Inside the Market’s roundup of some of today’s key analyst actions
Brookfield Asset Management Inc.'s (BAM-N, BAM.A-T) US$750-million acquisition of a 19.9-per-cent stake in American Equity Investment Life Holding Co. alters its “somewhat stale narrative and opens up an incremental growth path,” said Citi analyst William Katz.
In reaction to Sunday’s announcement’s, he upgraded Brookfield to “buy” from “neutral,” believing the deal “should help break the shares out of their more recent moribund trading range.”
“We see three areas of incremental opportunity not fully captured in our revised target,” said Mr. Katz in a research note released before the bell. “First, BAM will fund the deal likely with cash, creating favorable valuation arbitrage, in our view. Second, we only pencil in the initial $5-billion of reinsurance economics, with the deal scaling ultimately to $10-billion. Third, we assume relatively static FPAUM [fee-paying assets under management] against the $5-billion in initial AUM. Thinking longer term, we note: 1) management recently laid out $100-$200-billion long-term Insurance AUM target, and this deal should set in motion further scaling; 2) per management, the pipeline for additional deals remains very active; and, 3) the growth in Insurance will augment already strong capital raising in legacy Real Assets, PE and Core Plus mandates.”
Mr. Katz emphasized the claim by Brookfield management that the deal has been in the works for a while and is not a reaction to the recent acquisition proposal for AEL from Athene Holding Ltd. (ATH-N) and Massachusetts Mutual Life Insurance Co..
“In our view, this should limit the downside for BAM from a counter by ATH/Mass Mutual, and per our Insurance analysts' views, such an outcome seems less likely,” he said.
Mr. Katz raised his target price for Brookfield shares to US$40 from US$38.50. The average on the Street is US$41.82, according to Refinitiv data.
“Defensively, BAM is not subject to higher taxes should the Democrats sweep U.S. elections and raise the U.S. corporate tax rate,” he said. "Offensively, we suspect BAM’s Real Asset footprint, notably its Infrastructure platform, could be very well positioned post-election, given capacity, current capital raising and strong long-term track record. We also believe recent Retail-related RE angst is now widely appreciated.
“Our revised target offers about 20-per-cent upside, without the specter of tax-related leakage, somewhat enhancing its relative appeal, in our view.”
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Citing the potential stemming from its acquisition of an increased ownership stake in Petrogas Energy Corp., Credit Suisse analyst Andrew Kuske raised AltaGas Ltd. (ALA-T) to “outperform” from “neutral.”
“On Friday, AltaGas Ltd (ALA) announced the acquisition of an interest in Petrogas Energy Corporation in a somewhat expected transaction – albeit with a few twists, including: greater ownership and better economics than we anticipated and a series of positive details on the privately held Petrogas,” he said. “In our view, at the core of Petrogas is the Ferndale terminal and a Fort Saskatchewan rail terminal that should help ALA’s energy infrastructure midstream platform. We believe the underlying economics, future strategic potential and ALA’s valuation translate into an attractive risk-adjusted return and, thus, we upgrade the stock.”
After raising his 2021 earnings expectations, Mr. Kuske increased his target for AltaGas shares to $20 from $18. The average is $20.47.
“AltaGas is uniquely positioned with energy infrastructure assets in core parts of the Western Canadian along with a series of US-based utility assets,” he said. “The stock provides interesting exposure to frac spreads and selected export movements along with an ability to eventually drive greater returns from the core utility business.”
Elsewhere, Raymond James' David Quezada raised his target to $22.50 from $22, keeping an “outperform” rating.
Mr. Quezada said: “We maintain our constructive stance on Altagas — a function of several factors including 1) the company’s strong regulated utility rate base growth and rising ROE’s; 2) a structural advantage in propane exports at RIPET and Ferndale (which this transaction bolsters, in our view); and 3) a discounted valuation relative to each of the utility and midstream peers. We believe this increased stake in Petrogas comes at an attractive valuation.”
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A faster-than-anticipated rebound in the North American economy has led to a “healthy volume environment” for Canadian railway companies, according to Desjardins Securities analyst Benoit Poirier.
“The various economic indicators we monitor have improved significantly since the trough in April. Volumes for both railroads have gradually improved through 3Q and have been in positive territory for the past 3–4 weeks, with notable strength in grain, intermodal and potash,” he said.
“We see an interesting parallel between the financial crisis in 2008–09 and the current situation. While industrial production and U.S. freight carloads decreased by similar magnitudes through both recessions, the decline and subsequent recovery have been much faster this time around (V-shaped recovery). Both CN and CP have been fairly resilient throughout the pandemic, with volumes recovering nicely as the North American economy reopened. Nevertheless, we note that the strength and rapidity of the recovery, combined with the resurgence of COVID-19 cases globally, could temper volume growth in 2021 vs 2010.”
In a research report previewing the release of third-quarter results on Tuesday, Mr. Poirier said the focus has shifted to “efficiently and profitably navigating through the recovery" for both Canadian Pacific Railway Ltd. (CP-T, CP-N) and Canadian National Railway Co. (CNR-T, CNI-N).
“For 3Q, we forecast that CN should be able to keep its OR [operating ratio] fairly stable at 57.7 per cent (down 20 basis points year-over-year), with the opportunity for stronger year-over-year improvements in 4Q (we forecast a reduction of 610 basis points) as it laps easier comps due to the strike last year. For CP, we forecast a deterioration in its OR of 60 basis points to 56.7 per cent in 3Q (vs our initial forecast of 56.4 per cent) as a derailment in BC and stock-based compensation are expected to more than offset the impact of stronger-than-expected volumes. We still expect CP to deliver on its objective to reduce OR by 200–300 basis points year-over-year in 2020 (we forecast a 260 basis points reduction to 57.3 per cent).”
Maintaining a “hold” rating for both CN and CP shares, he said their valuations are currently “off the charts, reflecting their resiliency against COVID-19 as well as the healthy volume environment.”
“While we are cognizant that 2020 has been disrupted by the pandemic, CN and CP are trading at a premium over the S&P 500 of 2.9 times and 2.6 times, respectively (vs the historical average of 1.3 times and 1.2 times),” he said. “Overall, we believe these rich valuations demonstrate CN’s and CP’s operational leverage and discipline in terms of adjusting their cost structure throughout the pandemic, as well as a certain level of optimism with respect to the encouraging volume prospects.”
Mr. Poirier raised his target for CP shares to $453 from $375. The average on the Street is $432.78.
“As with CN, while we are encouraged by the recent volume improvements and the prospects for key commodities in 4Q and beyond, we are maintaining our Hold rating as we believe these fundamentals are already reflected in the share price,” he said.
His CN target increased to $156 from $132, exceeding the US$129.36 consensus.
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Industrial Alliance Securities analyst Elias Foscolos expects Canadian Energy Services and Diversified Energy companies to see a modest rebound in activity in the third quarter.
In a research report previewing earnings season, he said anecdotal evidence and data from the U.S. Energy Information Administration (EIA) suggested almost half of Canadian and U.S. production that was shut-in earlier in the year has been brought back online through September.
“The expected shape of a recovery in drilling activity is still uncertain, but we believe that E&Ps will prioritize free cash flow toward debt repayment, bringing back shut-in production, and working through inventories of drilled uncompleted (DUC) wells as commodity prices improve, before drilling new wells,” said Mr. Foscolos. "Growth will also be constrained by access to capital markets, which will likely be limited until there is line of sight for a sustained period of more supportive full-cycle E&P economics. Our North American land rig forecasts for Q4/20 and 2021 currently remain unchanged from our previous industry update.
“We are forecasting average active land rigs in Q4/20 of 83 in Canada and 267 in the U.S.. In Canada, rigs bottomed at record lows late in Q2/20, averaging 16 in June, and have since been following a gradual incline to last week’s count of 78. In the U.S., rigs bottomed in August, averaging 237 in the month, and have similarly gradually trended upward since to reach last week’s count of 268. We are expecting that weekly rig additions will continue at a slow pace into the early part of 2021 before accelerating through the remainder of the year, as the inventory of DUC wells declines and more rigs are required to sustain a more normalized level of production. For 2021, we are forecasting average active land rigs of 98 in Canada and 397 in the U.S..”
Mr. Foscolos raised his third-quarter projections for companies in his coverage universe to account for the Canada Emergency Wage Subsidy (CEWS), however his projections largely remain lower than the consensus on the Street due to higher assumed margins.
“BAD, CMG, and MTL all posted positive stock price returns in Q3/20, whereas most of our covered companies returned in the minus 20-30-per-cent range for Q3/20,” he said. “Despite its weighting to production and industrials, and effective margin management in Q2/20, TEV was the bottom performer in our coverage universe in Q3/20, which we believe is due to the overhang of its upcoming note maturity at the end of 2021. On a year-to-date basis, companies with more leverage and torque to the oil & gas sector and E&P CAPEX continue to underperform, including CEU, PSD, SCL, SES, and TEV. While PSI is the most directly tied to drilling, its stock is partially insulated by having the most durable balance sheet.”
Mr. Foscolos also made a pair of target price changes after a “valuation refresh.” They are:
* Secure Energy Services Inc. (SES-T) to $2.50 from $2.75 with a “speculative buy” rating. The average on the Street is $2.99.
“Production-related and fee-based cash flows should continue to provide an offset to weak western Canadian drilling activity in Q3/20," he said. "Production has increased quarter-over-quarter, and SES commissioned a new feeder pipeline in Q2/20, which will add stable cash flows secured by 15-year commitments to its cash flows from its other feeder pipeline and crude oil storage assets. These factors, along with $40-million annualized in targeted cost reductions, should act as tailwinds against an 64-per-cent year-over-year drop in Canadian rig count. We do not forecast a covenant breach on SES’s debt, and believe capital preservation measures taken by the Company will allow it to generate positive FCF and lower its debt balance ahead of principal payments of $130-million due in July 2021. While the most significant catalyst for the stock would likely be the sale of drilling and completion-related business lines, the Company has indicated that this will likely be delayed until 2021.”
* Tervita Corp. (TEV-T) to $5 from $4.50 with a “speculative buy” rating. Average: $4.53.
“Production-related volumes and relatively stable results in Industrial Services (IS) should act as tailwinds offsetting continued weakness in drilling-related volumes,” he said. “Including $8-million of CEWS, we are forecasting Q3/20 Adj. EBITDA of $53-million, which is closer to the high end of Street estimates. We believe TEV will continue to effectively manage its margins, executing on cost-cutting measures that are expected to result in $30-34-million in annualized cost savings. The inclusion of CEWS in cash flow takes the pressure off of debt covenants, where we do not forecast any breach. In our minds, there is a value disconnect as TEV’s debt has crept toward par, yet its equity value is at a near 52-week low.”
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With the COVID-19 pandemic acting as “an accelerator” of global digital payment adoption," RBC Dominion Securities analyst Paul Treiber initiated coverage of Nuvei Corp. (NVEI.U-T, NVEI-T) with an “outperform” rating.
“Nuvei is a global provider of payment solutions,” he said. “The company’s mix of digital is 71 per cent (trailing 12 months) owing to the August 2019 SafeCharge acquisition, compared to card present at 29 per cent. We expect high-growth verticals like online retail, social gaming, and online marketplaces to contribute disproportionately to Nuvei’s organic growth. Our outlook calls for Nuvei to see 16-per-cent compounded organic growth between FY20 and FY23, with digital forecasted to reach 83 per cent by Q4/FY23. We believe the competitive advantages of Nuvei’s technology (single tech stack, pay-in/pay-out, 450 APMs, 150 currencies) position the company for more complex use cases in these markets.”
“Nuvei’s payment volumes have accelerated post-COVID-19 compared to pre-COVID-19 levels as global adoption of digital services like online retail, online gaming/gambling, social gaming and online marketplaces has increased. The growth from digital has more than offset the slowing in card present transactions. Our forecast calls for Nuvei’s mix of card present to decline from 29 per cent TTM to 17 per cent by Q4/FY23.”
Mr. Treiber thinks the Montreal-based firm is “well positioned to remain dominant” as a leading provider of payment solutions in the online gaming market, estimating it now has seven of the 10 largest companies in that space as customers. He also sees the increased legalization of online gambling at the U.S. state-level as a potential catalyst for growth.
“Payments offer attractive economics, and we believe that Nuvei’s scale and operational discipline will help sustain high margins,” he added. “Our forecast calls for Nuvei to sustain low 80-per-cent gross margins and low 40-per-cent adjusted EBITDA margins and realize 70 per cent adjusted EBITDA to FCF conversion. In light of Nuvei’s history, we believe the company is likely to continue to deploy excess FCF on acquisitions of payments companies.”
Seeing valuation multiple expansion as “likely” as its mix of digital increases and “robust” organic growth is realized, Mr. Treiber set a target of US$50 per share.
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Expecting to see “a return to normalcy” with the third-quarter results for Canadian precious metals companies, Credit Suisse’s Fahad Tariq raised his target prices for their shares on Monday.
“We expect less volatile earnings this quarter, given mines are generally back to normal operations (with a few exceptions) following previous COVID-related shutdowns, albeit with additional health and safety protocols and in some cases backfilling regular employees who have not returned to work with contractors, which is modestly impacting costs (higher gold prices are masking this effect),” he said. “The recent Denver Gold Forum is a good barometer to frame what we expect will be the main discussion points on Q3 conference calls, with capital allocation the main question (in Q2, COVID-19 impact was the main discussion point). We expect companies in our coverage to print strong FCF (despite the pullback in gold prices late in the quarter) and to hear announcements of higher dividends (specifically from AEM and CG, with AUY and KL already announcing increases).”
“With mines mostly running normally and no government-imposed or precautionary shutdowns, investor attention turns to FCF and returning more capital to shareholders, to continue to demonstrate discipline and attract generalists. However, with COVID-19 cases continuing to rise in many parts of the world and fears of a more significant ‘second wave,’ there remains a risk that mines could be forced to shut down again, though we view this as lower probability given the extensive, and to date highly effective, health and safety protocols at the mines. We are not aware of any recent positive cases at any mines for companies in our coverage.”
Mr. Hamed’s changes included:
- Agnico Eagles Mines Ltd. (AEM-N/AEM-T, “outperform”) to US$105 from US$90. The average on the Street is US$90.44.
- Alamos Gold Inc. (AGI-N/AGI-T, “neutral”) to US$10.75 from US$12. Average: US$16.15.
- Barrick Gold Corp. (GOLD-N/ABX-T, “outperform”) to US$34 from US$33. Average: US$33.81.
- Eldorado Gold Corp. (EGO-N/ELD-T, “underperform”) to US$12.50 from US$12. Average: US$14.44.
- Endeavour Mining Corp. (EDV-T, “outperform”) to $50 from $42. Average: $49.33.
- Iamgold Corp. (IAG-N/IMG-T, “neutral”) to US$4.75 from US$5. Average: US$7.74.
- Kinross Gold Corp. (KGC-N/K-T, “neutral”) to US$10.50 from US$9.50. Average: US$11.98.
- Kirkland Lake Gold Ltd. (KL-N/KL-T, “neutral”) to US$59 from US$54. Average: US$59.
- New Gold Inc. (NGD-N/NGD-T, “market perform”) to US$2 from US$1.70. Average: US$2.03.
- Yamana Gold Inc. (AUY-N/AUY-T, “outperform”) to US$7.50 from US$7.25. Average: US$7.38.
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Canaccord Genuity analyst Aravinda Galappatthige thinks Cogeco Communications Inc. (CCA-T) stock “may not may not respond well” to a sweetened bid from Altice USA Inc. (ATUS-N) and Rogers Communications Inc. (RCI.B-T) given the “unwavering” position of Gestion Audem.
Gestion Audem Inc. is the company controlled by the Audet family, which quickly turned down the increased $11.1-billion bid on Sunday.
“Legally, we are not aware of a path forward for Altice/Rogers if the Audet family stands firm,” said Mr. Galappatthige. “With that said, we believe that the acquirers may be hoping for more vocal support from the public shareholders given the aforementioned 51-per-cent premium, which they may anticipate could in turn place pressure on the independent members of the board.”
“While the offer premium is attractive, a breakdown of the offer reflects the fact that the transaction translates to 8.5 times fiscal 2021 estimated EBITDA for the Canadian assets (including smaller Radio assets) and 10.3 times for U.S. assets. Given the significant potential synergies in Canada and the valuation of comparable U.S. assets, we believe a higher offer is not out of the question. With that said, in the absence of any movement from any of the parties involved other than the acquirers, this would be meaningless and thus unlikely to be the case.”
Maintaining a “buy” rating for Cogeco Communications shares, he lowered his target to $119 from $123. The average on the Street is $118.78.
“While the bid increased by 12 per cent versus the first offer, we have readjusted our probabilities given the lack of momentum thus far for the acquirers and the Audet family’s consistent position,” said Mr. Galappatthige. “Previously, we valued the company using a 40-per-cent weighting to the pre-announcement price ($99.35), 40% to the first offer ($134.22) and 20 per cent to a higher offer ($150), which translated to $123 per share. We now value the shares using 70-per-cent weighting towards the pre-announcement price, 10 per cent to the current bid ($150), and 20 per cent to a higher bid ($172 per share – 9.5 times for Canada, 11.3 times for ABB). Given this risk/reward picture, we believe maintaining our BUY rating makes sense, as there is more potential upside than down.”
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Ahead of the release of its third-quarter results on Oct. 29 before the bell, RBC Dominion Securities analyst Sabahat Khan raised his financial expectations for Gildan Activewear Inc. (GIL-N, GIL-T) in the wake of recent channel checks.
“Based on recent conversations, our key takeaways heading into Q3 reporting are as follows: 1) Fashion Basics are performing relatively better (POS is flat to up mid-single digits year-over-year) versus Basics products (down 20 per cent-plus year-over-year),” he said. “The strong demand for Fashion Basics has been driven by consumers shopping online for higher quality blank product to wear while WFH, and in some cases, demand from corporate customers. 2) Service levels/fill rates from t-shirt manufacturers/suppliers to distributors have been somewhat challenged following the manufacturing shutdowns during Q2/20, which have led to some shortages (we believe Gildan’s service/fill rates are likely above industry-average as it had entered the year with a larger inventory position). 3) Distributors have reduced inventory levels, and will replenish/re-stock as end-market demand picks up, but are likely to operate at lower inventory levels going forward relative to pre-COVID inventory positions.”
For the quarter, Mr. Khan is now forecasting sales of US$555-million, down 25 per cent year-over-year but above the Street’s expectation of US$491.4-million. His adjusted earnings per share projection is 20 US cents, down from 53 US cents and exceeding the 5-US-cent consensus.
With that view, he raised his 2020 EPS estimate to a loss of 44 US cents from a loss of 56 US cents. His 2021 projection rose to a profit of US$1.07 from US$1.02.
“At Q3 reporting, we expect investor focus to be on: 1) management commentary on POS trends in the U.S. Printwear channel through Q3 and Q4 to-date; 2) trends for Gildan’s Basics products vs. Fashion Basics (we believe Fashion Basics are performing much better than Basics); 3) any update on trends in the retail channel and performance of the company’s branded/private label offerings; and 4) the company’s leverage/liquidity position exiting Q3,” he said.
Maintaining a “sector perform” rating for Gildan shares, he raised his target to US$18 from US$16. The average is US$18.54.
“Our valuation multiple reflects our view that Gildan is increasingly a ‘mature’ company, with a greater proportion of the total return to investors coming in the form of return of capital versus growth in the underlying operations (over the longer term),” the analyst said.
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Raymond James analyst Farooq Hamed expects B2Gold Corp.'s (BTG-N, BTO-T) “steady, high-margin operating profile” to generate significant free cash flow, “bolstering its already strong balance sheet allowing the Company to internally fund its pipeline of growth projects over the coming years.”
He initiated coverage of the miner with an “outperform” rating, emphasizing its “strong track record of developing mines on time/budget and a history of successfully operating in riskier jurisdictions with minimal interruption.”
Mr. Hamed set a target of US$8.50 per share, matching the consensus on the Street.
“On valuation, our analysis suggests BTG trades at a slight premium to the P/NAV and P/CF average multiples of the senior and mid-tier gold producers in our coverage universe, however, given BTG’s higher than average operating margins, attractive project pipeline and net cash position, we believe a premium is warranted,” he said.
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Predicting 2021 “should be a treat,” Citi analyst Wendy Nicholson initiated coverage of Hershey Co. (HSY-N) with a “buy” rating.
“Despite what could be weak sales leading up to the Halloween holiday, and a subdued outlook for 4Q, we nonetheless expect HSY to show some sequential improvement in its top line in 3Q when compared to 1H,” she said. "More importantly, as we turn the corner into 2021, we expect HSY to benefit not only from easier year-over-year comps related to its international and convenience businesses, but also from a return to more robust innovation and marketing. This should help the company get back to its long-term growth algorithm (2-4-per-cent sales growth, 6-8-per-cent EPS growth) next year.
Ms. Nicholson set a target of US$172 per share. The average is US$150.69.
“Given our outlook for accelerating growth in both sales and EPS in 2021, we believe that HSY’s relative valuation should return to being in line with its 5-year historical average of a 25-per-cent premium to the market,” the analyst said.
Separately, Ms. Nicholson initiated coverage of Campbell Soup Co. (CPB-N) with a “neutral” rating and US$52 target, falling short of the US$53.41 consensus.
“We recognize that COVID-19 will create tough year-over-year compares during fiscal 2H21,” she said. “More importantly, once we cycle through those tough year-over-year compares, we think this new management team will likely return to “show me” mode with regard to their ability to generate consistent organic revenue growth in both relatively mature (e.g. soup) and very competitive (e.g. salty snacks) categories. Indeed, while the company’s long-term growth targets of organic sales growth of 1-2 per cent, EBIT growth of 4-6 per cent, and adjusted EPS growth of 7-9 per cent are in line with those of many other US packaged food companies, we fear they may be hard for CPB to achieve.”
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In other analyst actions:
- Barclays analyst Matthew Murphy lowered Agnico Eagle Mines Ltd. (AEM-N, AEM-T) to “equal weight” from “overweight” with a US$79 target, up from US$71. The average on the Street is US$90.44.
- Mr. Murphy also raised its target for Barrick Gold Corp. (GOLD-N/ABX-T, “buy”) to US$28 from US$27. The average is US$33.81.
- National Bank Financial analyst Adam Shine raised Spin Master Corp. (TOY-T) to “outperform” from “sector perform” with a $35 target, up from $31. The average is $30.55.
- National Bank’s Vishal Shreedhar increased his target for Canadian Tire Corp. Ltd. (CTC.A-T, “outperform”) to $156 from $128. The average is currently $143.10.
- RBC Dominion Securities upgraded Just Energy Group Inc. (JE-T) to “sector perform” from “outperform”
- Haywood Capital Markets started Exro Technologies Inc. (EXRO-X) with a “buy” rating and $6 target. The average $1.69.
- Eight Capital initiated coverage of PopReach Corp. (POPR-X) with a “buy” rating and target of $2.35, exceeding the $1.82 target.
- RBC Dominion Securities analyst Paul Treiber raised its target for Lightspeed POS Inc. (LSPD-T, “sector perform”) to $47 from $40. The average is $48.
David Leeder