Monday’s analyst upgrades and downgrades

Inside the Market’s roundup of some of today’s key analyst actions

Secure Energy Services Inc. (SES-T) and Tervita Corp. (TEV-T) on Friday announced they closed a deal to merge the two companies - even though they have yet to get approval from Canada’s competition watchdog.

Raymond James analyst Andrew Bradford thinks the regulator has reservations about the transaction for no good reason.

“To be frank, the Competition Bureau appears to not fully understand the competitive dynamics of waste disposal in Western Canada. The Bureau’s stated position is straightforward enough: Secure and Tervita are the two largest third-party oilfield waste disposal companies in Western Canada and as such, any combination of the two would surpass a pre-determined market concentration threshold, so it should not proceed.

“What the Bureau appears to be missing is that Secure and Tervita’s greatest competition is the producers themselves. Many producers handle their own disposal today, but the credible option for producers to bring disposal in-house for future development represent the largest source of competition for Secure /Tervita. The prospect of losing a customer in perpetuity is more than sufficient to keep pricing in-line,” Mr. Bradford said in a note.

“At the very most, a combined Secure and Tervita would handle less than a fifth of all water production in the busiest plays in Western Canada,” he added.

The Competition Bureau filed an application with the Competition Tribunal to prevent the closing of the transaction until the matter is heard by the Tribunal. Secure and Tervita first responded with a press release stating they will continue to cooperate with the Competition Bureau and Tribunal. Then they proceeded to move-up the closing of the merger to last Friday. It was previously planned for mid-August.

The merger itself is now completed and Tervita will be delisted from the TSX today; the Competition Bureau will now have to deal with competition issues on an asset-by-asset basis.

Both Secure’s and Tervita’s counsel believe divestitures will be minimal and immaterial to the combined business. The early closing also accelerates planned synergies and cost reductions.

Amid this noisy merger, Mr. Bradford sees a good opportunity for investors to snap up shares in Secure.

“The bigger consideration in our view is that Secure’s share price has been moving in opposition to its underlying fundamentals and cash flow visibility - and had been doing so even prior to the Competition Bureau’s June 30 press release. Over the last 30 days WTI crude is up 9%, Contract Drillers are up 32%, Pumpers are up 18%, and the median Canadian OFS company is up 16%. Secure is down 11%.”

Even after the recent share price decline, Secure is a $1.3 billion market cap company, making it eligible for being included in the S&P/TSX Composite Index in the future. “Even in the most unlikely event that Competition Tribunal were to force the dissolution of the two companies in their entirety, we’d still estimate SES to be worth at least $5.75 on a stand-alone basis. Accordingly, we recommend investors take advantage of the current pricing and add to positions of Secure today.”

Mr. Bradford reiterated his “strong buy” rating on the shares and raised his price target to C$7.25 from $6.75.

The average price target among analysts on Secure Energy Services is $6.43, according to Refinitiv Eikon.

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Haivision Systems Inc. (HAI-T) will be adding expertise in situational awareness and security solutions, with a focus on the defence, government and public safety markets, through its acquisition announced last week of Atlanta-based visual collaboration leader CineMassive, noted Desjardins Securities analyst Kevin Krishnaratne.

In its first acquisition since its IPO, Haivision will pay $30 million U.S for CineMassive, consisting of $15 million in cash and the issuance of 2.145 million shares.

“We view the deal as attractive financially (priced at 1.5 times sales) and strategically, as it strengthens HAI’s government business and provides opportunities for revenue synergies,” Mr. Krishnaratne said in a note.

The analyst raised his price target to C$13.25 (from $12.50) and maintained a “buy” rating. The average price target is $13.38.

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After four consecutive earning beats, investors appear somewhat cautious on the sustainability of Intertape Polymer Group Inc.’s (ITP-T) higher margin and organic growth, judging by the stock’s lack of multiple expansion.

But Scotiabank’s Michael Doumet has a more favourable take.

“Intertape is a largely de-risked story now, having achieved accretive returns from its higher-margin, higher growth ecommerce and woven segments – areas which also provide the company with multi-year runway for accelerated growth,” he said in a note.

Mr. Doumet argues that this isn’t the ‘old Intertape’ where growth for the packaging producer may have seen limited.

“The expanded ecommerce, protective packaging, woven, and packaging equipment platforms have permanently enhanced its competitive position and return profile,” the analyst said. “The company is now putting more capital to work into these high-growth areas with its acquisition of Nuevopak,” which develops a range of machines to provide void-fill and cushioning protective packaging solutions.

Mr. Doumet expects earnings growth to moderate in the second half of 2021 due to tough comparisons made to 2020 when economies were partially reopening. But he sees growth reaccelerating in 2022.

“However, with ITP trading below pre-pandemic multiples and what we view as potential near-term catalysts – namely, positive revisions to guidance and capital deployment – we think there’s still quite a bit of ‘easy’ money to be made on the name,” he said.

Mr. Doumet raised his price target by $1 to $40 Canadian and reiterated a “sector outperform” rating. The average analyst target is $38.50.

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Lightspeed POS Inc.’s (LSPD-N, LSPD-T) recent purchase of Ecwid and NuORDER represent transformational acquisitions for the company, as it expands its focus towards supplier and consumer solutions, commented Scotiabank analyst Paul Steep.

“Our view remains that Lightspeed is a strong organic revenue growth name with potential to benefit from a number of organic vectors (e.g., conversion of on-premise POS (Point of Sale) market to cloud, introduction of Lightspeed Payments into new markets), with the potential to continue actively consolidate the POS market,” Mr. Steep said in a note.

He raised his price target by $10 to $93 (U.S.), a reflection of his expectations the company can trade at a modest premium to peers based on its enterprise value to revenue ratio, reflecting the firm’s faster revenue growth relative to comparable companies. He reiterated a “sector perform” rating.

The acquisition of Ecwid provides the firm with an enhanced omni-channel offering, whether that be in-store, on the web, social media, or apps, that allows merchants to quickly set up and sell products online. NuORDER is a B2B e-Commerce platform that connects buyers and suppliers allowing planning and visualization to achieve a better, more informed process.

“Lightspeed’s recent acquisitions of Ecwid and NuORDER for $500M and $425M in stock and cash, respectively, signal a shift in its approach from a firm centered around merchant services towards a broader set of capabilities supporting both suppliers and retailers,” Mr. Steep added in a note.

“We view this transition as a natural expansion into adjacent markets that will help the firm to increase its value proposition and drive additional revenue growth through capabilities including analytics and personalization by integrating software into more of the commerce software value chain,” he added.

The average price target is US$90.70.

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Raymond James analyst Frederic Bastien has reaffirmed his bullish stance on Aecon Group Inc. (ARE-T), believing that the firm’s growing nuclear activities will support stronger overall profitability “well into the future.”

Aecon and a joint venture partner on Monday scored a $350 million contract to replace two more steam generators at the Bruce generation plant in Ontario. The work will include engineering activities, the removal of existing and installation of new steam generators, procurement, and construction activities. Mr. Bastien noted that the award builds on the work the ARE-led team is already executing for Unit 6 at the facility, positioning it as a clear frontrunner for Bruce’s remaining three steam generators down the road.

Mr. Bastien also applauds the company’s sustainability efforts. Aecon has set a goal to reduce direct CO2 emissions to 30 per cent over the decade by transitioning its gas and diesel fleet to electrical, moderating the fuel demands of its heavy equipment, driving operational efficiency and accelerating new technology adoption.

“It is already testing out various technologies at its Holland Landing Training and Innovation Center, including a laser ablation technique that cuts down on waste, a new geothermal drill, and a simulator for directional drilling. The fact ARE has already started operationalizing sustainability across ESG considerations, to us, will benefit shareholder value creation,” the analyst said.

Mr. Bastien reaffirmed a “strong buy” rating and $23 price target on Aecon. The average analyst target is $22.27.

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