Inside the Market’s roundup of some of today’s key analyst actions
In response to share price appreciation following the announcement of the $725-million sale of its chemical business to private equity fund manager Birch Hill Equity Partners, ATB Capital Markets analyst Nate Heywood lowered his recommendation for Superior Plus Corp. (SPB-T) to “sector perform” from “outperform” on Monday.
Shares of the Toronto-based energy company jumped 6.7 per cent on Thursday on news of the deal before falling back 2.1 per cent on Friday with the release of in-line fourth-quarter financial results.
“Despite the dilutive transaction valuation, we view the deal as a positive development given the simplified revenue structure and increased dry powder available for future growth within propane distribution,” said Mr. Heywood. “Management is optimistic around doubling the U.S. segment’s EBITDA over the next five years, citing a healthy pipeline of acquisition opportunities.”
“Following the asset divestiture, management highlighted increased confidence in the growth through acquisition strategy. With five acquisitions in 2020 for $285-million and three acquisitions year-to-date 2021, the track record provides a good indication of the Company’s ability to acquire. Superior is expected to focus on mid- to small-size transaction with multiples ranging from 7-9 times(pre-synergies), with the potential to compress the multiple by one to two turns with synergies.”
To reflect an “improved growth outlook for the U.S. propane distribution segment given the enhanced liquidity following the announced asset sale,” Mr. Heywood raised his target price for Superior Plus shares to $14.50 from $14. The average on the Street is $14.67.
“Despite the attractive runway for further U.S. expansion, we believe SPB is trading near its intrinsic value with 2021 EV/EBITDA of 9.8 times (peer group average: 9.6 times),” he said. “The Company has successfully improved financial flexibility by paying down current indebtedness and will have greater availability to fund additional growth following the close of Specialty Chemicals business sale. We continue to view the dividend yield of 5 per cent as an attractive consideration given the modest 2021 estimated payout ratio of 38 per cent, supported by the stable margin-based business of fuel distribution and potential corporate growth through acquisitions.”
Conversely, Raymond James analyst Steve Hansen upgraded Superior Plus to “outperform” from “market perform” with a $15.50 target, up from $13.50.
“We are increasing our target price on Superior Plus Corp. ... and upgrading our rating back to Outperform (vs. Market Perform prior) based upon the beneficial multiple expansion we see from the company’s divestiture of its Specialty Chemicals division, corresponding transition into a pure-play energy distribution (propane) story, and attractive M&A growth prospects,” he said.
Citing a quartet of factors, RBC Dominion Securities analyst Paul Treiber raised his rating for Montreal-based Lightspeed POS Inc. (LSPD-T) on Monday.
In moving its shares to a “outperform” recommendation from “sector perform” on Monday, Mr. Treiber pointed to:
* The expectation consumer stimulus and the re-opening of retail and restaurants will drive material acceleration in organic growth;
“We believe the impact from the re-opening of retail/restaurants is likely to be greater than our previous expectations,” he said. “Already, retail sales are rebounding due to consumer stimulus; e.g. U.S. retail sales rose 7 per cent year-over-year in January, up from 3 per cent in December. We see retail acceleration through 2021, as consumers have accumulated savings and are likely to rush to previously forbidden activities like going to retailers/restaurants and travel/vacations (e.g. hospitality).”
* The rollout of new valued-added services will spark organic growth;
“Lightspeed is barely scratching the surface of monetizing new value-added services,” he said. “We estimate that payment revenue contributed $25-million or 14 per cent of TTM [trailing 12-month] revenue, but penetration is only single digit percentage of total GTV. Capital and Lightspeed’s Supplier Network have effectively zero penetration currently. Value-added services boost Lightspeed’s economics, address an unfilled customer need, and strengthen Lightspeed’s moat/competitive advantages.”
* The potential for additional value-creating acquisitions;
“Lightspeed has successfully augmented its organic growth with acquisitions,” he said. “The company currently has $813-million cash, which is an all-time high. We estimate the company deploying another $500-million on acquisitions at 10 times EV/S [enterprise value to sales] would be 9 per cent accretive to the stock.”
* Expanding scale will raise its platform value.
“As Lightspeed scales organically and through acquisitions, the value of its platform increases,” he said. “More merchants and GTV increase the probability of successful monetization of new value-added services like payments, capital, and the supplier network. As such, we believe that Lightspeed’s valuation multiple is likely to expand with further organic growth acceleration and M&A.”
With the expectation organic growth will accelerate and see “improving investor visibility” to its platform value, Mr. Treiber hiked his target for Lightspeed shares to $120 target from $90, exceeding the $100.36 average.
After RBC’s commodity strategist team increased its oil price forecasts to US$60-65 per barrel over the next two years, equity analyst Greg Pardy upgraded MEG Energy Corp. (MEG-T) to “outperform” from “sector perform,” seeing an “attractive” potential return versus other stocks in his coverage universe.
“We peg MEG’s 2021 free cash flow at $508 million (US$61.50 WTI, US$11.50 WTI-WCS) in the context of 88,000 barrels per day of bitumen production and $260-million of capital spending,” he said. “This would equate to a free cash flow yield of 29 per cent (vs. our oil sands peer group average of 21 per cent). Every US$1 per barrel change in WTI prices impacts MEG’s 2021 cash flow inclusive of hedging) by about $48 million (6 per cent).
“Under our recut outlook, MEG’s average net debt-to-cash flow ratio falls from 3.5x in 2021 to 1.9x in 2022. Liquidity wise, we believe MEG is in good shape, and undrawn on its modified covenant-lite $800 million revolving credit facility (maturing July 2024). The company recently issued US$600 million of 2029 senior unsecured notes, with its next long-term debt maturity in 2025 (circa US$496 million).”
Mr. Pardy raised his target for MEG shares to $8.50 from $5.50. The average is $6.
“MEG is trading at a 2021 debt-adjusted cash flow multiple of 4.5 times (vs. our oil sands peer group average of 4.2 times),” he said. “We believe the company should trade at a slight discount vs. our peer group given its elevated financial leverage, partially offset by its top quartile in-situ portfolio and extensive proven RLI of 39 years.”
“Our bullish stance towards MEG reflects its strong leadership, enhanced market access via Flanagan-Seaway to the U.S. Gulf Coast, strengthening balance sheet, and long-life assets.”
With RBC’s commodity price deck changes, analyst Keith Mackey raised Calfrac Well Services Ltd. (CFW-T) to “sector perform” from “underperform” with a $5 target, falling below the $5.38 average.
“The macro backdrop has improved as reduced North American oil supply from lower drilling and a rebound in global oil demand have led to improved commodity prices,” he said. “Such a combination of factors is normally a very bullish signal for OFS stocks. Although, since the strong commodity price action is partially driven by producer capital discipline, it may be less positive than in prior cycles, but encouraging none the less, in our view.”
Mr. Mackey expects to see “an improving cash flow profile” over the next two years, which should bring Calfrac’s leverage profile closer to its Canadian oilfield services peers.
Ahead of the March 4 release of its fourth-quarter financial results, he raised his estimates for the Calgary-based company.
“We forecast Calfrac’s revenue to increase 31 per cent/51 per cent year-over-year in 2021/22, although performance remains below 2019 levels,” the analyst said. “We forecast EBITDA margins to progress from 7 per cent in 2021 to 10 per cent in 2022 reflecting higher industry activity in Calfrac’s operating areas combined with cost reduction efforts. In 2021, we assume Calfrac pays the $6-million interest on its PIK notes in shares, but in cash thereafter as the company’s financial outlook improves.”
Mr. Mackey maintained a $5 target for Calfrac shares, which sits 38 cents below the consensus on the Street.
CIBC World Markets analyst Robert Catellier stressed Inter Pipeline Ltd.’s (IPL-T) stock is likely to be driven primarily by developments surrounding Brookfield Infrastructure Partners L.P.’s hostile takeover bid and the subsequent strategic review initiated by independent directors.
Accordingly, pointing valuation concerns following the release of in-line quarterly results, he lowered his rating for the Calgary-based company to “neutral” from “outperformer” on Monday.
“While it’s early in the process, the shares have moved past our prior price target. We are updating our assessment to include a wider range of outcomes that might result from the broad strategic review being undertaken by the board,” said Mr. Catellier. “The reduced return to our revised price target causes us to go to Neutral from Outperformer. From a merger arbitrage point of view, we’d be more inclined to partake in it from the long side. We continue to believe this will be a long process with the potential for many twists and turns along the way. Potential future catalysts include filing of a formal offer, the company releasing contracting information related to HPC, and updates on the strategic review process.
“Management did not provide much information with respect to the recently announced strategic review process, other than expectations to release more information surrounding HPC. The company is also taking advantage of current market conditions to hedge some frac spread exposure, with about 40-per-cent hedged near term, with a company policy that allows for as much as an 80-per-cent hedge. While prices were not disclosed as the company is still executing the hedging program, the lower implied risk to cash flow could reduce risk to operating results.”
Pointing to a “probability-weighted scenario analysis of potential strategic review outcomes,” he raised his target for Inter Pipeline shares to $18.50 from $17. The average on the Street is $16.86.
Other analysts making target price adjustments included:
* Industrial Alliance Securities’ Elias Foscolos to $17 from $16.50 with a “hold” rating.
“Normalizing for non-recurring costs, we view IPL’s Q4/20 results as solid,” said Mr. Foscolos. “In our view, several tailwinds are supporting a constructive outlook for 2021. The recent unsolicited potential offer by Brookfield has simply surfaced fundamental value we always knew existed, and we once again remind investors that a formal offer has not been filed. As a result of strengthening commodity margins, we are raising our target price.”
* Scotia Capital’s Robert Hope to $17.50 from $17 with a “sector perform” rating.
* RBC’s Robert Kwan to $18 from $17 with a “sector perform” rating.
* ATB Capital Markets’ Nate Heywood to $18 from $13 with a “sector perform” rating.
CIBC World Markets analyst John Zamparo expects U.S. federal legalization of cannabis by the end of 2022.
“While political cooperation in Washington is limited, comments from top Democratic senators reveal that this is a bigger priority than previously expected,” he said. “We believe that Republican lawmakers will eventually accept cannabis reform. If not, this could be a meaningful ballot issue in the 2022 midterms, and recent ballot wins in right-leaning states like Montana and South Dakota, as well as nearly every survey we have seen, suggest that legalization is a rare bipartisan issue. Disagreements will likely exist on expungement, taxation and interstate commerce, but we view these as surmountable challenges.”
“There are possible opportunities for U.S. entry without traditional legislation. The current roadblocks that prevent U.S. operations are somewhat determined by the exchanges, but also internal interpretations of what federal permissibility consists of. It’s not unthinkable that executive action combined with SAFE Banking, and merely an evolution of views from exchanges and regulators, would tip the scales for some Canadian producers to cross the border.”
Despite this view, in a research report released Monday, Mr. Zamparo emphasizing that investors have already acted upon the upside from legal reforms south of the border for Canadian cannabis producers.
“The rising tide stemming from U.S. legalization has lifted all Canadian boats,” he said. “With our cannabis coverage universe having moved an average of 102 per cent since President Biden’s election win, and large-cap producers trading at 12 times consensus 2022 sales on average (valuations on several are near all-time highs), we believe much of the upside is priced into Canadian stocks.”
“CRON shares are up 93 per cent since immediately prior to November’s Presidential election, up 68 per cent year-to-date, and have surged past our previous price target,” said Mr. Zamparo. “We believe the market has rewarded CRON for its U.S. positioning, but we see little upside to the current valuation in the medium term. We do not believe next year’s estimates reflect the future of CRON’s business, and we fully support the company’s strategy, but generating meaningful price appreciation even through acquisitions is difficult to justify, in our view.
“We recommend investors focus on CRON’s strategic partnerships, balance sheet strength, M&A optionality, management quality, relationships with U.S. retailers and brands, and its investments in R&D and intellectual property, rather than placing too much emphasis on Canadian results. We believe these strengths deserve a valuation among industry leaders, and we apply a 20 times multiple to fiscal 2022 estimated sales.”
After increasing enterprise value-to-sales multiples “to reflect the recent upward movement in sentiment,” Mr. Zamparo also raised his targets for these stocks:
* Aphria Inc. (APHA-T, “outperformer”) to $28 from $18. Average: $15.70.
“While 18 times cannabis revenue is well above historical norms, we do not view it as unreasonable in the current environment for what we believe is Canada’s market share leader,” he said. “Additionally, upside potential exists purely from the implied price of the stock based on the pending deal with Tilray.”
* OrganiGram Holdings Inc. (OGI-T, “outperformer”) to $4.25 from $2.25. Average: $2.59.
“We view APHA, CRON, RIV and WEED as best-positioned for a U.S. entry and long-term success, but valuation limits our optimism on CRON and WEED. We currently rate APHA, RIV and HEXO as Outperformer, and CRON, WEED, ACB and OGI as Neutral,” he said.
Seeing “an asset-light, niche-focused model with plenty of upside potential,” Credit Suisse analyst Mike Rizvanovic initiated coverage of ECN Capital Corp. (ECN-T) with an “outperform” rating.
“ECN has successfully transitioned from being an asset-based lender with a focus on rail, aviation, and commercial and vendor (C&V) finance to an asset manager owning a portfolio of niche business service providers that operate a fee-based, asset-light model with a very strong and diversified funding structure in place that we believe materially diminishes the risk of business disruption,” he said. We see meaningful upside for ECN over the medium term as we forecast adjusted EPS growth of more than 50 per cent in 2021 and further growth of 17 per cent in 2022.”
Predicting strong upside potential in each of its business verticals, Mr. Rizvanovic added: “We expect Service Finance to grow pre-tax operating income by 50 per cent in 2021 on strong origination volume driven by both rising demand for home improvement spending in the U.S. and market share gains in what remains a very fragmented industry. For Kessler, we expect 2021 to be a recovery year with 14-per-cent growth as U.S. card balances gradually recover, while we estimate solid 2021 growth of 35 per cent for Triad largely on rising origination volume for both the core program of chattel loans as evidenced by a sizable backlog of orders and the recent expansion of the Land Home program for traditional mortgages that will be funded by government-sponsored entities.”
Seeing its valuation remaining “compelling” despite a strong recent run, he set a target of $10 per share. The average is currently $9.15.
“The company trades at a forward P/E multiple of 12.6 times and 10.2 times on consensus EPS expectations for 2021 and 2022, respectively, which we believe undervalues both its favorable risk profile that has been proven throughout the current downturn, and strong upside potential within its three business verticals,” he said.
Calling it “a low-risk, double-digit total return compounder,” he said: “As we detailed in our August 2020 report Sizing Up Thomson 3.0, we believe that over the next five years Thomson Reuters can sustain an NAV CAGR [net asset value compound annual growth rate] of 8– 9 per cent, a notable increase from an estimated normalized NAV CAGR of 5– 6 per cent through the 2000s and 2010s. We see potential for further multiple expansion as Thomson Reuters continues an evolution to software provider. Importantly, we believe all of the KPIs underpinning NAV growth and multiple expansion are sitting at structural low points when looking out over the next decade.”
When Thomson Reuters reports its fourth-quarter financial results on Tuesday before the bell, Mr. McReynolds expects its 2021 guidance and strategic update to “take the spotlight.”
“Management is expected to provide 2021 guidance and provide a strategic update including near-term priorities. For 2021, we forecast: (i) organic revenue growth of 3.3 per cent versus an estimated 1.4 per cent in 2020 (including sequential improvement in the three core segments from an estimated 3.6 per cent in 2020 to 4.3 per cent in 2021; (ii) 100 basis points of year-over-year EBITDA margin expansion from an estimated 32.4 per cent in 2020 to 33.4 per cent in 2021; and (iii) FCF of $1.3-billion (up versus $1.1-billion in 2020), which factors in capex intensity of 8.0 per cent (versus 2020 capex intensity guidance of 8.0–8.5 per cent).”
For the fourth quarter, he’s projecting revenue and EBITDA of US$1.618-billion and US$488-million, up 2.2 per cent and 23.4 per cent year-over-year, respectively. Those estimates fall in line with the Street’s estimates of US$1.616-billion and US$490-million.”
Updating his valuation to include the closing of the sale of Refinitiv to London Stock Exchange Group PLC, Mr. McReynolds increased his target price for shares of Thomson Reuters to US$92 from US$88 with an “outperform” recommendation. The average is US$86.29.
“MGA’s Q4 results and multiyear outlook demonstrated why it is a bellwether within the automotive space,” he said. “The company is leveraged to secular trends within the auto sector with an operating model that produces a significant amount of FCF. With MGA’s 2021-2023 outlook, the company highlighted its ability to grow faster than global auto production while hitting record margins.”
Mr. Chiang raised his target for Magna shares to US$100 from US$89, keeping an “outperformer” recommendation. The average is US$82.74.
Elsewhere, others making target changes include:
* JP Morgan’s Ryan Brinkman to US$100 from US$90 with an “overweight” rating.
* Raymond James’ to US$85 from US$61.50 with a “market perform” rating.
“Magna continues to demonstrate extremely strong results as auto production volumes have recovered,” he said. “This has culminated into a very strong 4Q result and extremely constructive full-year guidance for 2021. Going forward, we believe that Magna remains very well-positioned to benefit as overall auto demand and production remains strong. That said, despite a favourable backdrop to take into consideration overall, we must acknowledge that production shortfalls related to the fairly well telegraphed semiconductor shortages will mute 1H21 volumes / performance, with an expectation that any such shortfalls will be made up in the back half of the year. In terms of our valuation and price target, we acknowledge that we just continue to chase the stock higher. That said, we continue with Market Perform rating and recommend investors remain patient for a more opportunistic entry point on the name.”
* Credit Suisse’s Dan Levy to US$91 from US$74 with an “outperform” recommendation.
“MGA has had quite a run – not only from the depths of COVID (up 250 per cent since late March ’20), but also in the past 3 mo., with MGA up 39 per cent vs. US auto supplier average up 24 per cent, and S&P up 10 per cent,” said Mr. Levy. “Yet in spite of the run, we believe there is still solid upside ahead, as we are still in the early days of the MGA narrative unfolding … which we believe can support further multiple expansion. While investors have long understood MGA’s leading share positions and strong FCF capabilities, what has been neglected is its narrative…with MGA trading at a discount vs. other auto suppliers given its status as an auto supplier conglomerate with a somewhat unclear narrative. However, we believe we are in the early days of a robust MGA narrative unfolding. In addition to the core benefits of MGA remaining in place (leading share positions, strong FCF gen and balance sheet, continued solid financial performance), we see opportunity for new CEO Swamy Kotagiri to accelerate MGA’s standing as a blue-chip auto parts supplier leveraged to megatrends – with MGA as a beneficiary of EV, and with more of a spotlight to come on MGA’s portfolio of technologies (and we could see more of that at MGA’s upcoming Investor Day in April). All of this adds up to the case for MGA to see further multiple expansion. While MGA’s EV/EBITDA multiple of 7 times is currently ahead of its historical average of 5 times, it is nevertheless below the supplier average of 8.5 times … and we believe continued narrative expansion can drive further multiple expansion.”
* TD Securities’ Brian Morrison to US$100 from US$85 with a “buy” rating.
* BMO Nesbitt Burns’ Peter Sklar to US$96 from US$70 with an “outperform” rating.
In other analyst actions:
* Pointing to share price weakness, Industrial Alliance Securities analyst Elias Foscolos raised his rating for Parkland Corp. (PKI-T) ahead of the March 4 release of its fourth-quarter financial results. He kept a $41 target for its shares, which falls short of the $48.85 average.
* Scotia Capital analyst Michael Doumet initiated coverage of GDI Integrated Facility Services Inc. (GDI-T) with a “sector outperform” rating and $54 target. The average is $51.39.
“Since its IPO, GDI has generated strong shareholder returns (20 per cent per year),” he said. “With organic growth expected to re-accelerate, a multi-year runway for consolidation, and multiple expansion that we think is in the fifth or sixth inning – we expect continued solid returns.”
* RBC Dominion Securities analyst Greg Pardy increased his target for Enerplus Corp. (ERF-T) to $8 from $6 with an “outperform” rating, while National Bank Financial’s Travis Wood lowered his target by a loonie to $9.50 also with an “outperform” recommendation. The average is $6.71.
“With its recent US$465-million Bruin E&P acquisition on-track to close in March, Enerplus is set to deliver significant free cash flow over the course of 2021 while preserving a very strong balance sheet,” said Mr. Pardy.
* RBC’s Maurice Choy raised his target for Capital Power Corp. (CPX-T) to $38 from $35 with a “sector perform” rating, while TD Securities’ John Mould increased his target to $41 from $39 with a “buy” recommendation. The average is $39.31.
“We think Nutrien continues to execute well throughout all parts of the commodity cycle, and should now benefit from improved fundamentals in underlying ag and fertilizer markets. We expect continued strong FCF generation which should result in a combination of share buybacks, gradual dividend increases, and growth investment,” said Mr. Wong.
* Scotia Capital’s Michael Doumet raised his target for Richie Bros Auctioneers Inc. (RBA-N, RBA-T) to US$58 from US$70 with a “sector perform” rating, while National Bank Financial’s Maxim Sytchev increased his target to US$57 from US$68.50 with a “sector perform” rating. The average is US$62.17.
“While there could be some downside risk to 2021 (EPS and FCF), we think investors will soon view 2021 as a transitional (reset, or trough) year – bringing more focus to 2022 (and the long-term earnings power of the company),” said Mr. Doumet. “The dust is still settling though. And, with a few tougher quarters ahead (and a tough 3Q comp), we think the stock could remain range-bound for the time being.”
* Mr. Doumet raised his target for Savaria Corp. (SIS-T) to $20 from $18, keeping a “sector outperform” rating. The average is $18.06.
“We are off restriction following the announced transaction of Handicare Group AB (expected to close in April) and concurrent equity offering,” he said. “The combination of the two highly complementary businesses will create a global player with an enhanced organic growth profile and ample synergy opportunities. Handicare is operating at a high level (i.e. not a fixer-upper like Garaventa) having successfully divested laggard businesses and executed an operational turnaround. In that regard, once having completed (low-hanging) cost synergies, we expect the focus to quickly turn to capitalizing on the extensive organic growth opportunities.”
* JP Morgan’s John Bridges cut his target for Barrick Gold Corp. (ABX-T) to $39 from $42 with a “neutral” rating. The average is $31.59.
* National Bank Financial’s Shane Nagle increased his target for Lundin Mining Corp. (LUN-T) to $15.50 from $13.50 with a “sector perform” rating, while Canaccord Genuity’s Dalton Baretto moved his target to $15 from $13 with a “hold” rating. TD Securities’ Greg Barnes increased his target to $13.40 from $12 with a “hold” rating. The average is $13.58.
* National Bank Financial analyst Cameron Doerksen raised his target for Chorus Aviation Inc. (CHR-T) to $4 from $3.60 with a “sector perform” rating, while CIBC’s Kevin Chiang trimmed his target to $5.25 from $5.50 with an “outperformer” recommendation. The average is $4.88.
“While CHR’s share price performance has mimicked that of an airline, the reality is that its cash flow has proven to be more resilient,” said Mr. Chiang. “Other aircraft lessors have seen a significant rebound in their share price while CHR continues to lag and we view this underperformance as unwarranted.”
* Scotia Capital’s Himanshu Gupta trimmed his Morguard REIT (MRT.UN-T) target to $5.50 from $6, maintaining a “sector perform” rating. The average is $4.88.
* Desjardins Securities analyst Benoit Poirier increased his target for Uni-Select Inc. (UNS-T) to $16 from $13 with a “buy” rating, while TD Securities’ Daryl Young raised his target to $11.50 from $11 with a “buy” rating and National Bank’s Zachary Evershed bumped his target to $10 from $8.50 with a “sector perform” recommendation. The average on the Street is $12.20.
“In 4Q, UNS again reported solid results and further improved its balance sheet. Management introduced a positive outlook for 2021, with higher sales and EBITDA vs 2020. We believe the efforts undertaken to strengthen the business, such as the Continuous Improvement Plan and refinancing, have better positioned UNS. Despite a significant rebound from its 52-week low, the stock is still trading at a significant discount vs peers,” said Mr. Poirier.
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