Inside the Market’s roundup of some of today’s key analyst actions
Industrial Alliance Securities analyst Elias Foscolos raised his rating for Pembina Pipeline Corp. (PPL-T) to “buy” from “hold” in response to a 7-per-cent drop in share price last week, which he attributed to a negative reaction to the Dec. 14 release of its 2021 business release.
“With PPL announcing a modest 2021 growth program and expected impairments to come, we believe the bad news is out there and, moving forward, we believe risk is skewed to the upside,” said Mr. Foscolos.
“PPL’s underlying business fundamentals remain solid, in our view, and 2021 EBITDA guidance is in line with prior consensus forecasts. The Company has stated that performance closer to the high end of its guidance range would generate discretionary free cash flow, which would support deleveraging, share repurchases, or a dividend increase. We also believe that the current 2021 capital budget is largely a function of a lack of visibility in the current environment, and there is upside for additional projects to be sanctioned in the coming year. PPL continues to evaluate Peace Pipeline Phase VIII and IX expansions and the Prince Rupert Terminal Expansion, and expects to make final decisions in 2021.”
Mr. Foscolos maintained a $37 target price for Pembina shares. The current average on the Street is $37.77, according to Refinitiv data.
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Through a “strategic shift in strategy and an improved capital structure,” AltaGas Ltd. (ALA-T) has “positioned itself as a premier North American midstream business and U.S. utility,” according to ATb Capital Markets analyst Nate Heywood.
In a research report released Monday, he initiated coverage of the stock with an “outperform” rating.
“The utility assets offer a strategic growth program with immediate returns and rate regulated cash flows, while the Midstream space is underpinned by long-term contracts and a growth profile built around leveraging key export assets,” the analyst said. “In concert with the stable cash flow profile and attractive growth outlook, the Company boasts an attractive dividend yield at 5.4 per cent.”
Mr. Heywood said AltaGas has “undergone a material transition through asset disposals and organic growth investment” in recent years, leading to a more “refined” strategy for its two core business lines.
“Asset disposals have been primarily directed towards non-core power assets, while growth has been directed towards utility rate base, customer expansion and key midstream assets,” he said. “Moving forward, the strategy is expected to remain focused on the two core business segments, offering stability and improved market access.”
“Despite significant investments directed towards the midstream space in 2020, including the increased investment in Petrogas, AltaGas will direct the majority of its capital expenditures towards the Utilities segment in the near-term. With 2021 growth capital expected to be 82-per-cent utility focused, we would highlight that the returns related to system betterment, customer growth and accelerated pipe replacement programs, which have no material regulatory lag, providing an 8-per-cent CAGR [compound annual growth rate] to the Company’s rate base through the medium-term.”
Mr. Heywood said that shift in strategy has forced AltaGas to “right size” its balance sheet and emphasize deleveraging objectives. Through non-core asset sales and “disciplined” capital spending, he sees significant improvement.
“We remain comfortable with the relatively higher leverage levels given ALA’s utility cash flow stability and responsible capital deployment. Leverage metrics, specifically net debt to EBITDA, have improved from 10.1 times in 2018 to 5.7 times in 2019. We expect this metric to improve in 2020 as we forecast the Company to exit the year near 5.5 times. In the long term, the Company will prioritize the improvement of current leverage and targets a multiple below 5 times.”
He set a $22 target for AltaGas shares, exceeding the consensus on the Street by 7 cents.
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In a research report previewing 2021 for chemical companies in his coverage universe, CIBC World Markets analyst Jacob Bout made a pair of rating changes on Monday.
He upgraded Chemtrade Logistics Income Fund (CHE.UN-T) to “outperformer” from “neutral” with a $9 target, rising from $6. The average on the Street is $6.58.
“Though we do expect its results to be relatively soft in H1/21, we would argue that CHE.UN has high earnings torque to improving macro conditions in H2/21 and 2022,” he said. “The North Vancouver chlor-alkali facility has historically demonstrated sharp swings in profitability. With the improvement in industrial and fracking demand, we forecast EC segment 2022 EBITDA to be 40 per cent higher than 2020 levels. SPPC should also see a strong recovery from better regen demand (tied to driving trends). The 10-per-cent-plus dividend yield (despite the dividend being slashed 50 per cent this year) is attractive and we regard the dividend as safe (free cash flow payout of 55 per cent next year).”
Conversely, Mr. Bout cut Superior Plus Corp. (SPB-T) to “neutral” from “outperformer” with a $15 target, up from $14.50. The average is $13.92.
“We expect a relatively muted H1/21 for the company, followed by a recovery in H2/21 supported by normalizing Canadian industrial/commercial propane volumes, a full-year contribution from recent M&A, and improving ERCO chemical demand/pricing,” the analyst said. “We continue to like SPB’s resilient business model, accretive propane roll-up strategy, dividend yield of 6 per cent, and valuation multiple re-rate with the potential sale of ERCO. That being said, we believe the returns to our price target (which we increase slightly from $14.50 to $15.00 as we roll out 2022 estimates) do not warrant an Outperformer rating and we are downgrading to Neutral.”
He also hiked his target for Methanex Corp. (MEOH-Q, MX-T) to US$47 from US$29, maintaining a “neutral” rating. The average is US$37.62.
“Methanol prices have rallied more quickly than anticipated, with methanol prices currently well above the cost curve (due to several supply-side issues),” said Mr. Bout. “We do expect methanol prices to retreat with the ramp-up of the YCI Koch facility in late Q1/21 but rally again in late 2021 and into 2022 (as the economy and energy prices recover). Given the recent rally in the MEOH share price, we think Q2/21 may be a better entry point to buy the stock given our expectation of softness in methanol prices during that period.”
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Three of the five analysts on the Street currently covering Enghouse Systems Inc. (ENGH-T) reduced their target prices for its shares on Monday following last week’s release of its fourth-quarter and year-end financial results.
* RBC Dominion Securities’ Paul Treiber lowered his target for to $80 from $90 with an “outperform” rating. The average is $79.20.
* Scotia Capital’s Paul Steep to $71 from $74 with a “sector perform” rating.
* CIBC’s Stephanie Price to $84 from $98 with an “outperformer” rating.
“Enghouse’s FQ4 results represent a return to more normalized organic growth, after clients pulled forward demand for remote work solutions early in the pandemic,” said Ms. Price. “Moving forward, we expect low-single-digit organic growth, with Vidyo demand offsetting weakness in other areas. Our profitability forecast for F2021 is relatively unchanged, with efficiencies and the absence of M&A integration expenses leading us to increase our margin expectations by 200 basis points.”
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A “convergence of forces” are likely to benefit Microsoft Corp. (MSFT-Q) in 2021 and beyond, according to Citi analyst Walter Pritchard.
“We note that relatively slow-moving enterprise IT is likely to accelerate cloud adoption, which we expect favors Azure over its peers (Azure = IT cloud, AWS/GCP = ‘builder’ cloud),” he said. “Additionally, an increased reliance on digital prod/collab is likely to boost O365 [Office 365] premium SKU adoption, just as we are seeing units plateau (recent investor concern). We see this as especially true as customers focus in 2021 on rationalizing deployments after ‘hurry up’ adoption in 2020 (video a key area to watch).”
Seeing a “favourable numbers set up where it counts,” Mr. Pritchard upgraded Microsoft shares to “buy” from “neutral” after raising his expectations for both Office 365 and Azure.
“We see cloud consumption growth staying higher for longer while our PBP estimates are also above on O365 ARPU improvements from premium SKU adoption,” he said. “We continue to have some concern around unsustainably positive trends in the PC market, which could turn in 2HFY21 (although looks strong through 2Q/Dec) as well as tough comps on transactional server in 2Q and 3Q. While we expect this could impact reported EPS, given margin implications as we exit FY21, we expect that strength in Azure / O365 will overpower this in terms of how investors weigh the impact.”
Seeing a “better set-up” for its shares in 2021, he increased his target to US$272 from US$229. The average is US$240.26.
“2020 has been a good year for software (up 44 per cent year-to-date) and MSFT shares are up 39 per cent, slightly underperforming as investors have ‘chased’ growth,” Mr. Pritchard said. “While we don’t see MSFT necessarily up against a valuation “backstop”, we note that shares are at the lowest premium in 7 months vs. our SW benchmark on FCFF basis. Also, while MSFT is not in the top quartile of growth, we note that when we compare MSFT to these peers in software, the company’s growth has keep pace with this group vs. a year ago, while MSFT’s multiple has lagged.”
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Citing its “size, rapidly growing e-commerce platform and consumer value proposition,” RBC Dominion Securities analyst Scot Ciccarelli thinks Walmart Inc. (WMT-N) is “one of the best positioned” stocks in coverage universe “to handle the myriad of possible outcomes in 2021.”
Seeing it “well-positioned for multiple scenarios,” he raised his rating for the U.S. retail giant to “outperform” from “sector perform” on Monday, believing it provides investors with both offensive and defensive characteristics.
“As we have stated over the last few years, we have become big fans of Walmart the company, but admittedly were less constructive on the stock due to limited EBIT $ growth in the face of the stock’s continued multiple expansion,” said Mr. Ciccarelli. “What has increasingly changed, in our view, is improving profitability in the company’s core U.S. operations, as EBIT $s have increased for 6 of the last 7 quarters and, importantly, we think the company’s step-function change in e-commerce sales has permanently improved profitability from that channel. We believe WMT shares can perform well both in a more challenged environment (55 per cent of sales are grocery) as well as a vaccine recovery/reopening scenario.”
He raised his target for Walmart shares to US$170 from US$153. The average on the Street is currently US$162.38.
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Citi analyst Paul Lejuez raised his financial expectations for Nike Inc. (NKE-N) in response to a “lights out” second quarter.
“In the first Friday night earnings report of our careers, NKE kicked off the weekend with a bang. Sales beat expectations in every region led by DTC [direct-to-consumer] strength (DTC up 32 per cent vs wholesale down 2 per cent), showing the DTC focus by NKE is working (which is key to future earnings power and the investment thesis),” he said. “We still have not seen the GM improvement tied to the mix shift to DTC as GM [gross margins] was down 60 basis points (excluding 30bps of one-time cost) driven by promos needed to get inventory in very good shape (inventory down 2 per cent vs sales up 9 per cent), though promos were not as deep as management expected. The strong quarter was punctuated by a topline guidance raise, showing biz is recovering faster than plan.”
Overall, Nike reported earnings per share of 78 US cents for the quarter, exceeding the 63-US-cent projection of both Mr. Lejuez and the Street. A sales increase of 7 per cent also topped his forecast (a 1-per-cent decline).
“We estimate that wholesale overall was down 2 per cent in the quarter while DTC was up 32 per cent, driven by Ecom up 84 per cent and stores down 3 per cent,” he said. “With DTC representing 38 per cent of total sales in 2Q (vs 31 per cent last year), we estimate this should have provided over 100 basis points of GM channel mix benefit. It didn’t show up given the promos needed to get inventory clean in all channels, but with management guiding 3Q GM to be flat (including 55bps drag from FX), we believe we are at an important inflection point in the NKE GM story.”
“Management guided FY21 revs to be up low-teens vs high single digit-low double digits previously. GM is expected to be up 50 basis points (including 35 basis points fx headwind), which we believe will prove conservative. SG&A $ are expected to be up low single digits including $315-million restructuring charge ($220-million already realized in 1H).”
Based on better sales and margin expectations, Mr. Lejuez raised his 2021 and 2022 EPS projections to US$3.32 and US$4, respectively, from US$3.24 and US$3.81.
Keeping a “buy” rating for Nike shares, he increased his target to US$157 from US$137. The average is US$157.76.
“NKE is the dominant player in the global athletic footwear and apparel market, which is a healthy and growing market buoyed by structural tailwinds, including growing sports participation even in its most mature markets,” the analyst said. “NKE’s deep pockets and unrivaled innovation pipeline should help them drive high-single digit constant currency growth over the next several years and their accelerating shift toward DTC should drive strong EBIT margin expansion.”
Elsewhere, RBC Dominion Securities’ Kate Fitzimons raised her target to US$160 from US$145, keeping an “outperform” rating.
Ms. Fitzsimons said: “Trading near all-time highs, expectations were certainly high headed into Friday’s print. That said, the magnitude of the 2QF21 beat including revenues up 9 per cent (or 7 per cent CC vs. Street up 2 per cent), 24-per-cent revenue growth out of China, up 84 per cent (80 per cent CC) owned digital growth, a return to growth in North America, and clean inventories are likely to send the shares higher as investors look through a conservative 2H outlook. We remain buyers of NKE, as we view the company as a best-in-class global athletic play with multiple levers supporting topline growth and margin expansion from here.”
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TerrAscend Corp.’s (TER-CN) US$120-million debt financing “significantly derisks” its outlook at “favourable terms,” according to Echelon Capital analyst Andrew Semple.
“We view this positively since we modelled TerrAscend requiring US$135-million of new capital to meet the upcoming milestone payment owed to former Ilera shareholders,” he said. “The US$120-million debt financing fills almost all of the Company’s funding needs (per our model), and an additional US$30-million available could satisfy the remaining amount.”
“We also note the progress of an adult-use cannabis legalization bill in New Jersey, which includes much of the provisions we had hoped for. The bill fast-tracks the licensing process for medical cannabis companies, limits the number of new cultivation licenses issued in the first two years (with further licensing subject to market demand), and sets a timeline that should allow first sales to begin in H221. These provisions protect the economics of incumbent medical cannabis operators, and will allow for the development of defensible, highly profitable CPG businesses. This plays to TerrAscend’s strengths as a CPG-first operator and justifies its immediate plans to develop significant cultivation/processing capacity in the state.”
After raising his forecasts for its New Jersey operations, noting they remain “below full potential,” Mr. Semple increased his target for TerrAscend shares to $14.50 from $12, keeping a “speculative buy” rating. The average on the Street is $13.08.
“The debt financing raised and the progress on New Jersey adult-use legalization regulations have mitigated two of the largest risks to our fundamental outlook on TerrAscend,” he said. “We believe this warrants an upward revision to our terminal year FCF multiple to 27.5 times (prev. 25.0 times). This puts TerrAscend in line with the valuation multiple we assign Green Thumb Industries (GTII-CSE, Buy, $34 target), which is the highest in our coverage universe. We believe a premium valuation multiple is warranted for TerrAscend given its high proportional exposure to best-in-class state markets and capable management team. Though we still rate the shares as a ‘Speculative Buy’, we view there to be substantially less risk to our outlook than previously. We look for additional derisking to occur upon future financing developments (either equity capital or TerrAscend drawing down the optional US$30-million of senior secured debt) and final passage of New Jersey’s adult-use cannabis bill.”
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In other analyst actions:
* In reaction to the completion of its amended recapitalization plan, BMO Nesbitt Burns analyst John Gibson lowered Calfrac Well Services Ltd. (CFW-T) to “underperform” from “market perform” with a 10-cent target. The average is 32 cents.
“Overall debt levels move down by $576-million, although leverage remains concerning despite an uptick in market dynamics of late,” he said.
“Further, several billion warrants sit outstanding that are deep in the money anywhere from 2.665 cents per share to 5 cents per share, which should cause some substantial dilution over the next few years.”
* BMO’s Thanos Moschopoulos raised his target for shares of Constellation Software Inc. (CSU-T) to $1,800 from $1,700 with an “outperform” recommendation. The average is $1,807.14.
“CSU has filed the final prospectus for its spin-out of Topicus. We expect CSU to trade ex-dividend for the spin-out on Dec. 23rd, and for Topicus to start trading in late January,” he said.
“We’ve updated our preliminary valuation for Topicus based on new disclosure, and have raised our estimates and target price for CSU (on both a pre-spin and post-spin basis), reflecting a robust level of M&A in the current quarter.”
* BMO’s Ryan Thompson raised his target for Equinox Gold Corp. (EQX-T) to $22 from $21.50 with an “outperform” rating. The average is $22.60.
* CIBC s Robert Bek raised his target for Cineplex Inc. (CGX-T) to $9 from $8 with a “buy” rating. The average is $8.29.
“The Cineplex story remains highly vulnerable to the COVID spread, vaccine development (and Hollywood’s response),” said Mr. Bek. “The company continues to demonstrate strong cost control and preserve liquidity to get to the other side of the crisis. With a huge film slate backlog, we could see a potentially large bounce-back in valuation if the pandemic recedes quickly in 2021. As such, virus developments remain the largest factor for stock performance over the next 6-12 months, and the main reason for our cautious view for investors.
* CIBC’s Todd Coupland increased his target for BlackBerry Ltd. (BB-N, BB-T) to US$9 from US$8 with a “neutral” rating. The average is US$7.86.
“Blackberry reported FQ3/21 results that were in line with FactSet expectations,” he said. “Blackberry reiterated that FY21 was on track for annual revenue of $950-million with the mix in Q4 expected to shift to Patent Licensing with only a modest, sequential improvement in Software and Services revenue (due to QNX rising and Spark (UEM, UES) remaining flat). These results and outlook support only modest growth. Investors consequently have more time to evaluate the company’s new UES products and go-to market strategy. We continue to recommend investors wait for a more attractive entry point to purchase the company’s shares.”
* Canaccord Genuity analyst Robert Young raised his target for shares of Dye & Durham Ltd. (DND-T) to $50 from $40, exceeding the $42.75 average. He kept a “buy” rating.
* Echelon Capital analyst Rob Goff raised his target for kneat.com Inc. (KSI-X) to $3.30 from $3 with a “speculative buy” rating upon resuming coverage of the stock. The average is $3.13.
“Our PT finds support in the Company’s current niche focus within Global Pharma where the addressable revenues from existing client wins support internal baseline revenues of $50-million-plus,” he said. “We look for further upside with future contract wins within the Pharma vertical where additional tier I wins are expected along with the greater emergence of tier II Pharma wins. Deeper penetration into the Pharma vertical, and adjacent verticals such as cosmetics, supports upside beyond our baseline scenario.”
David Leeder