Inside the Market’s roundup of some of today’s key analyst actions
Following a “rare” second-quarter earnings miss, Desjardins Securities analyst David Newman lowered his rating for Superior Plus Corp. (SPB-T) to “hold” from a “buy” recommendation.
“We are moving to the sidelines given a warm summer in western Canada, margin challenges given high propane prices (margins lag spikes in the underlying commodity), tight supplies and the looming risk of an Enbridge Line 5 shutdown and valuation,” he said in a research report released Monday.
Last Wednesday, the Toronto-based company reported earnings before interest, taxes, depreciation and amortization of $31.6-million for the quarter, missing both Mr. Newman’s $34.3-million estimate and the consensus forecast on the Street of $33.1-million. Its EBITDA from its U.S. Propane Distribution (USPD) segment fell 48 per cent year-over-year, hurt by warmer weather and higher operating costs.
Concurrently, Superior Plus raised the low end of its 2021 guidance to $390–420-million from $380–420-million.
“For the full year, SPB is guiding to higher USPD EBITDA year-over-year (acquisitions and synergies offset by warmer weather and weaker wholesale propane market fundamentals) and lower CPD EBITDA year-over-year (lower CEWS and propane margin, aided by lower opex and a recovery in commercial customers toward the end of the year). On FX, SPB is substantially hedged this year and mostly hedged for the next 2–3 years (every 5-cent increase per US$1 impacts 2022 EBITDA by only $5-million),” said Mr. Newman. “We reduced our 2021 EBITDA estimate to $422-million, which remains modestly above its guidance.”
After cutting his earnings and free cash flow projections for both 2021 and 2022, the analyst reduced his target for Superior Plus shares to $17 from $17.50. The average on the Street is $16.40.
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Seeing near-term share-price upside potential, TD Securities analyst Graham Ryding upgraded Home Capital Group Inc. (HCG-T).
Citing its well-capitalized balance sheet, solid credit track record, and material improvements to governance and risk management since the 2015-2017 period,” he moved the Toronto-based company to “action list buy” from a “buy” recommendation in the wake of Friday’s release of better-than-anticipated quarterly results.
“We believe that Home Capital’s over-capitalized balance sheet could lead to valuation expansion over the near term,” he said. “We see potential for OSFI to lift restrictions on increasing capital returns (possibly in Q4/21). As such, Home Capital is positioned to respond with right-sizing capital initiatives, which could include a substantial issuer bid (SIB) over the near term, followed by reinstating the quarterly dividend and/or an NCIB. Our forecasts incorporate material capital returns in 2022 and an ROE lift, yet material excess capital remaining as Home Capital exits 2022.”
Mr. Ryding increased his target for Home Capital shares to $50 from $48. The average is $47.25.
“Home Capital is very well-capitalized, which should support healthy capital returns once regulatory restrictions are lifted (or modified). Although we are not forecasting significant loan growth, credit trends remain solid, and we see an attractive earnings profile (12.5-per-cent ROE outlook on an over-capitalized balance sheet),” he added.
Others making adjustments include:
* Raymond James analyst Stephen Boland to $39 from $38 with a “market perform” rating.
“Home Capital reported a quarter with improving originations. Single family residential originations were above our estimates as management becomes less cautious on the economy and housing market,” he said. “This was the major theme in the quarter, in our opinion, as other items of the results remained similar to 1Q21. Headline EPS was well above our estimate; however, there was a large provision release, again, in the quarter. Once that was normalized, results were generally in-line with our estimates. HCG released a provision of $18.8 million. HCG still remains extremely overcapitalized due to the pandemic which is dampening the ROE so there will be a gradual return of capital at some point.”
* RBC’s Geoffrey Kwan to $52 from $47 with an “outperform” rating.
“HCG is a Top 3 best idea within our coverage. HCG reported very good Q2/21 results even excluding the significant PCL recovery as pre-tax, pre-PCL EPS of $1.55 was ahead of our $1.46 forecast and originations were solidly ahead of our forecast. When OSFI lifts its ban on banks/insurers doing share buybacks/ dividend increases, HCG is well-positioned to return a substantial amount of capital to shareholders. When this happens, HCG said it could be 18-24 months to reduce its CET1 ratio to its 14-15-per-cent target range vs. 22 per cent currently, which implies more than $11 per share return of capital via substantial issuer bid(s), normal share buybacks, re-instatement of the quarterly dividend and possibly a special dividend. This would increase ROE by 400 basis points vs. 14 per cent currently. With HCG’s shares trading at just 1.1 times P/BV, we see the shares as attractively valued.”
* BMO’s Étienne Ricard to $44 from $40 with a “market perform” rating.
“This quarter’s take-away is that Home Capital’s loan growth prospects appear set to improve overH2/21 supported by the easing of underwriting standards in place since the start of the pandemic.
“ We recognize a more constructive thesis on Home Capital could partly be predicated on OSFI’s liftof capital restrictions and the company’s resulting ability to drive a step-function increase to EPS generation via buybacks. .... With the recent run-up to the stock’s valuation (9.1x earnings; March 2021: 7.5x), our sense is this potential catalyst could be priced in.”
* National Bank’s Jaeme Gloyn to $58 from $48 with an “outperform” rating
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A group of equity analysts on the Street raised their targets for Boardwalk Real Estate Investment Trust (BEI.UN-T) following the release of better-than-anticipated second-quarter results.
Though same property new operating income fell 3.2 per cent year-over-year, Boardwalk reported funds from operations per unit of 75 cents, exceeding the consensus projection on the Street by 2 cents with growth in Ontario and Saskatchewan offsetting a decline in Quebec.
“Following three consecutive quarters of sequential erosion, stabilized revenue increased 80 basis points quarter-over-quarter. Improved occupancy was the primary driver,” said Michael Markidis of Desjardins Securities. “In-place rents and amortized incentive losses were largely unchanged. Several months into the reopening and in the midst of a seasonally strong leasing period, BEI seems confident that it will push overall average occupancy to over 97 per cent before yearend. This is 100 basis points higher than the average economic occupancy in 2Q21 (96.1 per cent) and, if achieved, should enable BEI to dramatically reduce incentives offered on new leases.”
Raising his 2021 FFOPU estimate to $2.89 (from $2.82), which sits at the high end of the REIT’s newly introduced guidance ($2.80–2.92), Mr. Markidis said he sees it “well-positioned to generate mid- to high-single-digit FFOPU growth in 2022 and 2023.”
Keeping a “buy” rating, he hiked his target for the REIT’s units to $55 from $47. The average is $51.75.
Others making changes include:
* Canaccord Genuity’s Brendon Abrams to $50 from $45 with a “hold” rating.
“We highlight that the unit price has performed exceptionally well year-to-date (up 40 per cent), a rally admittedly we had not forecasted and surpassed our expectations (code for “we were wrong”). However, given the strong unit price appreciation, we believe the units are fairly valued, and we are maintaining our HOLD rating,” he said.
* BMO’s Joanne Chen to $51 from $42.25 with an “outperform” rating.
“On the back of a solid beat in Q2/21 and an encouraging outlook for 2021, we are more positive on Boardwalk’s road to recovery. We continue to believe BEI.UN’s portfolio of affordable apartments and ongoing value add initiatives will steadily attract renters flocking back to Alberta. We maintain our Outperform rating and increased our target price to $51.00, driven by a higher NAV estimate. In addition, given the clearer outlook for the recovery, we are now applying a slight premium to our NAV estimate to arrive at our target price,” she said.
* RBC’s Matt Logan to $54 from $44 with an “outperform” rating.
“Supported by the ongoing demand recovery, we believe Boardwalk REIT is well-positioned to deliver outsized growth over the next 2–3 years,” he said. “While the inflection point was not fully reflected in the Q2 print, the combination of committed occupancy, reinstated guidance, and recent benchmark transactions gives us confidence that the recovery is real — and quickly gaining momentum. With more financial leverage than multi-res peers, an unregulated rental market in Alberta, and a cyclical economic backdrop, we believe BEI’s units provide torque to the economic recovery,” he said.
* iA Capital Markets’ Frédéric Blondeau to $55 from $47 with a “buy” rating.
* Scotia Capital analyst Mario Saric to $51.25 from $43.50 with a “sector perform” rating
* National Bank’s Matt Kornack to $56 from $51.50 with an “outperform” rating.
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Despite reporting “strong” results in its first quarter since returning to the public markets, TD Securities analyst David Kwan lowered Softchoice Corp. (SFTC-T) to “hold” from “buy” based on recent share price appreciation.
“Peer-group valuations have increased materially since our initiation less than two months ago, with its software-focused IT Solution Provider/VAR peers trading at 22.2 times (vs. 19.3 times previously),” he said. “Although the Q2/F21 results have given us more confidence that Softchoice is executing well on its organic growth strategy, we believe that the shares are now fairly valued, with the stock almost doubling since our initiation. We would wait for a pullback to the low-to-mid C$30s before becoming more constructive.”
Mr. Kwan hiked his target to $40 from $28. The average is $35.
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Exchange Income Corp.’s (EIF-T) “strong” second-quarter beat “demonstrates the quality of the firm’s diversified business model,” according to Raymond James analyst Steve Hansen, who emphasizing the an “increasingly upbeat view over the firm’s embedded growth prospects and ability to capitalize on the forthcoming economic recovery.”
After the bell on Thursday, the Winnipeg-based firm reported adjusted EBITDA of $81-million, up 12 per cent year-over-year and easily topping both Mr. Hansen’s $74-million estimate and the $75.6-million consensus on the Street. He attributed the difference to “substantially better-than-expected” results from its Aviation segment, which he said is “gaining altitude, poised to accelerate.”
“Dovetailing on several moves to substantially strengthen its balance sheet, EIF is quickly transitioning from defense to offense, in our view, a thesis underscored by the firm’s recent $61-million acquisition of Carson Air, and three additional LOIs for an aggregate $53-million,” the analyst said. “We like this approach, with all four deals said to be closely related to EIF’s existing platforms (read: strong synergies/accretion), including Macfab Manufacturing (LOI#1), a group closely aligned with EIF’s Ben Machine. Management is also investing into existing operations (fleet capacity to north, R1 assets), with ample liquidity still available for additional offensive moves.”
Maintaining a “strong buy” rating for its shares, Mr. Hansen hiked his target to $52 from $47. The average is $48.40.
“EIF boasts significant (under-appreciated) leverage to the post-pandemic recovery, in our view, Specifically, we believe EIF is poised to benefit from several macro & organic tailwinds that include: 1) a deep backlog of medical procedures & pent-up travel demand in northern communities; 2) early signs of surging US regional jet traffic (i.e. demand for parts, services, leasing; 3) the resumption of international pilot training; 4) PAL’s ramping high-value contracts (DFO, FWSAR, Netherlands); and 5) Quest’s robust backlog/demand,” he said.
Others making target changes include:
* Canaccord’s Matthew Lee to $50 from $43 with a “buy” rating.
“After a strong Q2 print, we maintain our positive outlook on Exchange given its cash flow generation and diversified business portfolio, as well as the improving outlook on the aerospace front,” said Mr. Lee. “While there remain many questions as to the shape of an aviation recovery, we are very encouraged by management’s expectation of $400-million in EBITDA for the firm once the impacts of COVID subside. Additionally, we were impressed with the Legacy Airline segment’s ability to return to 90 per cent plus of F19 revenues, a feat supporting the thesis that EIF will likely see a more rapid airline recovery than peers given its essential nature. On the manufacturing front, management highlighted that it is still facing COVID-related supply chain challenges, but we believe that as construction projects come back online, the segment will see a significant ramp, which should benefit the firm in F22.”
* RBC’s Walter Spracklin to $47 from $43 with an “outperform” rating.
“Exchange delivered another strong quarter and has commendably navigated (what appears to have been) the worst of the pandemic, all while continuing to pursue its acquisitive growth strategy by deploying capital on a number of accretive acquisitions over the last year or so,” said Mr. Spracklin. “Looking ahead, we believe that recovery trends have officially turned the corner and (assuming travel restrictions are not re-implemented) see an attractive set-up for steady improvement across our forecast horizon.”
* Scotia’s Konark Gupta to $43 from $41 with a “sector perform” rating.
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BMO Nesbitt Burns analyst David Gagliano thinks Stelco Holdings Inc.’s (STLC-T) agreement to repurchase and cancel 11.4 million shares from LG Bedrock Holdings LP at is “a nicely structured buyback.”
On Friday, the company announced the $398-million deal with the private equity firm. After the deal, LG Bedrock’s stake in Stelco will drop to 9.9 per cent from 21.5 per cent.
In a research note, Mr. Gagliano said: “Three Reasons We View This as a Key Positive: 1. Reduces share count by 13 per cent, but doesn’t really impact liquidity given these shares were held by LG Bedrock. 2. Buying back stock at a 26-per-cent discount is a pretty nice transaction for Stelco, in our view, enhancing EPS and EV/EBITDA math. Compared with our prior estimates, STLC’s EV/EBITDA declines by 0.3 times. This, in turn, is the primary driver for the higher target price, i.e., $65/share target price represents 2.2 times/4.2 times 2021/2022 estimated EV/EBITDA, slightly higher vs. the 2.0 times/4.1 times implied multiples for our $60 target price before this transaction. 3. Removes overhang from future potential LG Bedrock transactions. With LG Bedrock lowering its ownership from 21.5 per cent to 9.9 per cent, and with a 12-month lock up, in one ‘swoop’ this transaction should essentially remove the overhang associated with potential future LG Bedrock secondary offerings, further arguing for a higher assumed multiple for STLC shares in our view.”
Keeping an “outperform” recommendation, he raised his target to $65 from $60, topping the $54 average.
“Yes, this is a significant buyback, and for now it essentially eliminates STLC’s cash position,” said Mr. Gagliano. “BUT ... Stelco is generating significant free cash flow every day. Our 2H’21 FCF estimate is $986-million, suggesting Stelco could repurchase another 10 per cent of outstanding shares (depending on STLC share price) within the next 6 months and still have over $400-million in cash on the balance sheet.”
Elsewhere, Stifel’s Anoop Prihar increased his target to $60 from $56 with a “buy” rating.
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In a research note previewing third-quarter earnings season for Canadian banks, CIBC World Markets analyst Paul Holden adjusted his target prices for shares of the Big 5.
“We expect Canadian banks will post better results than the U.S. banks with respect to the key drivers of loan growth and NIM. However, a slowdown in capital markets revenue and expense pressures may limit earnings upside. Our adjusted EPS estimates imply an average 2.5-per-cent quarter-over-quarter decrease. Positive EPS revisions will likely be tougher to come by versus recent quarters,” he said.
Mr. Holden’s changes were:
- Bank of Montreal (BMO-T, “outperformer”) to $139 from $138. Average: $133.82.
- Bank of Nova Scotia (BNS-T, “outperformer”) to $90 from $92. Average: $86.28.
- National Bank of Canada (NA-T, “neutral”) to $102 from $98. Average: $100.25.
- Royal Bank of Canada (RY-T, “neutral”) to $138 from $131. Average: $135.42.
- Toronto-Dominion Bank (TD-T, “outperformer”) to $99 from $95. Average: $92.57.
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In other analyst actions:
* National Bank Financial analyst Richard Tse downgraded Farmers Edge Inc. (FDGE-T) to “sector perform” from “outperform” and cut his target to $10 from $20, while CIBC’s Jacon Bout lowered it to “neutral” from “outperformer” and lowered his target to $6 from $20. The average on the Street is $8.75.
“It appears that since going public over the past two quarters, FDGE has over-promised and under-delivered,” said Mr. Bout. “What concerned us with Q2/21 results was the significant weakness in revenue, reflecting lower-than-expected subscribed acres. While we still believe the themes of carbon capture and digital/precision agriculture will be long term drivers, it is unclear if FDGE’s subscription model can drive management’s mid-term subscribed acres growth target of 35 per cent per year (sales of 45 per cent per year). We also question the diversion in strategy with the CommoditAg (Ag. E-commerce Platform) acquisition and the sudden CFO departure.”
* National Bank’s Don DeMarco upgraded Pretium Resources Inc. (PVG-T) to “outperform” from “sector perform” with a $16 target, up from $14 and above the $15.95 average.
* Scotia Capital analyst Mario raised his Canadian Apartment Properties Real Estate Investment Trust (CAR.UN-T) target to $63.50 from $61 with a “sector perform” rating. Others making changes include: Raymond James’ Brad Sturges to $70.50 from $68 with a “strong buy” rating and RBC raised its target to $68 from $65 with an “outperform” rating. The average is $64.35.
“Despite the recent challenges faced by the Canadian multifamily sector during COVID-19, CAPREIT has successfully maintained relatively higher same-property occupancy rates,” said Mr. Sturges. “As a result, we believe CAPREIT is well positioned to capture improving pricing power in its suburban ‘big-city’ weighted Canadian multifamily real estate portfolio as leasing demand gains further momentum.”
* Raymond James analyst Brad Sturges increased his Minto Apartment Real Estate Investment Trust (MI.UN-T) target to $28 from $26 with an “outperform” rating, while Canaccord Genuity’s Brendon Abrams raised his target to $26.50 from $26 with a “buy” rating and TD’s Jonathan Keltcher raised his target to $28 from $27 with a “buy” rating. The average is $25.90.
“We believe Minto’s NAV discount valuation provides an attractive entry point as Canadian urban multifamily property fundamentals recover in the coming quarters,” said Mr. Sturges. “We believe Minto also offers above-average 2022E AFFO/unit growth prospects as its average occupancy rates recover back to pre-covid levels, and rent growth accelerates when the REIT’s pricing power returns.”
* BMO’s Joanne Chen raised her Nexus Real Estate Investment Trust (NXR.UN-T) target to $13.25 from $11.75 with an “outperform” rating. The average on the Street is $12.81.
“Our outlook on Nexus REIT remains unchanged following Q2/21 earnings,” she said. “Our positive thesis continues to be based on the REIT’s steady transformation towards being a nearly pure-play industrial REIT (which is occurring much quicker than previously anticipated) and our expectation for the favourable industrial fundamental tailwinds to continue over the near-to-medium term. In our view, data points from recent industrial transactions in Canada also serve as a testament to the positive outlook.”
* BMO’s Jenny Ma increased her PRO Real Estate Investment Trust (PRV.UN-T) target to $7.25 from $6.50 with a “market perform” rating. The average is $7.43.
“PROREIT had an exceptionally busy Q2/21, acquiring several industrial portfolios which boosted the REIT’s size by almost one-quarter,” she said. “Presently, more than half of PROREIT’s revenue is derived from the highly coveted industrial asset class, albeit of properties located in secondary markets such as Winnipeg, Ottawa, and Atlantic Canada. Reflecting the attractiveness of industrial and stabilization of retail properties, we are lowering our utilized cap rate by 25bps to 6.25 per cent, which raises our NAV estimate to $7.23.”
* RBC analyst Irene Nattel raised her Park Lawn Corp. (PLC-T) target to $46 from $43 with an “outperform” rating while TD’s Daryl Young bumped up his target to $42 from $38 with a “buy” recommendation. The average is $41.61.
“Our investment thesis on PLC is playing out as anticipated, with solid underlying organic growth augmented by M&A contribution, and as pandemic impact wanes, higher pre-need call volume and revenue per call for at-need,” Ms. Nattel said. “Strong Q2/21 results reinforce our constructive view on the stock, with our Outperform rating predicated on sector-leading earnings growth, and underpinned by favorable demographic trends and a long tail of consolidation opportunities.”
* RBC’s Andrew Wong cut his target for Largo Resources Ltd. (LGD-T) to $24 from $25 with an “outperform” rating. The average is $26.20.
“Although Largo’s strategic shift toward the clean energy battery business will take time and may come with growing pains, we continue to see significant value in the transition, which will be supported by improved operations and cash flows from the traditional mining business. Additionally, tight vanadium markets are supporting strong prices that may persist through next year, which Largo should benefit from due to the recently completed expansion,” said Mr. Wong.
* RBC’s Matt Logan increased his BSR Real Estate Investment Trust (HOM.U-T, HOM.UN-T) target to US$17 from US$14, keeping an “outperform” rating. The average is $16.02.
“With rent growth in BSR REIT’s core Texas markets hitting alltimes highs, it should come as little surprise that cap rates are compressing, and outsized NAV growth is following suit. Looking ahead, positive trends are set to continue, if not strengthen, over the next 12 months as leases signed over the summer filter through the rent roll and rent increases on renewals catch up to market. Overall, we continue to see attractive risk-adjusted returns from BSR’s units, underpinned by strong NAV growth and the discount to peers narrowing further,” said Mr. Logan.
* National Bank’s Tal Woolley raised his American Hotel Income Properties REIT (HOT.UN-T) target to $5 from $4.75 with a “sector perform” rating. The average is US$4.31.
* Raymond James analyst Stephen Boland raised his Payfare Inc. (PAY-T) target to $13.50 from $9 with an “outperform” rating. The average is $14.75.
* RBC Dominion Securities analyst Pammi Bir raised his Plaza Retail Real Estate Investment Trust (PLZ.UN-T) target to $4.75, matching the consensus, from $4.25 with a “sector perform” rating. The average is .
“On the back of results that ranked modestly ahead of our call, our outlook on Plaza continues to improve. While retail fundamentals certainly have some challenges to work through, we’re encouraged by signposts that point to improving fundamentals through 2H/21, particularly as re-opening ramps up. As well, after a period of blocking and tackling, Management’s game plan is shifting to offense as the pipeline of acquisition and development opportunities expands. Net-net, we see PLZ’s premium valuation as well-supported,” said Mr. Bir.
* TD Securities analyst Cherilyn Radbourne trimmed her Ritchie Bros. Auctioneers Inc. (RBA-N, RBA-T) target to U$64 from US$67, falling below the US$62.67 average, with a “hold” rating.
“We believe that the cycle has turned against Ritchie Bros.’ counter-cyclical business model, with secular growth initiatives like the IMS still at a far too early stage to provide an offset, a set-up which does not favour share-price outperformance, particularly given that the valuation is high by historical standards,” she said. “That said, the blue-sky opportunity for Ritchie Bros to take a larger share of the highly fragmented used-equipment market seems to impose a relatively high floor-price under the stock, which persuades us that our HOLD recommendation is most appropriate.”
* TD’s Daryl Young raised his Intertape Polymer Group Inc. (ITP-T) target to $40 from $38, reiterating a “buy” rating. The average is $40.33.
“Looking forward, we are attracted to ITP’s product portfolio, which is geared to benefit from the continued evolution to greater E-commerce. Additionally, the company is generating good free cash flow and reinvesting in high-return capacity expansions to drive near-term growth,” he said.
David Leeder