Inside the Market’s roundup of some of today’s key analyst actions
After a “solid” fourth-quarter of fiscal 2020, Brookfield Business Partners LP (BBU-N, BBU-UN-T) is ”well positioned to benefit from a gradual economic recovery,” according to RBC Dominion Securities analyst Geoffrey Kwan, who believe it has sufficient liquidity to “capitalize on new investment opportunities.”
On Friday, Brookfield reported earnings before interest, taxes, depreciation and amortization of US$423-million, exceeding Mr. Kwan’s projection of US$381-million wiht all of its business segments outperforming his estimates.
Mr. Kwan pointed to several takeaways from the earnings release, including: “(1) active M&A pipeline globally, but BBU is seeing opportunities in new sectors vs. historical. BBU thinks there is substantial growth opportunities in technology services (management is getting more comfortable on the space given their work closing the acquisition of Everise); (2) BBU opportunistically sold 10 per cent of its public equity portfolio during the quarter given strong equity markets since the market bottom. Although BBU sold/sold down stakes in certain companies, it still remains a potential acquirer if the opportunity arose at an attractive valuation; (3) BBU ended the quarter with US$2.5-billion of corporate liquidity; and (4) BBU continued its NCIB activity in Q4/20, repurchasing 881,245 units.”
Maintaining an “outperform” rating for its NYSE-listed shares, he raised his target to US$52 from US$50. The average target on the Street is US$47.14.
Others making target changes included:
* Desjardins Securities’ Gary Ho to US$47 from US$44 with a “buy” rating.
“BBU posted solid 4Q EBITDA, led by strong results from Westinghouse, Clarios and Multiplex. The potential Westinghouse monetization could be a positive catalyst in our view, with proceeds which could be recycled into other opportunities. While our EBITDA estimates are largely unchanged, the reduction in GrafTech EBITDA (due to decreased ownership) is more than offset by higher contribution from Westinghouse and Clarios,” said Mr. Ho.
* National Bank Financial analyst Jaeme Gloyn to US$50 from US$47 with an “outperform” rating.
* CIBC World Markets’ Nik Priebe to US$50 from US$45 with an “outperformer” rating.
Desjardins Securities analyst Benoit Poirier said Heroux-Devtex Inc.’s (HRX-T) “impressive” third-quarter financial results were everything he “wished for” when he raised his rating for the Longueuil, Que.-based aircraft landing gear manufacturer’s stock to a “Top Pick” designation on Nov. 15.
“Since the beginning of the pandemic, HRX has been focused on solidifying its balance sheet and cost structure to emerge stronger from the crisis,” he said. “Despite its resilient attributes, namely its greater and growing exposure to the defence sector, strong operational track record, healthy balance sheet and solid FCF generation capabilities, the stock is still trading at an unjustified discount vs peers in our view.”
On Friday, Heroux-Devtex reported revenue of $150-million, down 4 per cent year-over-year but exceeding the $139-million projection of both Mr. Poirier and the Street. Adjusted EBITDA of $23.7-million also beat expectations ($21.6-million and $20.3-million, respectively), implying a margin of 15.8 per cent (versus estimates of 15.6 per cent and 14.6 per cent).
“Impressive FCF generation enabled HRX to solidify its balance sheet further — positioning the company to seize attractive M&A opportunities in the mid-term,” said Mr. Poirier. “3Q FCF [free cash flow] of $20.4-million was well above consensus of $13.0-million. The strong FCF beat enabled HRX to reduce net debt to EBITDA to 2.0 times (from 2.3 times; we expected 2.2 times). We forecast that lower EBITDA for FY21 will be more than offset by ongoing inventory reduction and working capital management initiatives, resulting in whopping FCF of $61.3-milion, yielding an impressive 10.9 per cent.”
“Selection as part of Boeing’s Premier Bidder Program is a testament to HRX’s strong operational track record. The award was for HRX’s consistent excellence in quality, delivery and business performance over the past 12 months. We believe this new award should ideally position HRX to win new business with Boeing in new ventures such as actuations or on a new commercial program (eg NMA).”
Keeping his “Top Pick” rating, Mr. Poirier raised his target to $22 from $20. The average target on the Street is $19.17.
“HRX currently trades at 8.4 times EV/FY2 EBITDA, a discount of 7.0 times vs its U.S. peers despite its stronger balance sheet and robust FCF (FCF yield of 10.9 per cent, the highest among its U.S. peers),” he said. “We believe the market underappreciates HRX’s greater exposure to the defence segment and its solid operational reputation.”
Elsewhere, citing “a de-levered balance sheet, a stabilized cost structure, and a management team with the ability to navigate through a turbulent market,” Raymond James analyst Bryan Fast raised his rating for Heroux-Devtek to “outperform” from “market perform” and hiked his target to $17.50 from $12.50.
“Our constructive view of Heroux comes on the heels of a better-than-expected quarter (again), led by the defence segment which broke above $100-million for the first time,” said Mr. Fast. “Our prior hesitance on the name was largely driven by the monumental changes underway in the aerospace sector as a result of the pandemic. The civil sector remains under pressure; in fact, revenue passenger kilometers (RPKs) were down 66 per cent in 2020, and are not expected to return to pre-pandemic levels for three years, with a return to long-term growth several years thereafter. That being said, we cannot ignore the strength in the defence sector which was up 20 per cent year-over-year and up 15 per cent year-to-date, as the company has ramped up several new programs.”
Other analysts raising their targets included:
* Scotia Capital’s Konark Gupta to $22 from $19 with a “sector outperform” rating.
* TD Securities’ Tim James to $18 from $17 with a “buy” rating.
* National Bank’s Cameron Doerksen to $18.50 from $17.50 with an “outperform” rating.
Separately, ahead of the Feb. 24 release of its fourth-quarter results, Mr. Poirier revisited his investment thesis for WSP Global Inc. (WSP-T), raising his target price for its shares to account for its two latest strategic tuck-in acquisitions.
“While management was clear that the focus post-transaction closing will be on integration, it highlighted that M&A remains a key part of WSP’s growth ambitions. Therefore, we expect management to remain on the lookout for tuck-in acquisitions given the solid balance sheet (net debt to adjusted EBITDA of 1.3 times on a pro forma basis) historically a key driver of value creation,” he said.
Expressing confidence that WSP can unlock value from its acquisition of Golder Associates, a Mississauga-based global engineering and consulting firm, and “remaining opportunistic to seize attractive tuck-in opportunities,” Mr. Poirier moved his target to $127 from $117 with a “buy” recommendation. The average is $129.38.
“Bottom line, we maintain our bullish stance on the name as we remain confident that management will unlock value with its growth strategy,” he said.
Mr. Poirier also raised his Stantec Inc. (STN-T) target to $56 from $47 with a “buy” recommendation, exceeding the $49.86 average.
“Entering 2021, STN was our favourite E&C name given its strong exposure to the US and focus on sustainability. Despite its year-to-date share price performance, we believe the company remains well-positioned as it accelerates its M&A strategy and executes a second cost-optimization phase,” he said.
Seeing its “long-awaited” consolidation strategy taking shape, he raised his rating for Enerplus shares to “outperform” from “market perform.”
“From a financial perspective, we see attractive transaction metrics, meaningful accretion and an improved free cash flow outlook; debt metrics deteriorate somewhat, though remain inline with the peer group out the gate and should return to top-quartile in the sector by yearend,” said Mr. Cox. “Additionally, we see the transaction driving a modest improvement in decline rates, while increasing the company’s liquids mix and concentration within the Bakken - all positives, in our view. Finally, we see a strong asset fit, with a significant portion of the Bruin lands contiguous to the existing acreage with broadly similar well performance to-date. All told, an improved story and one that we see well-positioned to benefit from the recovery in oil prices. Accordingly, we are upgrading Enerplus.”
His target rose to $6.50 from $5.75, exceeding the $6.10 average.
In a research report previewing fourth-quarter earnings season for precious metals companies, CIBC World Markets analyst Anita Soni downgraded Centerra Gold Inc. (CG-T) to “neutral” from “outperformer” based on valuation.
Her target slid to $12.50 from $14.25. The average on the Street is $19.03.
Ms. Soni also made these target price changes:
- Agnico Eagle Mines Ltd. (AEM-N/AEM-T, “outperformer”) to US$107 from US$123. Average: US$92.32.
- Yamana Gold Inc. (AUY-N/YRI-T, “outperformer”) to US$9 from US$9.25. Average: US$7.42.
- B2Gold Corp. (BTG-N/BTO-T, “outperformer”) to US$6 from US$8. Average: US$7.43.
- Barrick Gold Corp. (GOLD-N/ABX-T, “outperformer”) to US$36.50 from US$47. Average: US$32.50.
- Endeavour Mining Corp. (EDV-T, “outperformer”) to $47 from $61. Average: $49.36.
- Kinross Gold Corp. (KGC-N/K-T, “outperformer”) to US$12 from US$14. Average: $12.27.
- Pretium Resources Inc. (PVG-T, “neutral”) to $16 from $19. Average: $17.76.
Analyst Cosmos Chiu made these changes:
- Alamos Gold Inc. (AGI-T, “outperformer”) to $16 from $19.25. Average: $16.44.
- Wheaton Precious Metals Corp. (WPM-N/WPM-T, “outperformer”) to US$65.50 from US$70. Average: US$60.68.
- Dundee Precious Metals Inc. (DPM-T, “outperformer”) to $12.50 from $14.25. Average: $13.89.
- Eldorado Gold Corp. (EGO-N/ELD-T, “outperformer”) to US$20 from US$16.76. Average: US$15.62.
- SSR Mining Inc. (SSRM-Q/SSRM-T, “outperformer”) to US$26.75 from US$30. Average: US$30.50.
- Endeavour Silver Corp. (EDR-T, “neutral”) to $7.25 from $7.75. Average: $6.85.
- Fortuna Silver Mines Inc. (FVI-T, “neutral”) to $11.25 from $11.50. Average: $11.01.
- Franco-Nevada Corp. (FNV-T, “outperformer”) to $230 from $251.50. Average: $210.14.
- Kirkland Lake Gold Ltd. (KL-T, “outperformer”) to $77.50 from $95.50. Average: $75.81.
- Pan American Silver Corp. (PAAS-Q/PAAS-T, “outperformer”) to US$45 from US$43. Average: US$39.42.
- Osisko Gold Royalties Ltd. (OR-T, “outperformer”) to $19.50 from $21. Average: $22.97.
- Oceanagold Corp. (OGC-T, “neutral”) to $2.85 from $2.65. Average: $3.46.
Analyst Bryce Adams made these changes:
- Torex Gold Resources Inc. (TXG-T, “neutral”) to $26.50 from $28.50. Average: $32.81.
- Golden Star Resources Ltd. (GGS-N/GSC-T, “neutral”) to US$5 from US$5.75. Average: US$7.84.
- Lundin Gold Inc. (LUG-T, “outperformer”) to $15 from $16.50. Average: $16.43.
KITS Eyecare Ltd. (KITS-T) “offers investors attractive exposure to the highly fragmented, high-margin eyecare market,” according to Canaccord Genuity analyst Derek Dley.
He initiated coverage of the Vancouver-based company, which began trading on the TSX on Jan. 19, with a “buy” recommendation, seeing it “well positioned on the precipice of what will be an acceleration of the penetration of e-commerce within the retail eyecare market.”
“The company’s unique, 100-per-cent online-only business model should allow KITS to exceed the average industry growth rate, as e-commerce eyecare penetration is set to accelerate, in our view,” said Mr. Dley. “The company is run by a seasoned management team, which together owns 74 per cent of the shares outstanding and has demonstrated prior success in the online eyecare market. We believe the current valuation of 1.3 times our 2022 estimated revenue estimate, versus peers which trade at 2.9 times, represents an attractive entry point.”
Currently the lone analyst covering the stock, he set a target of $17 per share
“We believe KITS deserves to trade at a premium to the broader eyecare retail peer set, due to the company’s higher growth rate, strong management team, and healthy balance sheet,” he said. “Furthermore, the company’s focus on e-commerce only sales should command a higher multiple than brick-and-mortar peers, in our view, particularly in the challenging brick-and-mortar COVID-19 environment.”
On Monday, RBC Dominion Securities analyst Paul Steves assumed coverage of Apple Inc. (AAPL-Q) with an “outperform” recommendation and a Street-high target price of US$171, exceeding the current average of US$136.09.
In a research report titled Pad Your Wallet First, Flashy Cars Can Come Later, Mr. Steves sees long-term opportunity with its potential car product, however he thinks its wallet initiative “appears to be a clear multi-billion dollar opportunity for the firm,” projecting the possibility of over US$40-billion in annual revenue with limited research and development commitments.
“When we look at Apple as an ecosystem player we note that the firm has industry-leading software, security and a 1.5 billion install base,” said Mr. Steves. “While an electric car could be a long-term opportunity, competing with Elon Musk and Tesla (a distributed energy company) is a higher risk proposition ($10-billion-plus in R&D cost) vs. utilizing its install base: Apple Wallet. If the firm decides to enter into the crypto exchange business (multi-billion dollar industry) we think the firm could immediately gain market share and disrupt the industry (while simultaneously making the USA a leader in crypto for the next 10-20 years). To put some numbers around this, Square generates $1.6-billion per quarter in bitcoin related revenue on an active install base that we estimate to be in the 30 million range. Apple’s install base is 1.5 billion and even if we assume only 200 million users would transact, this is 6.66 times larger than Square. Therefore, the potential revenue opportunity would be in excess of $40-billion per year (15-per-cent incremental top-line opportunity). The best part? The R&D cost would be de minimis in our view as Square’s entire R&D budget is under $1B. Net Net: fundamentals at Apple remain secure with a cash flowing business related to iPhones, Peripherals, Computers and Services. However, the firm could unlock a multi-billion dollar opportunity with a few clicks while investing into next generation chips as well.”
In other analyst actions:
* TD Securities analyst Sean Steuart lowered Interfor Corp. (IFP-T) to “hold” from “buy” with a $36 target, up from $34, while BMO Nesbitt Burns’ Mark Wilde increased his target to $31 from $27 with an “outperform” rating. RBC Dominion Securities analyst Paul Quinn increased his target to $37 from $34 with an “outperform” recommendation. The current average is $35.83.
* CIBC World Markets analyst John Zamparo raised his target for Aurora Cannabis Inc. (ACB-T) shares to $17 from $15 with a “neutral” rating. The average on the Street is $11.95.
“Though the reduced timeline to U.S. legalization supports higher multiples across the space, and although ACB’s valuation remains well below all-time highs, current market conditions appear to reflect excessive optimism on operations, while for ACB, meaningful profitability will likely take time,” he said.
* Scotia Capital analyst Paul Steep increased his Dye & Durham Ltd. (DND-T) target to $58 from $52, keeping a “sector outperform” rating, while BMO Nesbitt Burns’ Thanos Moschopoulos increased his target to $55 from $50 with an “outperform” recommendation.. The average is $48.
* Mr. Steep also raised his target for Nuvei Corp. (NVEI-T) to $83 from $71 with a “sector outperform” rating, while CIBC’s Todd Coupland moved his target to $90 from $76 with an “outperformer” recommendation. The current average is $65.
* Citi analyst Navann Ty raised his target for Bausch Health Companies Inc. (BHC-T, BHC-N) to US$32 from US$31 with a “buy” rating, while National Bank moved its target to $40 (Canadian) from $39. The average is US$29.17.
* BMO Nesbitt Burns analyst Fadi Chamoun raised his target for Westshore Terminals Investment Corp. (WTE-T) to $19 from $18 with a “market perform” rating. The average is $20.30.