Inside the Market’s roundup of some of today’s key analyst actions
Though he thinks its deal to acquire Husky Energy Inc. (HSE-T) “makes strategic sense,” Credit Suisse analyst Manav Gupta downgraded Cenovus Energy Inc. (CVE-T) to “neutral” from “outperform” on Monday, seeing the price as “excessive.”
“Given CVE asset quality is far superior to HSE, particularly on the thermal side, a mid to high single digit premium would have been sufficient," he said in a research note. "Post CVX-NBL (7.4-per-cent premium), the deal dynamics have changed and more than 20-per-cent premium is viewed as excessive. We expect CVE to trade down on this news.
“For multiple years, CVE success was measured against its target of lowering net debt to below $7-billion, HSE deal adds net debt of over $7-billion to merged entities balance sheet. With West White Rose on hold and growth and Lloyd slowed, we viewed HSE sustaining capex at $1.2-billion not at $1.8-billion. Therefore, we do not see $600-million lower sustaining capex as a real synergy benefit. CVE bulls thought of it as an acquisition target for SU or CNQ or even a U.S. major, not as an acquirer.”
Mr. Gupta emphasized the deal, announced early Sunday, makes strategic sense, noting: “like US E&Ps Canadian energy companies also need to come together, cut cost and become leaner to better adapt to lower energy demand in post pandemic world.”
“CVE is a top tier operator, while HSE has continued to struggle with operational issues,” he added. “CVE taking control of HSE operations would be viewed positively. Given HSE’s higher G&A and significantly higher operating cost, we believe $600-million of the projected $1.2-billion in synergy are achievable. The deal lowers CVE’s corporate breakeven from current $38 per barrel to $36 in 2021 and then $33 in 2023. CVE is targeting, net debt to EBITDA of less than 2 times by 2022, on WTI price of $45 per barrel and above, and assuming $13 per barrel crack. Deal also lowers CVE exposure to WTI-WCS diff.”
The analyst trimmed his target for Cenovus shares to $7 from $8. The average target on the Street is $7.57, according to Refinitiv data.
Separately, Raymond James analyst Chris Cox raised Husky Energy Inc. (HSE-T) to “market perform” from “underperform” with a $6 target. The average is $4.29.
“From an HSE-perspective, the merger is a clear win. The transaction offers an attractive premium - 21 per cent through the share exchange ratio and an additional 2 per cent of upside in the form of warrants with a 5-year term," said Mr. Cox. “That premium is noticeably larger than the low/no premium transactions that we have seen dominate the headlines in the sector in recent weeks, while the pro-forma company represents a marked improvement from standalone HSE. Additionally, with HSE shareholders owning 39 per cent of the pro-forma company, the merger with CVE accomplishes similar goals to what was being pursued back in late-2018 when HSE announced its attempted hostile take-over of MEG. The merger with CVE greatly improves the upstream asset base with a larger share of long-life, low-decline production to enhance the free cash flow profile vs. HSE standalone.”
Mr. Cox maintained a “market perform” rating for Cenovus, but he raised his target to $7.50 from $6.
“Overall, we have a mixed view of the transaction from the CVE-perspective. Strategically, we question the pivot to reduce heavy oil exposure and add refining exposure at this juncture, as we believe the market is turning in the opposite direction. The merger also greatly dilutes the quality of the upstream asset base, which has always been a key point of differentiation. However, the magnitude of the projected synergies are substantial enough that, if achieved, the deal could still be a success, even if the market turns in the opposite direction. Accordingly, this ultimately comes down to a question of whether we have faith in the $1.2-billion synergy target. In this respect, the presence of Jon McKenzie - the current CFO of CVE and former CFO of HSE - is a critical de-risking factor. His tenure with both companies should provide a firm grasp of the integration challenges and opportunities ahead. We think the operational synergies are well understood internally and lower-risk, whereas the sustaining capital savings need more definition, in our view.”
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CIBC World Markets analyst Dennis Fong initiated coverage of five TSX-listed large-cap energy companies on Monday in a research report titled The More Things Change, The More They Stay The Same.
“To say the energy industry has come under severe pressure over the past five years is an understatement," he said. "More recently, with an unprecedented global shutdown prompted by the COVID-19 pandemic and a brief OPEC+ pricing war, the current environment has tested our view of corporate resiliency under an already volatile commodity. In a world in which there is an underlying belief that we will not run out of oil, we favour companies with a combination of the lowest cost of supply (on a total cash cost and capital basis), flexibility in capital allocation, a strong balance sheet and assets that can increase the value of production. These characteristics provide resiliency for operations and the greatest potential for consistent returns. The two companies which we believe best showcase these characteristics and could outperform are SU and CNQ. We are also watching IMO as recently completed reliability projects could be a catalyst for outperformance.”
Mr. Fong gave “outperformer” ratings to the following stocks:
Suncor Energy Inc. (SU-T) with a $28 target. The average on the Street is $28.29.
“Suncor has each of our favoured characteristics: a clean balance sheet, low-decline assets with significant market access, and integration,” he said. “The company’s share price showed resilience at the beginning of the pandemic and we believe that recent underperformance represents an opportunity for investors. We believe the share price has been unfairly impacted by comparisons of the company to U.S. refiners, and we expect the company’s Canadian downstream assets to outperform going into Q3/20 results, as previous quarters were muddied by inventory revaluation and a volatile commodity price.”
Canadian Natural Resources Ltd. (CNQ-T) with a $30 target. Average: $32.17.
“Canadian Natural has exposure to every formation and region in Western Canada, providing it with significant flexibility to pursue capital allocation decisions that drive the strongest shareholder return,” he said. “We highlight the company’s track record of lowering outstanding costs and finding synergies through existing and newly acquired assets. We expect the share price could outperform as the company allocates free cash flow to corporate de-leveraging, increasing investor confidence in the corporate sustainability. We expect the company could provide a dividend increase to shareholders in early 2021 if oil prices remain steady.”
Mr. Fong gave “neutral” ratings to the following:
Imperial Oil Ltd. (IMO-T) with a $22 target. Average: $21.43.
“Imperial Oil’s (top-tier, in our view) downstream and marketing assets have generated outsized refining margins over time,” he said. “Further, we believe investors have been appropriately skeptical about the upstream assets given operational upsets and above-average costs. In our opinion, the company has alleviated many of the major concerns surrounding Kearl and is on the cusp of higher production and lower cash operating costs at the asset. In the near term we believe the company’s clean balance sheet enables continued (albeit slowed) investment in projects that can better utilize existing assets like Grand Rapids. While the company is expensive on cash flow, we regard its free cash flow valuation as being more in line, especially given balance sheet strength. The refining segment could be set for a modest tailwind given Imperial’s exposure to Mogas and upon a recovery in light vehicle traffic.”
MEG Energy Corp. (MEG-T) with a $3.25 target. Average: $4.27.
“MEG has significant torque to oil, we believe, given its exposure to the oil sands and its outstanding leverage," he said. "While we view reservoir quality to be top tier and operations to be resilient, leverage is a concern. Notwithstanding the above-average leverage, we do not have concerns about liquidity given the timing of MEG’s debt maturities. We expect it would take several years of continued strong execution and a higher oil price for investor confidence in the fundamentals to improve significantly.”
Mr. Fong gave an “underperformer” rating and US$11 target to Ovintiv Inc. (OVV-N, OVV-T). The average is US$16.19.
“We like Ovintiv for a number of reasons, one of the main ones being the portfolio of assets the company has accumulated north and south of the border, providing diversity in basins, commodity types and markets,” he said. “Further, the company has showcased an ability to continuously improve ground-level operations to drive production growth (and now cash flow generation). Despite the company’s high share price correlation to oil price and our positive bias to WTI, Ovintiv shows an expensive valuation compared to shorter-cycle Canadian Montney peers on both 2021E EV/DACF and FCF yield. We also believe that it will take time (and execution of its plan) for Ovintiv to regain investor confidence given the number of corporate-level changes the company has undergone.”
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Boralex Inc. (BLX-T) is a “standout renewable IPP with best-in-class organic growth profile,” said Industrial Alliance Securities analyst Naji Baydoun following recent investor meetings with the Kingsey Falls, Quebec-based company.
“BLX’s established footprint in France is expected to remain a key driver of near-term and long-term organic growth, and we see the potential for the company to increase its existing operating capacity by more than 65 per cent in the country via organic growth over time,” he said. “In Canada, we expect BLX’s growth to be more lumpy, but note that the Apuiat project could represent a significant catalyst for the shares. Furthermore, the company’s recent solar capacity awards in New York could pave the way for BLX to continue successfully diversifying and expanding its U.S. portfolio.”
“As some of the company’s facilities near the end of their existing contract terms, BLX will look to either (1) recontract facilities via corporate PPAs, (2) repower existing sites, or (3) operate assets on a merchant basis. We see BLX’s early success in both repowerings and corporate power purchase agreements (PPAs) in France as positive developments that could open the door for additional repowering/recontracting over time. Overall, BLX expects to maintain its highly contracted profile through 2023.”
Mr. Baydoun sees the potential for the company to increase its existing operating capacity by as much as 65 per cent through greenfield project development.
“Depending on BLX’s success at project development, we estimate that an additional 500-600 megawatts of capacity additions could translate into more than 10 per cent FCF [free cash flow] per share growth compared to our current long-term forecasts; from a valuation perspective, this could translate into $5-6 per share to valuation ($3 of which is now included in our price target,” he said. “Furthermore, we expect FCF/share growth to support sustained dividend increases over time within the company’s FCF payout target range, which could further support total shareholder returns (TSR) over time. BLX’s 2023 financial guidance remains unchanged, and we continue to see further potential upside to our current long-term estimates and to financial guidance from additional growth initiatives that could materialize in both Europe and North America.”
Keeping a “buy” rating for Boralex shares, Mr. Baydoun hiked his target to $46 from $38. The average on the Street is $40.72.
“Overall, we view BLX as the best organic growth investment vehicle in the Canadian renewable IPP space, with (1) highly contracted operations (13-year weighted average contract term), (2) strong FCF/share growth (5-8 per cent per year, CAGR 2019-24), (3) potential upside from the company’s development pipeline (more than 2.5GW of prospects), (4) potential for dividend growth (2-per-cent yield, 40-60-per-cent FCF payout target), and (5) potential upside from M&A (not included in our estimates/valuation),” the analyst said.
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TFI International Inc. (TFII-T) is “ideally positioned to unlock value with its disciplined M&A strategy,” said Desjardins Securities analyst Benoit Poirier following the release of “robust” third-quarter financial results.
On Friday, the Montreal-based transport and logistics company reported adjusted EBITDA and earnings per share of $251-million and $1.25, respectively, exceeding Mr. Poirier’s forecast of $207-million and 82 cent.
The company also raised its full-year 2020 guidance, as it “reaps the benefits of recent restructuring efforts and M&A activity” as well as stronger market conditions It now expects EPS of $4, up from a range of $3.40-$3.75 and leading Mr. Poirier to hike his projection to $3.63 from $3.07. He also increased his 2021 expectation to $3.97 from $3.39.
“In 3Q20, TFII generated free cash flow of $161-million (up 24 per cent year-over-year), well above consensus of $52-million (we expected $14-million),” he said. "TFII reported funded debt to EBITDA of 1.6 times (or 1.2 times on a net debt basis), down sequentially from 1.7 times. Moving forward, while management has enough financial flexibility to be active on the NCIB program, the preferred avenue for capital deployment remains M&A in the near term given the strong pipeline of opportunities ahead. TFII has plenty of balance sheet flexibility to continue realizing tuck-in acquisitions while potentially looking at a transformative transaction. On that front, we estimate that TFII could deploy up to C$1.3b of capital toward M&A while still maintaining a leverage ratio of 2.25 times (management’s maximum leverage target for a transformative deal; includes acquired EBITDA and assumes an EV/EBITDA multiple paid of 6.0x).
“We support management’s desire to maintain lower leverage given uncertainty due to the pandemic. Management reiterated that its main focus for M&A remains in (1) specialized TL [truckload] in the U.S. and Canada, (2) last mile in the U.S., and (3) LTL [less-than-truckload] in Canada and the U.S.. We like TFII’s M&A strategy as it enables the company to consolidate its market position while also creating value for shareholders (typically pays enterprise value-to-last 12-month EBITDA of 5 times while it is trading at 7 times).”
Keeping a “buy” rating for TFI shares, Mr. Poirier raised his target for its shares to $78 from $70. The average is $70.09.
“The 3Q results give us confidence that TFII has what it needs to benefit from the improving market environment. With its solid balance sheet and disciplined management team, we expect TFII to seize more accretive M&A opportunities to unlock value for shareholders,” he said.
Elsewhere, Cowen and Company analyst Jason Seidl raised his target to $53 from $48 with an “outperformer” rating, while Credit Suisse’s Allison Landry raised her target to US$63 from US$56 with an “outperform” rating.
Laurentian Bank Securities' Mona Nazir raised her target to $75 from $66 with a “buy” rating.
Ms. Nazir said: “We are pleased with TFII’s quarterly financial performance, once again. Despite a challenging backdrop as a result of COVID and macro headwinds that curtailed topline growth, TFII illustrated success by focusing on operational efficiencies augmented by continued end market consolidation. Going forward, we believe the company is well positioned due to strong FCF generation ($600-million in 2020 alone), significant balance sheet dry-powder and focus on generating operational excellence (continued reduction in OR; operating ratio).”
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National Bank Financial analysts Matt Kornack and Tal Woolley adjusted their target prices for a group of TSX-listed real estate investment trusts on Monday.
Their increases included:
- CT REIT (CRT.UN-T, “outperform”) to $17 from $15.50. The average is $15.43.
- Crombie REIT (CRR.UN-T) to $15.50 from $14.50. Average: $14.75.
- Automotive Properties REIT (APR.UN-T, “outperform”) to $11.50 from $11. Average: $10.89.
- Dream Industrial REIT (DIR.UN-T, “outperform”) to $13 from $12. Average: $12.53.
- Summit Industrial Income REIT (SMU.UN-T, “outperform”) to $14.50 from $13.25. Average: $13.19.
- Tricon Residential Inc. (TCN-T, “outperform”) to $14 from $11. Average: $12.61.
They lowered the following:
- Allied Properties REIT (AP.UN-T, “outperform”) to $48 from $54. Average: $49.95.
- Dream Office REIT (D.UN-T, “outperform”) to $22 from $24. Average: $25.78.
- H&R REIT (HR.UN-T, “outperform”) to $14 from $15. Average: $14.50.
- InterRent REIT (IIP.UN-T, “outperform”) to $15 from $15.75. Average: $16.10.
- Minto Apartment REIT (MI.UN-T, “sector perform”) to $21 from $22.50. Average: $23.50.
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Citing its “healthy fundamentals and significant opportunity for external growth,” Canaccord Genuity analyst Mark Rothschild initiated coverage of Flagship Communities Real Estate Investment Trust (MHC.U-T) with a “buy” rating.
“Flagship Communities REIT (Flagship) presents Canadian investors with a unique opportunity to gain exposure to the U.S. manufactured housing market, which is benefitting from solid fundamentals that should support steadily growing cash flows for the foreseeable future,” he said. "In addition, Flagship has an opportunity to consolidate MHCs in its target markets on a highly accretive basis. The REIT currently owns 8,255 MHC lots and 593 rental homes across seven markets, with its greatest concentration in Louisville, Kentucky (40 per cent of NOI), Cincinnati, Ohio (33 per cent) and Evansville, Indiana (17 per cent). Flagship completed its IPO on October 7, 2020, raising $108-million at $15.00 per unit, including the exercise of the over-allotment option.
Mr. Rothschild said his long-term investment thesis is based on three factors: “strong” market fundamentals that should bring “healthy” internal growth; a fragmented manufactured housing market providing “numerous accretive acquisition opportunities” and an experienced and aligned internal management team.
“Canaccord Genuity believes that MHCs are an attractive asset class due to a number of factors, including: very modest capital expenditures, a sticky tenant base (as residents are primarily homeowners), regulatory supply constraints, and low bad debt expense,” he said. “In addition, the COVID-19 pandemic has led to greater demand for homes with more space and separate entrances, which are advantages for MHCs as compared to smaller rental apartments.”
He set a target of US$17.25 per unit.
“Our target price of $17.25 equates to an approximate 5-per-cent premium to our NAV estimate or 22.7 times 2021 AFFO per unit,” said Mr. Rothschild. "We believe Flagship should trade at a slightly lower multiple relative to peers given its smaller size, higher leverage, and quality of properties. However, as Flagship grows and reduces leverage, its multiple should expand. Flagship’s annual distribution of $0.51 per unit equates to 67 per cent of our 2021 AFFO per unit estimate. At the current unit price, the yield is 3.4 per cent. With a forecast total return of 18.2 per cent, we are initiating coverage with a BUY rating.
Elsewhere, BMO Nesbitt Burns initiated coverage with an “outperform” rating and US$17.25 target.
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Desjardins Securities' Gary Ho expects Founders Advantage Capital Corp. (FCF-X) to report “robust” third-quarter financial results, led by a “solid” performance from Dominion Lending Centres due to strong housing market activity.
The analyst is projecting consolidated earnings before interest, taxes, depreciation and amortization of $12.2-million, up from $10.8-million during the same period a year ago.
“3Q is typically DLC’s seasonally strongest quarter and this year Club16′s annual equipment refresh fee falls into 3Q (due to COVID-19), benefiting results,” he said. “Focusing on DLC, national home sales activity (non-seasonally adjusted) rose 36 per cent year-over-year in 3Q, according to the CREA. This should benefit DLC’s funded mortgage volumes and continue its 19-per-cent 1H20 growth momentum. We raised our 2021 estimates to incorporate the recent franchise agreement with Premiere Mortgage Centre, representing $2.2-billion in funded mortgage volumes (5-per-cent growth).”
After revising his valuation to account for the expected approval of a corporate reorganization, Mr. Ho increased his target for Founders Advantage shares to $2.50 from $1.75, maintaining a “buy” rating. The average on the Street is $2.75.
“Our positive thesis is predicated on: (1) a rebound in housing activity, which bodes well for DLC in 2H20 (jewel within the FCF group of companies); reorg to purely focus on the DLC business supports a valuation re-rate over the near to medium term; (2) reflagging efforts to add new brokers (eg Premiere franchise agreement) could bolster DLC growth in 2021; (3) it is a potential fintech play with Velocity, to which we ascribe zero value; and (4) the monetization of non-core assets Club16 and Impact could reduce leverage.,” he said.
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Seeing its current valuation as “very attractive,” Mackie Research analyst Yue Ma initiated coverage of CB2 Insights Inc. (CBII-CN), a Toronto-based healthcare services and technology company, with a “speculative buy” rating.
“CB2 has a solid existing base of over 110,000 patients – most of them are expected to be registered under the membership-based model going forward, which charges $150 per year per patient on average,” the analyst said. " Some of those patients should be Medicaid or Medicare eligible in the following years, which would be switched to the FFS [fee-for-services] model that charges at least $500 per year per patient – we believe those patient switches should improve CB2′s revenue generation from its existing patient base. Over 33M Americans are estimated to have no medical insurance – which represents an enormous market for CB2 as its membership-based model provides access to affordable primary and urgent care. For any new patient that is outside CB2′s existing patient base, the membership-based model charges $199/year. Additionally, we expect CB2 to diversity its offerings to include additional sub-specialties and complementary services to patients, as well as, to branch out its business into other states."
Mr. Ma thinks CB2 is likely to remain to acquire primary and urgent care clinics, noting the U.S. market is " highly fragmented with many good opportunities, most of which are profitable but do not offer telemedicine."
“CB2′s clinic business should be high-margin as the current telemedicine platform is sufficient to support patient expansions and as the company pays wages to its doctors rather than splitting revenues with them (most Canadian clinics pay 60-70 per cent of their revenues to doctors)," he said. "CB2 achieved its first EBITDA-positive quarter in Q2 2020. We expect the company to turn cash flow positive by mid 2021.”
Currently the lone analyst covering the stock, Mr. Ma set a target price of $1.10 per share.
“CBII has been trading up recently," he said. “We believe the company is still undervalued compared to its peer companies in the primary care/telemedicine sector. Based on our financial estimates, the stock is currently trading at a 5.9 times 2020 EV/Sales ratio (vs. 19.4 times for the sector) and a 4.0 times 2021 EV/sales ratio (vs. 11.9 times). We view CB2 as an attractive telemedicine play which growth investors should own.”
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Canaccord Genuity analyst Tania Gonsalves initiated coverage of CareRX Corp. (CRRX-T) with a “buy” rating and a $6 target. The average is now $7.75.
“Following the acquisition of Remedy’sRx in May 2020, CareRx emerged as the #1 provider of specialty pharmacy services to seniors in Canada," she said. "Specialty pharmacies have high-volume dispensing capabilities in order to service institutions. CareRx serves 50,000 residents in over 900 senior living facilities and generates annual runrate revenue of $185.0-million. This represents a 12-per-cent share of the estimated 425,000 beds in Canada and 13-per-cent share of the $1.4-billion market. Management believes the current infrastructure can support a 50-per-cent increase in beds serviced without a material increase in fixed costs. We estimate this would add up to $100.0-million in revenue, $25.0-million in EBITDA, and provide for EBITDA margin expansion from sub-10% today to 14-per-cent at scale. We have confidence that this is achievable based on an attractive runway of organic and acquisitive growth.”
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In other analyst actions:
* TD Securities analyst Brian Morrison upgraded Martinrea International Inc. (MRE-T) to “buy” from “hold” with a $15 target, up from $14. The average on the Street is $15.21.
Mr. Morrison increased his target for Magna International Inc. (MGA-N/MG-T, “buy”) to US$64 from US$58 and Linamar Corp. (LNR-T, “buy”) to $56 from $55. The average on the Street are US$61.11 and $48.83, respectively.
* CIBC World Markets analyst Scott Fromson raised Neo Performance Materials Inc. (NEO-T) to “outperformer” from “neutral” with a target of $14.50, up from $10.50. The average is $12.42.
“We expect Q3/20 to be another challenging quarter for NEO, reflecting the impact of COVID-19,” he said. We are more interested in NEO’s long-term growth prospects: the stock rally (in conjunction with the upward market trend) reflects diminished concerns over China growth and automotive recovery, the largest factors to which NEO is leveraged. We believe these positive developments will drive faster recovery in the sales of NEO’s rare earths and related manufactured products; thus, we are raising our estimates."
* Seeing it as “undervalued," CIBC’s Kevin Chiang increased his target for Chorus Aviation Inc. (CHR-T, “outperformer”) to $5 from $4.25. The average is $4.66.
“CHR received a preliminary, non-binding acquisition proposal on Oct. 23 which caused its share price to surge 34 per cent,” he said. “Running a DCF across CHR’s two main segments gets us a value of $6-$7 per share, suggesting there is still significant upside to CHR’s share price. We have argued that the market was taking too punitive a view on the counterparty risk facing CHR, resulting in a significant dislocation in the company’s market value versus what we saw as its intrinsic value.”
* CIBC’s Hamir Patel hiked his target for Cascades Inc. (CAS-T, “outperformer”) to $22 from $21. The average is $18.83.
* Scotia Capital initiated coverage of Nuvei Corp. (NVEI-T) with a “sector outperform” rating and $68 target. The average is currently $51.16.
* JP Morgan analyst Phil Cusick moved his target for Rogers Communications Inc. (RCI.B-T, “underweight”) to $63 from $61. The average is $66.36.
* National Bank Financial analyst Vishal Shreedhar increased his target for Sleep Country Canada Holdings Inc. (ZZZ-T, “sector perform”) to $27 from $23. The average is $23.86.
David Leeder