Inside the Market’s roundup of some of today’s key analyst actions
RBC Dominion Securities analyst Robert Kwan expects Enbridge Inc. (ENB-T) to underperform its peers on Monday following rejection of its commercial proposal to offer transportation contracting on its Mainline pipeline system by the Canada Energy Regulator (CER), “given the uncertainty with respect to the path forward and, more importantly, the risk-reward trade-off for a negotiated settlement or regulatory process.”
“Boiling down the CER’s 154-page document, the regulator was not willing to support the proposal that would ‘dramatically change access to the pipeline’ to lock in 90 per cent of the pipeline’s capacity under long-term contracts,” he said in a research report released Monday. “The CER also noted that ‘the negative impacts would affect certain groups more than others’ and that the tolling framework would ‘excessively favour’ shippers who signed long-term contracts.
“We believe a negotiated settlement is in the cards. While a fractured shipping group could make for contentious settlement negotiations, we continue to believe that a cost-of-service regulatory framework would be a bad outcome for both shippers and Enbridge. Particularly given language in the CER’s decision that encourages a settlement, we view this as a more likely outcome versus a cost-of-service regulatory filing (outside of cost-of-service potentially being a short-term bridge solution). Enbridge noted that it intends to imminently engage with stakeholders.”
In the wake of the late Friday announcement, Mr. Kwan now sees any “material” weakness in Enbridge’s share price as a buying opportunity ahead of its Dec. 7 investors day, which he expects will “largely hit the mark on capital allocation messaging as well as providing additional details on its path forward for the Mainline.”
“Given the CER’s willingness to give significant weight to non-customers and a minority of shippers, along with its comments on returns, we believe that Enbridge is unlikely to preserve CTS-like economics,” he said.
The decision led Mr. Kwan to take a “more conservative” view of Enbridge’s 2022 and 2023 financial picture, estimating a “roughly $500 million reduction in EBITDA contribution from the Mainline is a conservative assumption for settlement economics. That prompted him to reduced his earnings per share projections to $3.07 and $3.17, respectively, from $3.16 and $3.37.
Maintaining an “outperform” recommendation for Enbridge shares, Mr. Kwan trimmed his target by $1 to $60. The average on the Street is $55.65, according to Refinitiv data.
“Our lower EPS forecast for 2023 is partly offset by nudging up our P/E valuation to 19 times (from 18 times) to reflect the potential that Enbridge will be able to negotiate enhanced risk mitigation versus the contracting proposal (i.e., giving up EBITDA to reduce overall risk),” he said.
Elsewhere, CIBC World Markets analyst Robert Catellier cut his target to $55 from $58 with an “outperformer” rating.
E Automotive Inc. (EINC-T) is “revved up for steep growth curve,” according to Canaccord Genuity analyst Aravinda Galappatthige, who sees a “substantial” total addressable market and touting its “prospects of emerging as one of the lead platforms in this space.”
He initiated coverage of the Toronto-based provider of a digital automobile auction platform for dealers, which began trading on the TSX in early November after its initial public offering, with a “buy” recommendation.
“The E Inc. thesis is built on a fairly typical traditional-process-to-digital-platform migration theme, with the company positioned as one of the leading digital disruptors, competing with others of its kind as well as industry incumbents,” said Mr. Galappatthige. “E Inc. serves the automotive dealership market with an online auction marketplace platform that enables dealers to buy and sell vehicles virtually. We estimate the digital transition of this industry is at the 20 per cent mark but moving rapidly to being fully online.
“E Inc. has established a leading position in Canada and has laid the groundwork, including an acquisition, to step up its penetration of the lucrative US market. On the retail front, E Inc. also offers a solution on a subscription model that helps dealers track, manage, and market vehicle inventory.”
The analyst emphasized the company’s management, including chairman Jason Chapnik, have “extensive” experience in the sector, and are “ideally suited ... to build one of the leading platforms for the wholesale used vehicle auction market.”
“We believe E Inc.’s digital wholesale auction marketplace platform, EBlock, is differentiated by its intense focus on saving time and hassle for dealerships,” he said. “We cite in particular its set auction times and run lists, which allow dealers to be well-prepared and efficient in their auction-related functions. E Inc.’s lead position in Canada is also a promising precursor, in our view.”
“Given the market size and early phase of its US rollout, we expect revenue growth to remain at 30 per cent-plus for an extended period. Our projections call for a steepening in growth in F2023 (to 42 per cent) as we see the impact of U.S. market development and a macro-level recovery in volumes as supply chain conditions improve. We also make the case that growth rates beyond our formal forecasts (F2023E) could steepen further as E Inc.’s U.S. efforts extend beyond its current western focus toward a more national profile, and as other opportunities around new product offerings, the launch of the retail product in the U.S., and potential encroachment on the commercial side (rental vehicle companies, REPO lenders, etc.) play out.”
Mr. Galappatthige set a target of $28 for the stock, which closed at $19.44 on Friday.
“Our target of $28 per shares translates to 8 times 2023 estimated EV/Revenue,” he said. “While this is higher than its comp group, we believe it is important to recognize that the central driver of the thesis – penetration of the U.S. market – would still be in its earlier innings (at just over $55-million) even as of 2023, heading into what we believe will be a steepening growth curve. Recall management’s goal of reaching $500-million in the U.S. market (wholesale market revenues only) over time, as well as the sizable TAM in play. As the penetration of the retail platform develops, we believe there could be further upside to valuation, given the SaaS nature of this business model which attracts higher multiples.”
Others initiated coverage include:
* CIBC World Markets’ Todd Coupland with an “outperformer” rating and $28 target/
“It has a high-growth platform with scale and liquidity and is the market leader in Canada with a 5-per-cent market share,” Mr. Coupland said. “The company also has what we consider to be achievable plans to roll out across the U.S. over the next 18 to 24 months. E Inc. has differentiated technology for wholesale vehicle dealers through EBlock and for retail dealers through EDealer.
“The market opportunity is significant with low digital penetration. In North America, 24 million used vehicles are sold wholesale each year, yielding a market opportunity of $16-billion. The benefits of moving online are encouraging market participants to do so at a high rate. E Inc.’s attractive business model can leverage low online adoption in this fragmented market in Canada and the U.S. As it does, we forecast 40-per-cnet revenue growth, high gross margins (50 per cent) and highly efficient capital use.”
* National Bank Financial with an “outperform” rating and $24 target.
Canaccord Genuity’s Mark Rothschild thinks American Hotel Income Properties REIT (HOT.UN-T) now possesses an “attractive” valuation compared to its U.S. peers.
He was one of several equity analysts on the Street to resume coverage of Vancouver-based REIT, which focuses on select-service hotels in secondary metropolitan markets south of the border, on Monday following its US$50-million offering of convertible unsecured subordinated debentures.
“We utilize an 8.5-per-cent cap rate to value AHIP’s portfolio and our NAV estimate remains US$5.24 (C$6.55),” he said. “This translates into a value per door of US$134,569, compared to the current average stock market implied value of US$109,623.”
“We note that recently completed transactions would suggest that AHIP’s units are materially undervalued. Using the average transaction value of $184,500 for the recent Condor-Blackstone and Summit Hotel Properties-NewcrestImage portfolio purchases, AHIP’s price per key is approximately 68 per cent lower, using the current average stock market implied value..”
While Mr. Rothschild views the issuance “positively” as its strengthens the REIT’s balance sheet, he did emphasize it will have a near-term negative impact on its unit price, leading him to reduce his target to $6 from $6.50 with a “buy” recommendation. The average is US$4.28.
“We continue to believe that AHIP is well positioned for cash flow growth as it benefits from a recovery in travel in the U.S.,” he said.
Others resuming coverage include:
* BMO’s Joanne Chen to US$4.50 from US$4.25 with a “market perform” rating.
“We remain encouraged by AHIP REIT’s ongoing recovery in Q3/21. We expect AHIP to benefit from the ongoing reopening and the eventual resumption in corporate demand in early 2022. The more confident outlook was solidified by the announcement of the reinstatement of distributions in 2022,” said Ms. Chen.
* CIBC World Markets’ Dean Wilkinson with a US$4 target, up from US$3.75, with a “neutral” rating.
* Scotia Capital’s Mario Saric to $5 from $5.25 with a “sector perform” rating.
* National Bank Financial’s Tal Woolley with a “sector perform” rating and $5 (Canadian) target.
* TD Securities’ Lorne Kalmar with a US$4.75 target, down from US$5.
NexLiving Communities Inc. (NXLV-X) achieved “critical mass” with the $72.6-million acquisition of 10 recently constructed apartment properties in Moncton and Riverview, N.B., said Echelon Capital Markets analyst David Chrystal.
“The transaction is highly accretive to per-share cash flow, owing to (1) an attractive 5.0-per-cent purchase cap rate on stabilization, and (2) an existing management platform that can support substantial growth in the asset base with minimal incremental G&A,” said Mr. Krystal in the wake of a marketed secondary offering of 100 million shares for gross proceeds of $20-million.
“We believe this transaction should give investors increased confidence in the underlying business, as well as management’s ability to execute on a substantial acquisition pipeline.”
Maintaining a “buy” rating for shares of Halifax-based NexLiving, Mr. Chrystal raised his target by a penny to 25 cents, matching the consensus.
“With the completion of the transaction, NXLV will significantly grow its asset base, NOI, market cap, and shareholder base,” he said. “Importantly, G&A as a proportion of NOI should drop substantially and is rapidly approaching levels consistent with several of the larger multi-family peers. Further, we note that management remains in discussion with respect to a disclosed pipeline of nearly $150-million of acquisition opportunities. We believe that this pipeline has likely grown since it was first highlighted several months ago. We expect that NXLV will remain highly acquisitive over the course of the next 12 months; should capital be accessible on favourable terms, growth should be highly accretive given the substantial pipeline in the context of the existing asset base.”
Wedbush analyst Dan Ives expects investors to focus further on the technology sector as fears around the Omicron variant grow, seeing it as “a clear buying opportunity” to own the “winners” for 2022.
“Ultimately this is not the first or last variant scare and our tech playbook over the last 18 months has been to use these macro/risk-off events as buying opportunities to own the tech sector specifically cloud, cyber-security, and 5G winners,” he said in a research note. “While we are seeing a return to normalcy, a semi-remote workforce environment we believe is here to stay which underscores our tech cloud thesis into 2022 that the digital transformation build-out will be accelerated and is not a one time Covid pull forward event. There is $1 trillion of cloud spending now being green-lighted for the coming decade and investors should focus on playing these trends and winners despite these near-term black cloud events.”
Mr. Ives said he would own “secular winners” in FAANG stocks, including his favourite Apple Inc. (AAPL-Q), as well as cloud, cyber security, metaverse and 5G stocks moving forward.
“Our view is that while tech valuations appear stretched to many on the Street, importantly the growth prospects around cloud, cyber security, 5G, and the metaverse are unparalleled to any period of time we have experienced since covering tech stocks in 2000,” he said. “Variant fears only reinforce our belief that the cloud build out among enterprises is here to stay as more companies are prepared for a flexible/semi-remote workforce over the coming years.”
“Cloud shift a major benefit to Microsoft, AWS, Google in 2022. For MSFT which remains our favorite cloud name, we believe Azure’s cloud momentum is still in its early days of playing out within the company’s massive installed base and the Office 365 transition is providing growth tailwinds into 2022. With this highest IT priority front and center, we believe 90 per cent of these cloud deployments have already been green-lighted by CIOs and healthy cloud budgets already in place for 2022, with Redmond firmly positioned to gain more market share vs. AWS in this cloud arms race. Naturally, AWS as well as Google (GCP) and (IBM) will benefit, as we predict enterprise workloads on the cloud increase from 43 per cent today to 55 per cent by the end of 2022.”
After a “strong” Black Friday weekend, the analyst thinks Apple is now on pace to sell almost 40 million iPhones between now and Christmas, emphasizing it’s a record pace despite lingering disruptions from the chip shortage.
“We believe Cook & Co. have been able to get more iPhones into the retail channel over the past week which is a step in the right direction with holiday season now kicking into full gear,” he said.
Mr. Ives maintained an “outperform” rating and US$185 target for Apple shares. The average on the Street is US$168.58.
Citi analyst Paul Lejuez saw 2021 as “ideal” for many U.S. retailers, however he thinks next year will be “tricky” to forecast due to a number of shifting factors, including “uncertainty with supply chains, inflationary pressures, the pricing environment and the health of the consumer.”
With that view, he thinks investors should focus on U.S. off-price retailers, believing their business model “thrives on curveballs” and seeing “an ideal buying environment.”
“Off-pricers were gaining significant share prior to the pandemic – during good times and bad,” he said. “And looking at F21 (the best year in modern retail history) vs F19, significant share gains continued. If the consumer were to be more stretched in 2022 as they anniversary stimulus checks and face inflationary pressures, off-pricers’ value positioning and fun shopping experience is likely to draw further share away from full price retailers.”
“There are so many different strategies retailers are using to manage through the current environment, but the key is that this is a period of maximum disruption and uncertainty, which is likely to lead to an extremely favorable environment for off-price buying in the near and medium term. There are so many different strategies retailers are using to manage through the current environment, but the key is that this is a period of maximum disruption and uncertainty, which is likely to lead to an extremely favorable environment for off-price buying in the near and medium term.”
Mr. Lejuez pointed to the “flexibility” of the off-price model, seeing such companies able to raise prices in response to inflationary pressures like regular retailers but also able to pivot to a “more promotional” environment if need be.
Given that “more optimistic view” of the off-price sector, Mr. Lejuez upgraded TJX Companies Inc. (TJX-N), parent company of Winners, Marshalls and HomeSense, to “buy” from “neutral” on Monday. He maintained targets of US$82, which falls below the US$85.68 average on the Street.
“In addition to the overall industry tailwinds that we expect in the near to medium-term (from great inventory availability) and longer-term (from the continued consumer shift off-mall), TJX has the added benefit of being the leading off-pricer with a higher end (‘want a bargain’ rather than ‘need a bargain’) consumer,” he said. “The slightly higher end customer demographic should help TJX pass higher prices through. The company has already indicated that it has not seen any resistance to its early pricing actions, which can be a margin driver in future years. In addition, as the industry leader, we believe TJX gets the first look on merchandise, which should help it obtain the best inventory in the coming quarters.
“Its international exposure can provide an added boost in the near-term that the others don’t have, as their international business was still meaningfully affected due to the pandemic in 2021. Comps in Canada are running up 1 per cent year-to-date and comps in Europe/Australia are running down 5 per cent YTD compared to Marmaxx comps up 14 per cent YTD.”
He also upgraded Burlington Stores Inc. (BURL-N) to “buy” from “neutral” with an unchanged US$335 target. The average on the Street is US$350.58.
“Like other retailers, BURL results were hurt in 3Q21 by higher freight and wage costs, and these pressures are expected to continue in the near-term. But we do not think this should take away from the success the company has had driving sales,” Mr. Lejuez said. “As the number three off-pricer, BURL’s ability to drive significant sales increases (comps up 19 per cent year-to-date vs 2019) shows it is increasing its relevance with consumers (and in a year when many wondered about their ability to obtain attractive product). And that gives us greater conviction in its ability to drive strong results longer-term.”
In other analyst actions:
* Following last week’s release of its fourth-quarter results, Desjardins Securities analyst Frederic Tremblay raised his Rogers Sugar Inc. (RSI-T) target to $6 from $5.75 with a “hold” rating. The average is
“While the FY22 volume growth outlook is relatively modest in Sugar (down 1.2 per cent year-over-year) and Maple (flat year-over-year), management expects profitability to improve in both segments, thanks in part to a more favourable sales mix, internal initiatives and the non-recurrence of certain FY21 headwinds,” he said.
* National Bank Financial analyst Michael Robertson upgraded Ag Growth International Inc. (AFN-T) to “outperform” from “sector perform” with a target of $46, up from $37 and above the $45.22 average.
* National Bank Financial analyst Vishal Shreedhar raised his Dollarama Inc. (DOL-T) target by $1 to $64, exceeding the $62.43 average, with an “outperform” rating.