Inside the Market’s roundup of some of today’s key analyst actions
The Street continue to lose faith in Cineplex Inc. (CGX-T) as the COVID-19 pandemic wreaks havoc on its business.
On Monday, two more equity analysts downgraded their ratings for the Toronto-based company.
BMO Nesbitt Burns’ Tim Casey moved its stock to “underperform” from “market perform" after lowering his financial projections as film release postponements mount and seeing potential balance sheet risk in 2021.
“2020 is now a lost year for exhibitors like Cineplex. Financial risk is elevated given lending covenants sit at 3.75 times annualized EBITDA (opposed to last 12 months) in 2021,” he said.
His target for Cineplex shares fell to a Street-low $6 from $12. The target average is $13.69.
Meanwhile, National Bank Financial analyst Adam Shine cut the stock to “sector perform” from “outperform” with an $8 target, falling from $12.50.
On Friday, Canaccord Genuity’s Aravinda Galappatthige downgraded his rating to “sell” from “hold," seeing the pressing need to renegotiate covenant commitments. His target slid to $7 from $8.
The moves came as Cineworld announced Monday it plans to close all of its UK and U.S. movie theaters this week, leaving as many as 45,000 workers unemployed for the foreseeable future as it strives to survive a coronavirus collapse in film-making and cinema-going.
The world’s second-biggest cinema chain said the reluctance of studios to push ahead with major releases such as the new James Bond film had left it no choice but to close all 536 Regal theaters in the U.S. and its 127 Cineworld and Picturehouse theaters in the UK from Oct. 8.
RBC Dominion Securities analyst Scott Robertson thinks units of Alaris Equity Partners Income Trust (AD.UN-T) offer upside potential of at least 75 per cent over the next 12 months.
In a research note released Monday, he initiated coverage of the Calgary-based firm, which began trading on the TSX on Sept. 4 and formerly known as Alaris Royalty Corp., with an “outperform” rating, seeing “an environment that could see above-average capital deployment.”
“We think the overall health of Alaris' portfolio is relatively strong versus historical, as: (1) the weighted-average earnings coverage ratio (or ECR, which we view as an indicator of investment health) is at a historical high (a good thing); (2) the percentage of the portfolio with very strong ECRs is at a historical high (and conversely, investments with weaker ECRs represent a historical low); and (3) Alaris is receiving more than 85 per cent of scheduled distributions from its investment partners, despite COVID-19,” said Mr. Robertson.
“Alaris has a positive investment track record, realizing a weighted-average gross portfolio IRR on returned investments of 17 per cent and, based on our analysis, is on track to achieve similar returns in its current portfolio.”
He thinks the big valuation upside is likely to stem from opportunities to deploy capital at levels higher than its historical average.
“We believe COVID-19 may have created a window for increased capital deployment opportunities pertaining to companies whose valuations may have been negatively impacted by the pandemic (making the private equity or strategic sale option less attractive), but whom are seeking significant capital to fund growth (or for other purposes) without increasing financial leverage or ceding voting control of the company,” he said. “We forecast Alaris could deploy $75-million next year, which would be in-line with its 5- and 10-year averages, resulting in a BVPU growth CAGR [book value per unit compound annual growth rate] of 7 per cent over the next 2 years, but believe that there is upside potential to this driven by these new investment opportunities.”
Mr. Robertson set a target of $17 per unit. The average target is currently $15.25.
“Alaris currently trades at 0.7 times P/BV [price to book value], below its 5-year average of 1.2 times and well below its 10-year average over 1.5 times,” he said. “We think the current unit price reflects investor concern regarding potentially significant write-downs of certain investments, perhaps in light of COVID-19.”
Echelon Capital Markets analyst Rob Goff nominated CloudMD Software & Services Inc. (DOC-X) as his “Q420 Top Pick,” citing the growth demand for telehealth stemming from the COVID-19 pandemic and emphasizing its “robust” acquisition pipeline and leadership.
“The stock is up 200 per cent in the last three months, rallying on the demand for telemedicine services during the pandemic and DOC’s aggressive acquisition announcements,” he said. “We are bullish toward the emerging, comprehensive service capabilities, cross-selling opportunities and the strength of management with each acquisition. Following on the success of its upsized equity offering, we look for DOC to announce further acquisitions including U.S. clinics and representation in Ontario. We remain bullish towards the telehealth market reflecting both its adoption and expanding scope including private care, mental wellness and non-regulated services. We believe management will announce additional acquisitions with geographical/capability/technological expansion as a key part of the strategy, a key catalyst to the share prices as we enter the last quarter of the year.”
Mr. Goff maintained a “speculative buy” rating and $2.90 target for shares of the Victoria-based company. The average on the Street is $2.80.
“Our recent positive revaluation of the shares in our PT can be attributed to five consecutive accretive, on-strategy announcements: Benchmark announcement, iMD deal, the SnapClarity acquisition, the U.S. deal, the recent Re:Function acquisition, the establishment of an impressive Advisory Board and the greater financial flexibility from its recent capital raise,” he said. “We see significant crossselling opportunities across its portfolio but in particular for SnapClarity and iMD with the Benchmark acquisition.”
Echelon Capital’s Ryan Walker introduced Osino Resources Corp. (OSI-X) as his “Top Pick” for the fourth-quarter.
He said investors should “position themselves ahead of several potentially high-impact catalysts in the coming weeks and months, including drill results, a maiden resource estimate, and Preliminary Economic Assessment of the Twin Hills Central (THC) portion of the Twin Hills gold project in the Karibib district of Namibia.”
Mr. Walker has a “speculative buy” rating and $2.30 target for shares of the Vancouver-based company’s shares. The average is $2.45.
“Our positive view on OSI shares is based on our expectations of a significant (2Moz) maiden resource at THC (the first of numerous targets), bolstered by substantial exploration potential on a very large (6,700km2) land package in an established (and relatively lower cost) mining region in politically stable Namibia,” he said. “We also highlight management’s previous success in selling the nearby Otjikoto gold deposit to B2Gold (BTO-TSX) for $180-million in 2011.”
Following last week’s announcement of a major restructuring, Citi analyst Jason Bazinet raised Houghton Mifflin Harcourt Co. (HMHC-Q) to “neutral” from “sell” while also “moving to the sidelines” on the stock.
On Friday, shares of the Boston-based textbook published soared almost 24 per cent after it unveiled a cost reduction plan, including a reduction in staff of over 20 per cent, that is expect to save US$95-US$100-million annually.
“Dramatic cost cuts means HMH can now generate robust FCF [free cash flow] at far lower billings,” said Mr. Bazinet. “On the other hand, we suspect the firm took these dramatic steps exactly because the revenue environment will likely remain challenging over the next 12-18 months. As such, the cadence of billings over the next 18 months (3Q20 to 4Q21) is going to be critical for the equity. Management seems to believe that 2021 billings will likely come in better than 2020. But, we don’t yet know how big 2020 billings will be since we still need to see 2H20 results. As such, we’re moving to the sidelines.”
Mr. Bazinet raised his target for Houghton Mifflin Harcourt shares to US$2.50 from US$1. The average on the Street is US$3.
“In the wake of this large restructuring, we have elected to lower our cost forecasts materially (in-line with the announced savings),” the analyst said. "But, in tandem, we are also lowering our billings forecast for 2021 about $200 million (from $1.34 billion to $1.14 billion). We are also raising our plate spend about $20 million after several years of declines to set it to more normalized levels. This suggests HMH’s equity is worth about $2.50 per share, up from $1 previously.
“As such, we are raising our target to $2.50 and upgrading HMH to Neutral. In effect, we are now on the sidelines and will wait for more billings color in 2H20 to reassess our 2021 forecast.”
“In particular, we point to continued momentum across key demand-side indicators, improved supply-side balance, and perhaps most importantly, incrementally higher spot/contract prices,” he said. “In this context, we’re taking this opportunity to increase our 2H20 estimates (again) to account for the latest round of better-than-expected contract postings.”
After Methanex posted “sizeable” increases to all three of its regional contract price postings over the past 10 days, Mr. Hansen raised his 2020 earnings per share projection to a loss of US$1.85 from a loss of US$2.39. His 2021 estimate improved by 3 US cents to a 77 US cent loss.
Keeping an “outperform” rating for Methanex shares, the analyst increased his target to US$32 from US$30. The average is US$23.85.
RBC Dominion Securities analyst Greg Pardy said a recent “upbeat” discussion with CEO Alex Pourbaix reinforced his confidence in Cenovus Energy Inc.'s (CVE-T) “game plan to deleverage its balance sheet and maintain a razor focus on cost leadership.”
“Perhaps the biggest takeaway from our meeting is the company’s relentless focus on remaining disciplined amid an uncertain oil tape,” he said in a research note released Monday. “While the company believes the worst is likely over from an oil pricing perspective, a broader recovery likely requires a covid-19 vaccine. Cenovus remains focused on the controllable as it works to reduce debt levels. A wildcard from this perspective is the potential for non-core asset dispositions; nothing is immediately in the company’s holster, and there are no plans to monetize midstream assets.”
Mr. Pardy maintained an “outperform” rating and $7 target. The average is $7.69.
Desjardins Securities analyst Benoit Poirier said he’s “pleased” the focus of Aecon Group Inc.'s (ARE-T) management remains on “operational excellence and strong project pursuits,” which he expects to fuel growth “for the years to come.”
He made the comments after a hosting a virtual discussion with Toronto-based construction company’s senior executives.
“Management indicated that all domestic operations are back on track, except the Site C project due to its remote location and risks surrounding COVID-19,” said Mr. Poirier. “With respect to ground instability issues recently reported by the Vancouver Sun, management noted that these are well-known and are not presently expected to cause any delay. Recall that ARE is ramping up key projects such as Eglinton LRT, Finch West LTR, Gordie Howe Bridge and REM Montréal, to name a few. During the meeting, management presented a video highlighting the progress on the REM LRT project, a sizeable contract for ARE (24-per-cent share of $6.5-billion, with delivery expected in 2023). According to management, the project is progressing well and the consortium is on track to deliver 2.4 kilometres of track to Alstom after only two years—a testament to ARE’s solid operational capabilities. With respect to nuclear refurbishment projects that were pushed to the right because of the pandemic (management mentioned late 3Q/early 4Q), everything is back to normal and ARE is now working on one reactor at Bruce Power. In relation to additional costs brought on by COVID-19 (time and productivity losses), management is in the process of demonstrating how productivity has been impacted and associated discussions with its clients are ongoing.”
Mr. Poirier emphasized government stimulus remains “a driving force” for infrastructure spending and Aecon itself.
“On October 1, the Canadian government announced a three-year infrastructure plan valued at $10-billion (through the Canadian Infrastructure Bank) to create jobs and stimulate economic growth. Meanwhile, the Québec National Assembly also recently proposed a bill to inject $3-billion in additional infrastructure funding for the current financial year. Finally, Infrastructure Ontario released its P3 Market Update in September which included 40 projects at different phases, valued at $60-billion-plus. These announcements support our bullish stance on infrastructure spending and ARE.”
Reiterating his bullish stance on its Aecon, he kept a “buy” rating and $20 target for its shares. The average is currently $19.95.
“ARE has a market-leading position in the growing infrastructure market in Canada, strong operational track record, solid balance sheet and unique portfolio of long-term concessions,” the analyst said. “We believe the current valuation gap vs U.S. peers (1.7 times EV/FY2 EBITDA) is unwarranted and offers an attractive entry point for long-term investors.”
In other analyst actions:
* Seeing the outlook for sugar remaining “favourable,” TD Securities analyst Michael Van Aelst upgraded Rogers Sugar Inc. (RSI-T) to “buy” from “hold” with a $5.50 target, exceeding the $4.95 average.
“With enough visibility to suggest a strong F2021 earnings recovery, a very attractive 7.6-per-cent dividend yield in a low interest rate environment, and trading at only 8.2 times our next-12-month EBITDA (versus its five-year average of 9.0 times), we see this as the best time in years to buy RSI shares,” he said.
Mr. Van Aelst downgraded North West Company Inc. (NWC-T) to “hold” from “buy” with a $38 target, rising from $36. The average is $36.
At the same time, He raised his target for Empire Company Ltd. (EMP.A-T, “buy”) to $45 from $43 and trimmed his target for Loblaw Companies Ltd. (L-T, “hold”) to $78 from $79. The averages are $41.22 and $81.70, respectively.
* TD’s Bentley Cross lowered Stingray Group Inc. (RAY.A-T) to “hold” from “buy” with a $6.50 target. The average is $7.31.
* Laurentian Bank Securities analyst Nick Agostino raised his target for Tecsys Inc. (TCS-T, “buy”) to $38 from $34.50 after vitual marketing meetings with its management. The average on the Street is $33.60.
“In-line with its recent strong results, the meetings reinforced TCS' core competencies and business fundamentals, particularly as it transitions to a SaaS model. More importantly, TCS reconfirmed its strong outlook both in healthcare and e-commerce as areas of sustained sales growth, driving our increased estimates and TP,” he said.
With a file from Reuters