Markets’ Paul Holden moved his target to $64 from $59 with a “neutral” rating, while Credit Suisse’s Mike Rizvanovic raised his target by a loonie to $60 with an “outperform” rating.
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Despite “strong” performance since its initial public offering in late July, Canaccord Genuity analyst Robert Young thinks Dye & Durham Ltd. (DND-T) shares “remain attractive.”
In a research note released Monday, he initiated coverage of enterprise software firm with a “buy” rating.
“DND is not a vendor of flashy, disruptive software but it does what cloud-based enterprise software is billed as doing: automate the mundane and undifferentiated parts of a business so that resources can be spent on higher-value activities,” said Mr. Young. “The company also has a novel business model within the cloud software space: generate ample cash flow. We believe valuation on an EBITDA multiple rather than ‘earnings before expenses’ means that DND shares will be less brittle when investors change their current growth mindset.
“Much of recent growth has come from acquisitions, a trend which we expect to continue. In fact, management targets 20-25-per-cent annual revenue growth with the bulk coming from M&A. We believe that DND is likely to complete accretive M&A but given uncertainty of timing and size, we are not including the benefit in our estimates, instead reflecting it in our multiple. Management sees a strong M&A pipeline and has a track record of buying at sensible multiples (8-10 times EBITDA) and achieving operational & cost synergies. Presently, the company is continuing a strong record of consolidation into the fragmented UK market, which is currently 20 per cent of sales.”
In justifying his rating, Mr. Young pointed to a number of factors, including: the view that it’s “entrenched in a large, fragmented, mature customer base;” its pricing power is “attractive” and appears sustainable; the expectation its “proven execution” on M&A will continue; the potential for expansion abroad given a large total addressable market and its valuation, calling it “a software company with cash flows, for a change.”
Mr. Young set a target of $18 per share.
“We believe the company’s 50-per-cent-plus adjusted EBITDA profile, stable GDP+ growth, and execution on accretive M&A all create opportunities for multiple expansion,” he said.
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Citing the expectation for increased demand for cleaning services in the “foreseeable” future as well as its dominant position in the industry, Industrial Alliance Securities analyst Neil Linsdell raised his target for GDI Integrated Facility Services Inc. (GDI-T) following better-than-anticipated second-quarter results.
On Thursday, the Lasalle, Que.-based company reported revenue of $323-million, up 4.5 per cent year-over-year and exceeding Mr. Linsdell’s $265-million forecast and the consensus estimate of $272-million. Adjusted EBITDA of $22.5-million was a rise of 21 per cent and also topped projections ($12.3-million and $12.2-million, respectively).
“Q2 was impacted as many businesses and buildings went into lockdown mode in mid-March, although many governments and organizations are continuing to work through plans to re-open,” said Mr. Linsdell. “Seemingly without exception, these plans include increased cleaning – not just for appearance, but now also for health. GDI is working with its partners to offer enhanced cleaning packages and services, and has launched a new website (cleanforhealth.com) as part of this marketing strategy. As we look at Q3 and Q4, we expect to see a gradual return to normal business levels, with additional services and revenue layered on top, depending on the client and market. We believe that relatively little business will be lost due to clients shutting down or scaling back operations enough that entire floors or buildings will be shut down. Offices operating at reduced staffing levels will still need to be cleaned more in the new environment than did a fully-staffed office prior to this pandemic.”
Also seeing its “active” M&A strategy complimenting organic growth, Mr. Linsdell raised is earnings expectations for 2020 through 2022, leading him to hike his target for GDI shares to $43 from $40 with a “strong buy” rating (unchanged). The average on the Street is $40.86.
“We believe that the COVID-19 situation, although disruptive in the short term, will drive increased demand for janitorial services in both Canada and the U.S., which combined represent approximately 65 per cent of GDI’s revenue and 80 per cent of EBITDA,” he said. “Additionally, the Complementary Services group includes the Superior Sany Solutions business, which manufactures and distributes a range of cleaning products, mostly to an external customer base. We expect this business unit to remain very busy for the foreseeable future.”
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Though it reported “solid” fourth-quarter results, Citi analyst Daniel Jester thinks Open Text Corp.‘s (OTEX-Q, OTEX-T) performance was overshadowed by its “cautious” 2021 revenue guidance.
"OTEX is seeing notable pressure in transaction related revenue from some of the hardest hit industries, equating to our estimate of a $130-million year-over-year headwind in FY21, driving the flattish revenue outlook for the upcoming year," he said. "On costs, OTEX continues to execute well here with margins anticipated to expand again this year. Growth in FY21 will be driven by macro and M&A."
"OTEX sees cloud revenue growing low double digits in FY21, but the rest of the business flat or down, implying double digit declines in license and professional service revenue. Margin improvement, driven by Carbonite integration and cost cutting, should help the company continue to de-lever."
The Waterloo, Ont.-based firm reported revenue of US$826.6-million, up 10.6 per cent year-over-year and topping both Mr. Jester's US$786.2-million forecast and the consensus on the Street of US$803.5-million. EBITDA of $317.4-million also topped estimates (US$252.5-million and US$262.8-million, respectively).
With a reduction to his revenue projections, Mr. Jester also lowered his 2021 and 2022 earnings per share estimates (to US$2.89 and US$3.32, respectively, from US$3.04 and US$3.34).
Keeping a "neutral" rating, he increased his target for Open Text shares to US$47 from US$41. The average on the Street is US$50.69.
“OTEX is generally well positioned in its core markets, but the acquisition of Carbonite is taking OTEX more down-market, and deeper in security markets, and near-term integration execution is key,” said Mr. Jester. “We think FY21 could present some meaningful potential catalysts for the shares, as OTEX starts to benefit from CARB integration and deleveraging completes.”
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Sprott Inc. (SII-N, SII-T) is “taking advantage of the gold rush,” said Desjardins Securities analyst Gary Ho, who believes “the favourable market sentiment, potential inclusion in the S&P/TSX Composite and growing investor interest all bode well.”
On Friday, the Toronto-based company reported fully diluted earnings per share of 41 US cents for the second quarter, above both Mr. Ho’s estimate of 26 US cents and the consensus of 28 US cents.
Keeping a “hold” rating, Mr. Ho raised his target for its shares to US$37 from US$35. The average is $49.17 (Canadian).
“SII shares are fairly valued, in our view,” said Mr. Ho. “That said, the company stands to benefit from increased U.S. investor exposure, potential inclusion in the S&P/TSX Composite in September and increased brokerage activities. SII will continue to be influenced by movements in the prices of gold, silver and their related equities.”
Elsewhere, RBC Dominion Securities analyst Geoffrey Kwan raised his target to $60 from $57, keeping a “sector perform” rating.
“The current macro environment appears supportive of SII’s high exposure to gold,” he said. “We view the shares as offering attractive defensive attributes with optionality for valuation upside to the extent that gold and precious metal prices continue to increase. On the flip side, the key risk to the stock is a material decline in gold prices, which would have a disproportionate negative valuation impact to SII relative to other stocks within our coverage.”
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After a “strong” second quarter, Raymond James analyst Michael Glen raised his financial expectations for CCL Industries Inc. (CCL.B-T) “modestly” higher to reflect improving business trends as well as a “relatively constructive tone” in its conference call.
“While we can clearly see opportunities for upside surprise as it pertains to our new forecast, given some of the lingering pressures still being seen within portions of CCL Label and the Checkpoint and Avery segments, we do not want to get ahead of ourselves with respect to our estimates,” he said. “That said, CCL clearly described a favourable cadence to results as 2Q progressed (i.e. April down 20 per cent, May down 15 per cent, June down mid single digits) and a continuation of such trends into July.
“As such, coupling the improving business trends with a strong balance sheet (i.e. leverage was indicated at 1.78 times at 2Q20) and reiteration for free-cash generation of $450-million in 2020, we remain constructive on the stock and reiterate out Outperform rating.”
Mr. Glen raised his target for CCL shares to $57 from $55. The average target on the Street is $53.22.
Meanwhile, TD Securities analyst Daryl Young upgraded CCL to “buy” from “hold” with a $56 target, increasing from $45.
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Citing its “impressive” track record and seeing organic, acquisition momentum supporting its “aggressive” goals, Echelon Wealth Partners analyst Rob Goff initiated coverage of Converge Technology Solutions Corp. (CTS-X) with a “speculative buy” rating.
“Converge’s track record of successfully completing 12 accretive acquisitions since October 2017 speaks to the existing market opportunities and management’s capabilities,” he said. “We believe the Company stands to build further shareholder value given the positive momentum of cross-selling its product suite for organic growth while key vendor relationships bring efficiencies, referrals, and acquisition candidates. We are bullish towards the Company’s ability to maintain its acquisition and organic growth momentum.”
Mr. Goff set a target price of $3 per share. The average is $2.71.
“We see the impressive outperformance of the marquee technology leaders and the interests of private equity as positive reflections of market growth along with a move to higher-value/margin services as digital implementations take on great complexity,” he said.
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In other analyst actions:
- CIBC World Markets analyst Hamir Patel lowered Domtar Corp. (UFS-N, UFS-T) to “underperformer” from “neutral” with a US$28 target, up from US$22 but 5 US cents below the consensus. Mr. Patel said: “While we like the containerboard market, given Domtar’s disappointing track record in Personal Care, we are cautious on the company’s ability to execute a successful entry into another market dominated by formidable competitors.”
- National Bank Financial analyst Ryan Li raised Lassonde Industries Inc. (LAS.A-T) to “outperform” from “sector perform” with a target of $183, up from $160. The average on the Street is $175.
- PI Financial analyst Gus Papageorgiou lowered Constellation Software Inc. (CSU-T) to “neutral” from “buy” with a target of $1,674, falling from $1,758. The average is $1,725.73.
- BMO Nesbitt Burns analyst John Gibson lowered Pason Systems Inc. (PSI-T) to “market perform” from “outperform” with a target of $6.50, down from $8.50 and below the $8.33 average.
- BMO’s Jenny Ma lowered Cominar REIT (CUF.UN-T) to “market perform” from “outperform” with an $8 target, falling from $10. The average is $9.89.
- RBC Dominion Securities analyst Nelson Ng raised Atlantic Power Corp. (ATP-T) to “outperform” from “sector perform” and raised its target to $4 from $3.50, which is the current average.
- Wedbush analyst Daniel Ives raised his target price for Apple Inc. (AAPL-Q) shares to a Street-high US$515 from US$475 and laid out a bull case scenario of US$600, keeping an “outperform” rating. The current average on the Street is US$425.17.
Editor’s note: An earlier version of this story incorrectly identified the firm Rob Goff works for. He's an analyst for Echelon Wealth Partners Inc.. This has been updated.
David Leeder