Inside the Market’s roundup of some of today’s key analyst actions
Weaker-than-anticipated quarterly results and significant changes to both its management and board of directors led Canaccord Genuity analyst Derek Dley to downgrade his rating for AutoCanada Inc. (ACQ-T).
“We have substantially reduced our 2019 EPS estimate to reflect the higher-than-expected operating expenses being incurred by AutoCanada. This coupled with the increased uncertainty in the business following the sweeping changes made to management in recent months compels us to move to the sidelines,” said Mr. Dley, moving the Edmonton-based automobile dealership company to “hold” from “buy.”
On Friday, AutoCanada reported a revenue drop of 1.6 per cent year-over-year, due largely to the divestiture of several General Motors dealerships in January, with same-store revenue declining 5.1 per cent. EBITDA fell to $13-million, well below both last year’s result of $31-million and Mr. Dley’s $32-million projection.
The company also announced a $44-million write-down related to the acquisition of Grossinger, an Illinois-based dealership group, which was announced early in the quarter. The company blamed the impairment charge on "revised expectations for the timeline of U.S. operational profitability."
“It is perplexing to us how the company could both close a large-scale $132-million acquisition during Q2/18 and proceed to book a $44-million write-down related to that acquisition in the same quarter,” said Mr. Dley. “This clearly suggests to us a lack of due diligence on the company’s part as it relates to the Grossinger acquisition. While a new management team is now in place, we question the company’s acquisition strategy in the U.S., which had previously been the premise for our rating upgrade in late March.
“Under new management, the company provided what we view as a much more cautious outlook for the near-to-medium term in both Canada and the United States. While the outlook is slightly more positive in Canada, which is coming off five consecutive record years for new vehicles sold and maintains lower levels of car ownership than the United States, both markets are expected to decline in the near term. The results also provided a slight glimpse into the company’s new strategy as it expects to increase focus on the parts, service and collision business to improve the earnings stability amidst the cyclicality in new car sales. AutoCanada also commented that it will take action to realize margin improvements in the following quarters; however, we are cautious as the specifics of the strategy remain to be seen. “
Mr. Dley dropped his 2018 EPS projection for the company to $1.13 from $2.02, while his 2019 expectation is now $1.21, down from $2.23.
As a result, he lowered his target price for AutoCanada shares to $11 from $27. The average on the Street is currently $18.69, according to Thomson Reuters Eikon data
“While new car sales in Canada remain strong, we believe shares are fairly valued given the increased uncertainty following the sweeping changes made to senior management and the Board of Directors,” he said.
Though its second-quarter financial results fell largely in-line with expectations, Raymond James analyst Ken Avalos lowered his rating for SmartCentres Real Estate Investment Trust (SRU.UN-T) to “sector perform" from “outperform,” citing both the recent performance of its stock and slower same property net operating income growth than its peers.
"The stock is up 8 per cent over the last 13-weeks (versus 3 per cent for peers)," he said. " Thus, recent stock outperformance as well as relative SPNOI performance and valuation have us moving our rating. Over the last five quarters, SmartCentres has lagged the peer group (our 3 Outperform stocks - Crombie, First Capital, and RioCan) in SPNOI growth (0.5 per cent vs. 2.5 per cent), FFO [funds from operations] per Unit growth (4 per cent vs. 8 per cent) and NAV [net asset value] per Unit growth (2 per cent vs. 5 per cent). We don’t think this is likely to change in the short-term.
"Despite this, the stock trades at a 6-per-cent discount to NAV while peers trade at a 14-per-cent discount. To be clear, this is not us abandoning the long-term, value creation-focused thesis – only getting off for part of the ride. While we appreciate the long-term development pipeline and the associated value creation, we feel that until overall retail sentiment turns, investors won’t attribute proper value."
On Aug. 9, the Vaughan, Ont.-based REIT reported second-quarter funds from operations of 57 cents per unit, excluding $1-million in CEO severance fees. It's a rise of 4 per cent from last year and meeting expectations.
"Overall this quarter, the large-cap retail REITs have delivered average SPNOI growth of 2.4 per cent," said Mr. Avalos. "SmartCentres posted 1.1-per-cent growth. We’d expect this pattern to repeat itself in the near-term as their legacy portfolio is less growthy than more urban peers."
Mr. Avalos did not specify a target price for SmartCentres units. His target previously was $32, while the average target on the Street is $32.64.
Desjardins Securities analyst Michael Markidis upgraded his rating for Dream Office Real Estate Investment Trust (D.UN-T) to “buy” from “hold,” expecting to see an acceleration in organic growth in 2019.
"D’s exposure to the office segment in downtown Toronto is 60 per cent; an expected ramp in disposition activity will likely take this higher over the next several quarters," he said. "Management is also moving ahead with redevelopment initiatives (357 Bay, 250 Dundas, 2200 Eglinton), which could surface considerable value over time. A low FFO [funds from operations] payout and expected activity on the NCIB should mitigate downside risk, in our view."
On Aug. 9, the Toronto-based REIT reported a 3.4-per-cent decline in same property net operating income year-over-year. The result was essentially flat from the previous quarter.
However, Mr. Markidis noted SPNOI was up 3 per cent in downtown Toronto, which accounts for 52 per cent of the REIT's total, noting: "The long-awaited lease with a government tenant at 438 University (323,000 square feel) will take effect in December. Market rents in downtown Toronto, which are already 14 per cent greater than in-place, are rising. Finally, future dispositions will inevitably increase the proportion of NOI derived from this segment."
Though he lowered his 2018 and 2019 FFO per unit projections to $1.67 and $1.42, respectively, from $1.68 and $1.69, Mr. Markidis raised his target for Dream units to $27 from $25. The average on the Street is $25.42.
The valuation for Magellan Aerospace Corp. (MAL-T) has “become compelling again,” said Canaccord Genuity analyst Doug Taylor, leading him to raise his rating to “buy” from “hold.”
“Magellan reported Q2 results last week that would have been just shy of expectations if not for a currency gain,” said Mr. Taylor. “On the back of the results and in light of the 26-per-cent year-to-date decline in Magellan shares, we are upgrading our recommendation to BUY (from HOLD). Most of Magellan’s end-markets are growing which we see as offsetting the pressure on margins induced by its large OEM customers and recent currency movements. At 5.4 times NTM [next 12-month] EBITDA and 10.1 times P/E [price-to-earnings], we think investors are compensated well for risks. There remains upside to our valuation if the company can effectively utilize its underlevered balance sheet to add complementary assets which is not reflected in our model.”
On Aug. 8, the Mississauga-based manufacturer of aerospace systems and components reported revenue for the second quarter of $241-million, missing the $248-million expectation from the Street and Mr. Taylor's $252-million projection. EBITDA of $42-million also missed estimates ($40-million and $44-million, respectively), due largely to currency gain.
Reported earnings per share of 40 cents did, however, topped the consensus by 4 cents and Mr. Taylor's estimate by 3 cents.
"While OEM’s continue to look to their supply chains for potential margin improvements, Magellan has shown itself to be adept in managing its own cost structure with an effort to improving margins over time," he said. "The company historically has spoken to the target of 20-per-cent margins by 2020. Our own model is more conservative at 18 per cent in 2019 and 2020 leaving upside if Magellan can execute on improving margins in this environment."
Mr. Taylor's target price for Magellan shares is now $20, down a loonie. The average is $22.13.
"In comparison to both the U.S. and Canadian aerospace and defence supplier peer group, Magellan continues to trade at a discount valuation," he said "We attribute this in large part to the company’s substantially lower liquidity, its status as a Canadian supplier to\ the U.S. in an uncertain geopolitical environment, as well as its lower top-line growth. Additionally, the company now trades well below its own historic valuation range which we see as creating a compelling entry point."
Despite lowering his target price for HudBay Minerals Inc. (HBM-T) in the wake of the release of its second-quarter earnings, which featured higher-than-anticipated operating costs, RBC Dominion Securities analyst Stephen Walker said its stock “remains attractive” and believes its current valuation discount to peers “appears overdone.”
“HBM is trading at a significant discount to peers at 2.8 times 2019 estimated EV/EBITDA [enterprise value to earnings before interest, taxes, depreciation and amortization] versus the NA large-cap copper producers at 5.3 times,” he said. “On a P/NAV [price to net asset value] basis the company is trading 0.52 times versus the large-cap peers at 0.87 times. While we expect HBM to trade at a discount to its peers … we believe the current gap is not warranted and can be reduced by improved execution and communication of the strategy. Delays in securing surface rights for Pampacancha and Rosemont’s 404 water permit are frustrating; however, we continue to believe both permits can be obtained within the next 6 months, which should provide positive share price catalysts.”
In order to reflect declining production results from its operations in Manitoba as well as near-term delays in its Rosemont (Arizona) and Pampacancha (Peru) growth projects, Mr. Walker lowered his net asset value per share projection to $12.88 from $13.46, while his 2018 earnings per share expectation fell to 46 cents from 67 cents. His 2019 and 2020 EPS estimates dropped to 80 cents and $1.17, respectively, from 88 cents and $1.23.
Despite those declines, which pushed his target for HudBay shares to $11 from $13, versus a $11.43 consensus, Mr. Walker said the company provides investors with “strong” leverage to both copper and zinc.
“For each 10-cents-per-pound increase in Cu and Zn prices in 2019, our EPS estimate increases by 17 per cent and our EBITDA estimate increases by 8 per cent,” he said. “We believe the fundamentals for copper and zinc remain strong and both metals appear to be seeking a near-term floor. Exchange inventories of zinc have fallen by 14 per cent since the end of June and the market remains tight, suggesting the correction is bottoming out.”
Mr. Walker maintained a “sector perform” rating for HudBay.
RBC Dominion Securities analyst Steve Arthur predicts “another steady quarter” from CAE Inc. (CAE-T, CAE-N) when it releases first-quarter 2019 results on Aug. 14, expecting to see year-over-year growth across most metrics.
"FQ1/19E results should show continued improvement in Civil sales and margins," he said in a research note released Monday. "We also anticipate an uptick in Military & Healthcare revenues. Bigger picture, we will look for commentary on capital deployment, growth drivers, and technology innovation plans in conjunction with recent government awards. We continue to see CAE as a strong GARP holding."
Mr. Walker maintained an "outperform" rating and $29 target for CAE shares. The average is $27.82.
"Over the next 3–5 years, we see potential for CAE shares to reach the low $40s as the Civil training network sees improved utilization rates and margins, balance sheet leverage is further reduced, and the Military segment sees continued high order flow and revenue conversion,” said the analyst.
“CORV is now above our previous valuation of US$3.30 and the stock has moved up relatively quickly since the positive Brinavess announcement,” he said. “We expect the stock to take a breather.”
His target for the stock rose to US$4.70 from US$3.30. The average is US$7.04.
“CORV was selected as one of our four top picks for 2018, the stock is up 210 per cent year-to-date,” said Mr. Uddin. “We are monetizing our 2018 top pick call here. CORV has traded up 235 per cent since we upgraded the stock on Dec. 15, 2017. Our total calls on CORV have generated a 483-per-cent return.”
In reaction to strong-than-anticipated second-quarter financial results, CIBC World Markets analyst Jacob Bout upgraded Cervus Equipment Corp. (CERV-T) to “outperformer” from “neutral”
“Cervus reported a solid Q2/18, with better-than-expected sales growth in both the Agriculture and Transportation divisions,” he said. “Historically, our concern has been the poor performance of Peterbuilt in the Ontario market, but it seems that CERV has turned the corner with strong sales of on-highway and dump trucks (used equipment also showing strong year-over-year growth), and in-roads into the fleet market.”
Mr. Bout raised his target to $19 from $17.50. The average on the Street is $17.38.
Citing “continued funding questions,” CIBC World Markets analyst Robert Cattellier cut Emera Inc. (EMA-T) to “neutral” from “outperformer.”
“The revised dividend guidance and funding outlook leave too much ambiguity for us to envision the shares outperforming,” said Mr. Catellier, lowering his target to $47 from $52, which is in-line with the consensus.
In other analyst actions:
Cormark Securities analyst David McFadgen cut Intertain Group Ltd. (ITX-T) to “market perform” from “buy.”