Inside the Market’s roundup of some of today’s key analyst actions
With Brookfield Property Partners L.P.'s (BPY-Q, BPY.UN-T) unit price rallying “much more strongly” from 52-week lows than its peers, RBC Dominion Securities analyst Neil Downey reacted by downgraded its stock to “sector perform” from “outperform” on Monday, seeing its implied cap rate “well below” many peers and citing its relative risk-return expectations.
“We see Brookfield Property Partners units as a levered ‘play’ on the return to greater normalcy," he said. "And on a sequential quarterly basis, it seems the daily routines of work and leisure for many around the world are returning to a more normal pace – but we remain concerned there may still be setbacks in coming months. The majority (by value) of BPY’s Core Office and Core Retail properties are high quality, but both asset classes face greater than usual challenges in the near-term.”
On Friday before the bell, Brookfield reported third-quarter funds from operations per unit of 18 US cents, down from 34 US cents a year ago and below Mr. Downey’s 23 US cent estimate. That led him to lowered his 2020 FFO per unit estimate by 10 per cent to 95 US cents from US$1.06, pointing to core retail challenges and higher-than-anticipated corporate costs.
Mr. Downey maintained a US$17 target for Brookfield Property units. The average is US$15.04.
“In recent months, BPY’s units have outperformed key peers on a 52-week high/low basis; valuation also appears to reflect this," he said. "BPY’s unit price as now doubled from its March-April 2020 lows and it is 30 per cent below its 52-week high. By comparison, the average stats for the key peers registers up only 26 per cent from the lows and still down by 55 per cent from the 52-week highs. BPY’s units currently trade at an implied cap rate of 5.3 per cent, with the peer average up 210 basis points, at 7.4 per cent. BPY’s leverage currently measures 16 times EBITDA, with the peers averaging 10 times. BPY’s units trade at 12 times 2021 estimated FFO, while the peers average 9 times.”
Elsewhere, Canaccord Genuity’s Mark Rothschild raised his target to US$12 from US$11 with a “hold” rating.
Mr. Rothschild said: “Brookfield Property Partners (BPY) Q3/20 results were negatively impacted by a number of factors, largely related to the pandemic. In particular, performance from the mall portfolio was notably soft. However, notwithstanding the weak financial performance, management remains extremely bullish that the long-term outlook for BPY is healthy and does not appear to be considering any adjustment to the distribution. More significantly, Brookfield Asset Management has been active in purchasing units of BPY, which is, in our view, the largest driver of the recent rally in the unit price. To the extent this continues, the unit price could continue to rise.”
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After its third-quarter financial results blew past expectations on the Street, a pair of equity analyst made opposing moves on Magna International Inc. (MGA-N, MG-T) shares on Monday.
BMO Nesbitt Burns analyst Peter Sklar raised his rating to “outperform” from “market perform” and hiked his target to US$70 from US$50. The average target on the Street is US$65.79.
“We are now valuing Magna based on our 2022 projections, which will essentially be the forward estimate one year from now,” he said.
“Historically, Magna has been valued within 4 times to 6 times EV/EBITDA. Based on our projected balance sheet at the end of 2022 and our 2022 EBITDA estimate, Magna is currently valued at 4 times EV/EBITDA.”
Conversely, Morgan Stanley analyst Adam Jonas lowered to “underweight” from “equal weight” with a US$45 target, up from US$36. The average target on the Street is US$65.79.
On Friday, the Vaughan, Ontario-based auto parts manufacturer reported adjusted earnings per share of US$1.95, easily exceeding the Street’s US$1.39 expectation. The results were bolstered by costs saving initiatives and wage subsidy programs.
Meanwhile, RBC Dominion Securities analyst Steve Arthur said Magna finds it “well-positioned for the quarters and years ahead.”
Keeping an “outperform” rating for Magna shares, he raised his target for US$70 from US$65.
“After successfully navigating Q2 COVID shutdowns and production restarts, in Q3 Magna delivered strong earnings leverage as auto volumes recovered,” said Mr. Arthur. "Importantly, many of the cost actions implemented in Q2 should have permanent impact, supportive of longer-term margins. We doubt the ‘road ahead’ will be linear (COVID, macro pressures could mount in the coming months/quarters), but in the near term Magna has the Balance Sheet and demonstrated execution capability to outperform. Over the mid-to-longer term, we see a number of earnings growth drivers to sustain double-digit earnings CAGR and share price returns.
“MGA shares have performed well, yet still trade at an unwarranted discount in our view. On our revised forecast, MGA trades at 5.2 times 2021 estimated EBITDA vs. the supplier group averaging 5.6 times. As Magna’s performance and technology capabilities (EV platforms, Steyr engineering and assembly, ADAS systems, etc.) are recognized, we expect that valuation gap to narrow. In our view, MGA should trade at least in line with the group, and would even argue that a modest premium is warranted.”
Other analysts making target price changes included:
* JP Morgan analyst Ryan Brinkman to US$73 from US$69 with an “overweight” rating
CIBC World Markets' Kevin Chiang moved his target to US$68 from US$59.
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In a research note titled A vitamin a day keeps the sellers away, Canaccord Genuity analyst Tania Gonsalves upgraded Jamieson Wellness Inc. (JWEL-T) to “buy” from “hold” following last week’s release of “impressive” third-quarter financial results, emphasizing “sustained” outperformance has turned her more “constructive.”
“When we initiated coverage at the end of last year, we were skeptical of JWEL’s ability to replicate its success in Canada, internationally,” she said. “It has now consistently beat expectations for the past eight consecutive quarters and, due to the pandemicrelated shift to healthier living, has accelerated organic growth both domestically and internationally. For instance, 2020 guidance has branded domestic and international revenue growing 12-14 per cent and 50 per cent year-over-year, respectively, versus 7 per cent and 25 per cent year-over-year in 2019. The runway and return on organic growth continue to surpass that provided by M&A, especially given the increase in acquisition multiples. We’ve witnessed this with JWEL too, whose forward EV/EBITDA multiple has expanded from 15.0 times historically to now 19.0 times.”
In reaction to the quarterly results and noting “performance has been so strong management opted to increase 2020 guidance for a second quarter in a row,” Ms. Gonsalves raised her 2020 revenue estimate by 2 per cent to $397.7-million and adjusted EBITDA estimate by 1 per cent to $87.0-million.
“Earlier in the pandemic, JWEL experienced some capacity constraints caused by the sudden jump in demand and exacerbated by physical distancing requirements,” she said. “In response, it decided to pull CAPEX budgeted for 2021 into 2020 in order to accelerate capacity expansion. For instance, it will be transitioning certain functions to a third-party logistics provider in order to free up space in its Twin Oaks and Scarborough distribution facilities. We view this as a wise decision considering demand is likely to stay high for longer than initially expected. With COVID-19 vaccine timelines continuing to be pushed out, we are now of the belief that this environment will persist at least through to next summer. The longer new customers are taking JWEL’s VMS [vitamin, mineral and supplement] products, the higher the likelihood they will remain on them in a post-COVID era. We’re opting to modestly increase our 2021 sales forecast and EBITDA margin given the expectation of sustained demand, higher production capacity and some modest operating leverage.”
Ms. Gonsalves raised her target to $48 from $35.75. The average on the Street is $44.31.
Elsewhere, keeping an “outperformer” rating, CIBC World Markets' Matt Bank increased his target to $46 from $42.
“Jamieson’s progress this year builds a foundation on which sustainable future growth can compound,” said Mr. Bank. “In Canada, the brand is gaining momentum (and market share), and customers are deepening consumption habits and entering adjacent categories. Internationally, Jamieson is demonstrating similar leadership in numerous geographies, and progressing in the large Chinese market. The company is investing in inventory and capacity to support demand, and we see continued growth potential with limited risk of backtracking.”
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Though its first-quarter 2021 results exceeded expectations, Open Text Corp. (OTEX-Q, OTEX-T) continues to face challenges, according to Citi analyst Daniel Jester.
Late Thursday, the Waterloo, Ontario-based firm reported revenue of US$804-million, up 15.4 per cent year-over-year and “easily” exceeding the projections of both the analyst (US$754-million) and the Street (US$757-million). That led to an EBITDA beat of US$342-million (versus Mr. Jester’s US$275-million forecast).
“In contrast to the cautious tone from the company earlier in the year, OTEX reported improved conditions across the portfolio, including in content services, digital experience, cyber resiliency/Carbonite, and even in parts of the business network outside of the most impacted industries like leisure and hospitality,” said Mr. Jester. “At the company’s recent user conference and in our follow up conversations, we noted a more assertive posture around the go-to-market and messaging to clients about OTEX vs. competitors, which we think could eventually help drive improved organic growth in a normalizing economy. The new buyback program is positive, as we do not see balance sheet capacity as a limiting factor should inorganic opportunities arise. 2Q should still see some macro-related pressure, although the guide for flat revenue seems conservative. Tactically, software valuations are still growth driven today which limits the chances of near-term multiple expansion which keeps us on the sidelines.”
Though he raised his full-year 2021 earnings per share projection to US$3.11 from US$2.89 based on the results and buyback, Mr. Jester trimmed his target for Open Text shares to US$46 from US$47, keeping a “neutral” rating. The average target is US$52.18.
“We update our model to reflect the better than expected first quarter and update the cadence of growth for the year to reflect ongoing demand uncertainty which will keep revenue similar quarter-over-quarter,” he said. “In addition, we lift cloud growth slightly to reflect the current improvements, but license recovery may take a bit longer.”
“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. 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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RBC Dominion Securities analyst Robert Kwan found Enbridge Inc. (ENB-T) messages about its capital allocation plans delivered with its third-quarter financial result, including the defence of its current dividend, as “solid.”
However, he expects the market to take a “wait and see approach” to potential buybacks.
“Enbridge addressed key concerns in the market being transformational M&A, which it called a ‘low priority’, and the sustainability of the dividend, which it described as central to its investment proposition,” he said. “As it relates to share buybacks, management noted they have moved up the preference order. However, with committed growth projects, we believe the market will be looking to see whether Enbridge takes action. We believe that share buybacks can provide multiple benefits.”
Mr. Kwan emphasized the potential for multiple benefits stemming from buybacks, noting: “While most pipeline/midstream companies view their shares as undervalued, we believe that the market is taking a 'wait and see” approach for midstream stocks in general given the lack of historical buyback activity. Further, we were intrigued by Enbridge’s willingness to explore asset sales as a way to source capital for buybacks, and we believe an added benefit of full or partial asset monetizations is that they would help accelerate the energy transition (by reducing exposure to hydrocarbon infrastructure)."
After trimming his 2021 financial estimates largely in anticipation of the pushback of the start-up of the L3R pipeline project, he lowered his target for Enbridge shares to $52 from $58 to reflect market weakness and a similar valuation to its peers. The average is $51.28.
Mr. Kwan maintained an “outperform” rating.
Elsewhere, Industrial Alliance Securities' Elias Foscolos lowered his target to $48 from $50 with a “strong buy” rating (unchanged).
“For Q3, ENB posted adjusted EBITDA of $2.99B which essentially matched our estimate and consensus,” he said. “The Company also tightened its 2020 DCF guidance to $4.65±0.15/share for 2020. Oil throughput volumes are recovering, and ENB’s Line 3 expansion continues to progress through regulatory proceduresin the U.S., and the Company’s dividend remains safe with a strong likelihood that it will be increased next year. Despite all this positive news, the market has reacted by pushing ENB to near panic (or pandemic) low prices.”
National Bank’s Patrick Kenny trimmed his target to $55 from $56 with an “outperform” rating.
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Several equity analysts on the Street raised their targets for shares of Hydro One Ltd. (H-T) in the wake of Friday’s release of better-than-anticipated quarterly results.
Laurentian Bank Securities Nauman Satti moved his target to $28 from $27 with a “hold” rating. The average is $30.41.
“Favorable weather trends witnessed in the second quarter, continued into Q3 and ultimately drove the 18 per cent year-over-year growth," said Mr. Satti. "While we are encouraged by Hydro One’s year-to-date performance we do highlight that it has been largely related to uncontrollable factors. With results management took the opportunity to reiterate 2022 guidance targets, inclusive of 4-7-per-cent EPS CAGR [earnings per share compound annual growth rate]. Net/net we believe that recent stock price appreciation has been correlated to a number of “wins”, including: 1) favorable OEB DTA decision ruling, 2) the Provincial government role as a partner vs. critique, and 3) a defensive business model in spite of the COVID-19 backdrop. We reiterate our Hold rating which is driven solely by Hydro’s premium valuation and lack of meaningful M&A (lower ROE/ equity thickness vs. U.S. peers).”
Others making changes included:
* Scotia Capital’s Robert Hope to $31 from $29 with a “sector perform” rating.
“Hydro One’s quarter was well ahead of our estimate and consensus, largely on the back of a better-than-expected weather impact and continued cost containment,” said Mr. Hope. “Our 2020 estimates increase to reflect the strong quarter and our go-forward estimates move up slightly to reflect the capture of some additional cost and financing synergies. We increase our 2022 target PE multiple for Hydro One to 19.5 times from 19.0 times to reflect a de-risking of its growth outlook. This is in line with Emera’s target multiple of 19.5 times and slightly below Fortis' of 20.0 times. Factors supporting a higher valuation for Hydro One would be limited regulatory risk as its rates are locked in for a few years, a strong balance sheet and funding outlook, and increasing visibility on its growth outlook. A tailwind would be some political risk associated with only operating in a single jurisdiction.”
* National Bank’s Patrick Kenny to $31 from $29 with a “sector perform” rating
* CIBC’s Mark Jarvi to $32 from $31 with a “sector perform” rating
“While favourable loads/consumption due to favourable weather and WFH that boosted Q3 results might fade, Hydro One is delivering against its strategic priorities, including cost control/savings, which have positively impacted earnings," he said. "The balance sheet remains in great shape and H has capacity for more LDC consolidation to complement its steady organic growth. We still believe H offers a good combination of defensive attributes and solid total return potential.”
* RBC’s Robert Kwan to $32 from $41 with a “sector perform” recommendation.
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Believing its acquisition from Shandong Gold Miniing “appears to be in jeopardy,” Laurentian Bank Securities analyst Barry Allan cut TMAC Resources Inc. (TMR-T) to “sell” from “under review,” seeing a “very high” risk to shareholders.
“In October the Canadian government announced the Shandong Gold transaction is to be subject to a national security review under the Investment Canada Act,” he said. “Given heightened political tensions between Canada and China, and sensitivities of Canada’s high north, we feel there is a very high probability either the transaction is rejected or a formal decision is not received before February 8, 2021 – a sunset date for the take-over offer. If the deal is terminated, outstanding debt is due and payable, potentially forcing TMR into bankruptcy and/or triggering a messy refinancing.”
“Management acknowledge that they are investigating alternative scenarios in the event the Shandong transaction is terminated, which may include a deferral or refinancing of debt, and could potentially involve a new bidder. We believe the Hope Bay mine is an attractive asset, but we do not foresee a reasonable near-term scenario that is good for shareholders – even at the current distressed price. As a result, we are reducing the recommendation.”
Mr. Allan did not specify a target for TMAC shares.
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In other analyst actions:
* National Bank Financial analyst Adam Shine upgraded Telus Corp. (T-T) to “outperform” from “sector perform” with a $27 target, rising from $25. The average on the Street is $26.07.
* Citing its current valuation, BMO Nesbitt Burns analyst Ryan Thompson lowered MAG Silver Corp. (MAG-T) to “market perform” from “outperform” with a $26 target, up from $23 but below the $27.37 average.
“While we continue to think Juanicipio is a world-class silver asset, the premium valuation leads us to believe the risk/reward is more balanced at current share price levels, and a Market Perform rating is more appropriate,” he said.
* National Bank Financial analyst Rupert Merer initiated coverage of Xebec Adsorption Inc. (XBC-X) with an “outperform” rating and $6.50 target, exceeding the $5.86 average.
* Berenberg analyst Richard Hatch initiated coverage of Wheaton Precious Metals Corp. (WPM-N, WPM-T) with a “buy” rating and US$56 target. The average is US$60.67.
* After hiking his financial expectations following “another” quarterly earnings beat, Canaccord Genuity analyst Yuri Lynk hiked his target for Toromont Industries Ltd. (TIH-T) to $96 from $82, keeping a “buy” rating. TD Securities' Cherilyn Radbourne increased her target to $95 from $78 with a “hold” rating. The average is $87.86.
“We continue to see long-term upside potential as there remain efficiencies to be realized with QM including rental and fully leveraging a common ERP,” Mr. Lynk said. “Furthermore, the demand outlook for construction, mining, and power equipment, parts, and service is robust, and we note Caterpillar’s leading market share. In the near term, we believe Toromont is well positioned to book a large equipment and support package for the Cote gold mine, which could represent upside to our 2021 and 2022 estimates.”
* National Bank’s Patrick Kenny also trimmed his target for Pembina Pipeline Corp. (PPL-T) to $35 from $39. The average is $38.59.
* JP Morgan’s Stephanie Yee raised her target for GFL Environmental Inc. (GFL-N, GLF-T) to US$27 from US$24 with an “overweight” recommendation. The average is US$22.92.
* CIBC’s Matt Bank raised his target for AutoCanada Inc. (ACQ-T) to $22 from $16 with a “neutral” rating. The average is $22.28.
“We are increasing our Q3 EBITDA to $37.3-million (from $32.2-million) and EPS to $0.46 (from $0.33),” he said." This reflects a catch-up on lost spring sales and better margins due to tight inventories and excess demand. While we expect a strong Q3, our remaining forecasts are only modestly changed, though our price target increases ... on a higher multiple. With this new price target below the share price today, but with upside should the Q3 momentum continue, we maintain our Neutral rating."
* After a “monster” third-quarter earnings beat, Raymond James analyst Steve Hansen raised his target for CanWel Building Materials Group Ltd. (CWX-T) to $8.50 from $7.50 with an “outperform” rating, while National Bank’s Zachary Evershed raised his target to $8 from $7.50 also with an “outperform” rating. The average is $7.76.
* Scotia Capital analyst George Doumet raised is target for Recipe Unlimited Corp. (RECP-T) to $18.50 from $16.50 with a “sector outperform” rating, while CIBC World Markets' John Zamparo increased his target by a loonie to $15 with a “neutral” rating. The average is $14.63.
“While there was a significant (and unexpected) amount of government aid in the quarter, we were encouraged to see a healthy recovery in system sales and continued momentum in off-premise and retail sales," said Mr. Doumet. "Looking ahead, we expect the recovery in restaurant traffic to be lumpy in the face of mandated closures. While we acknowledge that there’s near-term uncertainty in the shares, we are of the view that valuation is just too punitive (at 7 times 2021 EBITDA), especially in the context of what we expect to be a general 12-18 month earnings recovery.”
* Mr. Zamparo also raised his target for Premium Brands Holdings Corp. (PBH-T) to $103 from $100 with a “neutral” rating. The average is $114.
“PBH’s nimbleness throughout the pandemic has been commendable," he said. "Whereas Q2 featured a holding position to help cover fixed costs and protect EBITDA, Q3 revealed a resurgence in organic volume growth (OVG) without sacrificing margins. It’s quarters like these that support the premium valuation that PBH gets from investors. We believe the stock is fairly valued, though ongoing performance like this could support a re-rating.”
* Scotia Capital’s Michael Doumet raised his target for Ritchie Bros Auctioneers Inc. (RBA-N, RBA-T) to $80 from $62 with a “sector outperform” rating, while Raymond James' Bryan Fast hiked his target to $75 from $53 with a “market perform” rating. The average is US$68.43.
“Ritchie shares have been a clear beneficiary of the global pandemic, with the stock up 150 per cent from March 2020 lows (vs. the TSX up 45 per cent) and up 76 per cent year-to-date (vs. the TSX down 5 per cent),” said Mr. Fast. “Heading into the COVID-19 outbreak we highlighted the resilience of Ritchie’s business model, its strong cash flow characteristics, and its ability to thrive off major economic disruptions. However, what we underestimated at the time was the business' massive operating leverage under the “online-only” model and the seemingly infinite multiple that investors are willing to pay for the related earnings growth ... . While we expect Ritchie to continue thriving in the current environment we maintain that much of this upside is already baked into the current valuation. With the company hosting an Investor Day next month, we look for further clarity on what the ‘new normal’ could entail.”
* Scotia’s Konark Gupta raised his target for Westshore Terminals Corp. (WTE-T) to $21 from $20.50 with a “sector outperform” rating. The average is $19.20.
“We are slightly raising our target ... on an improved loading rate guidance and further reduction in the share count,” he said. “We maintain our post-2020 volume outlook at this time, reflecting the revised Teck contract, effective April 2021. The stock has pulled back by another 12 per cent since Aug. 26 (closing), the day it already lost 11 per cent on the Teck contract news (total 22-per-cent decline since Aug. 25). Although throughput is set to decline materially in 2021, we believe the stock is not reflecting WTE’s cost reduction efforts, which have started to appear and should ramp up as labour negotiations potentially conclude in 2021. Thus, we think WTE is significantly undervalued at 6.8 times our 2022E EBITDA (6.1 times our 2021 estimates), which is below -1 standard deviation.”
* Canaccord Genuity Brendon Abrams raised his target for Chartwell Retirement Residences (CSH.UN-T) to $11 from $10.50 with a “hold” rating, while National Bank’s Tal Woolley increased his target to $13.50 from $12 with an “outperform” recommendation.
“Looking forward, we expect operating fundamentals for Chartwell to remain challenging given the increases in COVID-19 case numbers heading into the winter months and potential for further government restrictions,” said Mr. Abrams. “More positively, it does appear as though the worst of the impacts from COVID-19 has already been felt, and there should be a gradual recovery in industry fundamentals over the medium term. We stress the word ‘gradual’.”
* Echelon Capital Markets analyst Amr Ezzat retained a “buy” rating and $15 target for mdf commerce inc. (MDF-T) after coming coming off research restriction following its $47.8-million bought deal offering. The average target is $12.10.
“The financing bolsters MDF’s balance sheet and provides flexibility to execute on its M&A plan,” he said. “We believe the Company’s scope of potential acquisitions extends from technology-focused to client-focused tuck-ins with the goal of consolidating a stronger foothold in its Strategic Sourcing vertical. To that end, the Company announced last week the acquisition of U.S.-based Vendor Registry (‘VR’), a provider of strategic sourcing solutions, for US$5.25-million. The acquisition, while modest in terms of sales, significantly enhances the Company’s geographic footprint in the U.S. and expands its offering. The shares currently trade at what we consider a significant (and unjustified) discount to comparable companies. While our target price looks ‘offside’ relative to the Street, we feel there is upside above and beyond our valuation should the Company continue to execute.”
* Following in-line quarterly results, Desjardins Securities analyst Michael Markidis lowered his target for Dream Office Real Estate Investment Trust (D.UN-T) to $23 from $25 with a “buy” rating. The average is $24.47.
“The modest increase to our FFO outlook reflects recent NCIB activity and higher financial leverage; our spot NAV is virtually unchanged,” he said. “Concerns with respect to the impact of work from home and increased supply will likely keep this stock range-bound in the short term. That said, we believe the long-term risk/reward profile is favourable.”
Elsewhere, CIBC’s Chris Couprie cut his target to $26.50 from $28.75 with a “neutral” rating, while BMO’s Jenny Ma trimmed her target to $24 from $25.50 with an “outperform” recommendation.
* Raymond James analyst Rahul Sarugaser initiated coverage of Perimeter Medical Imaging AI Inc. (PINK-X), a Toronto-based medical device company that began trading on the TSX Venture Exchange in early October, with an “outperform” rating and $3 target.
* BMO Nesbitt Burns analyst Andrew Mikitchook initiated coverage of Artemis Gold Inc. (ARTG-X) with an “outperform” rating to “reflect an expected revaluation as the company delivers development milestones on its 100%-owned Blackwater Gold Project.”
“We expect the H1 2021 DFS and permitting progress to be milestones that move the project closer to a development decision and financing arrangements in late-2021 or early-2022 should represent more substantial revaluation catalysts,” he said.
Mr. Mikitchook set a $9 target. The average is $10.17.
* After a “fruitful” quarter, Desjardins Securities analyst Frederic Tremblay increased his target for Lassonde Industries Inc. (LAS.A-T) to $210 from $190 with a “buy” rating. The average is $196.50.
“Lassonde posted another strong quarter as it continued to benefit from higher retail demand amid COVID-19, solid performance from the Sun-Rype acquisition and a favourable raw material cost environment,” he said. “The revenue and profitability outlook remains positive, cash flow generation and the balance sheet are strong, and valuation is attractive.”
David Leeder