Inside the Market’s roundup of some of today’s key analyst actions
Though IGM Financial Inc. (IGM-T) remains his preferred pick among Canadian large-cap asset managers, Desjardins Securities analyst Gary Ho downgraded his rating for the Winnipeg-based financial services company based on its current valuation.
“Given the recent AUM [assets under management] decline and its impact on EBITDA, we revised our target price [for shares of IGM] lower to $37 (from $39),” he said. “With a potential return to our target price of 17 per cent, we downgraded IGM to Hold (from Buy). On a relative basis, IGM has outperformed its closest peer CIX in the year to date (up 8 per cent vs 3 per cent for CIX); it posted a significant 10 per cent outperformance in 2018. We continue to favour IGM over CIX over the near term given material net outflows at CI.”
Mr. Ho’s new target of $37 continues to exceed the average target price for IGM on the Street of $36.14, according to Bloomberg data.
In a research report previewing fourth-quarter earnings season for the sector, Mr. Ho also lowered his target price for the following stocks:
Gluskin Sheff + Associates Inc. (GS-T, “hold”) to $12 from $12.50. Average: $11.60.
CI Financial Corp. (CIX-T, “hold”) to $20 from $21. Average: $20.50.
Sprott Inc. (SII-T, “hold”) to $2.50 from $2.75. Average: $2.56.
“In 4Q18, share prices for the group dropped 17.3 per cent (recovered 4 per cent year-to-date), underperforming the S&P/ TSX Capped Financials Index, which lost 12.2 per cent (up 8 per cent year-to-date),” he said. “For 4Q18, we believe investors will focus on: (1) the ability to control discretionary expenses given top-line pressure and guidance for 2019; (2) net flows outlook for the RRSP season given recent market volatility (December industry net outflows of $8.9-billion were the worst in the past decade); and (3) update on industry environment, including fee pressure and M&A aspirations. We lowered our estimates to reflect the recent AUM decline and made target revisions.”
Wondering whether there is money to be made as a supplier to Walmart Inc. (WMT-N), Desjardins Securities analyst Keith Howlett downgraded his rating for Gildan Activewear Inc. (GIL-T, GIL-N), expressing concern over its ability to successfully transition into a new role as the manufacturer of the U.S. retail giant’s private label men’s underwear line.
“Gildan has successfully restructured its business, consolidating its branded business within printwear and significantly reducing the SGA expense rate,” he said. “It managed through the planned reduction of US$65-million of mostly private label business in FY16 and the loss of US$125-million of mostly branded sock business in FY18. In FY19, Walmart will swap Gildan branded underwear for its own private label, manufactured by Gildan. After over a decade with Walmart as its major retail channel customer (revenue of US$327-million in FY17), Gildan is still seeking a route to acceptable profitability. It is positive in the short term that Gildan will be able to replace the lost branded volume. The longer-term issue is whether manufacturing private label men’s underwear for Walmart will generate adequate returns.
“We estimate that Gildan’s branded business in FY17 mostly comprised: (1) products sold to Walmart, 35 per cent; (2) Gold Toe socks sold primarily to department stores, 27 per cent; and (3) contract manufacturing for global lifestyle brands, 23 per cent . While revenue with Walmart has grown steadily over the years, our inference is that the profit margin has not.”
While he moved the stock to “hold” from “buy,” Mr. Howlett raised his target for Gildan shares by a loonie to $45. The average on the Street is $44.60.
“Gildan management is highly skilled at operating in challenging conditions (Honduras, Nicaragua, etc) and in adapting to trends and emerging opportunities,” he said. “The company has been a supplier to Walmart, a demanding customer, since at least 2007. In FY17, Gildan’s revenue with Walmart was US$327-million. Our inference is that the inadequacy of financial returns in the retail channel is likely due to the economics of supplying Walmart. Will the next iteration prove more successful?”
Emphasizing it has displayed the best funds from operations per share growth across the entire REIT sector over the last five years, Laurentian Bank Securities analyst Yashwant Sankpal initiated coverage of Mainstreet Equity Corp. (MEQ-T) with a “buy” rating on Monday.
“MEQ’s FFO/share has grown at a CAGR [compound annual growth rate] of 16 per cent since 2000, when it was listed on the TSX,” he said. “Despite the Oil market correction in 2014, MEQ’s FFO/share grew at a CAGR of 12 per cent over the last 5 years, the best in the entire Canadian REIT sector. Part of this growth could be attributable to MEQ’s capital allocation policy - unlike its peers, MEQ doesn’t pay a dividend and reinvests all its free cash flow. Having said that, MEQ’s phenomenal value creation is also attributable to its unique value-add model, its focus on operating efficiencies through technological innovation and strategic planning and its discipline of not issuing equity below NAV to fund portfolio growth. While part of this value creation is reflected in MEQ’s FFO/share growth, part remains hidden in the form of intangible asset.”
Mr. Sankpal said the Calgary-based company has “perfected a formula” to acquire struggling apartment properties in Western Canada and “reposition” them over the next 2-3 years to generate a return on investment of 30-80 per cent.
“MEQ’s operating platform is fine-tuned for its value-add model – from acquiring underperforming properties in off-market deals, to renovating properties using innovative labor management, to sourcing supplies from China, to extracting equity by refinancing properties,” he said. “Additionally, not only can MEQ leverage its model across North America, but it can also outsource its expertise to other investment vehicles. MEQ is currently looking to create a private property fund for institutional investors, to which it can provide asset management services.”
Noting Mainstreet is trading at a discount to his FFO projections versus peers despite its “leading performance,” Mr. Sankpal set a target price of $55 per share, exceeding the current average by 50 cents.
“While MEQ currently doesn’t pay a dividend, it is possible that MEQ may initiate a small dividend in the near term,” he said.
Calling its 100-per-cent-owned Dixie gold project in Red Lake, Ont., “an emerging discovery with the right signature,” Canaccord Genuity analyst Kevin MacKenzie initiated coverage of Great Bear Resources Ltd. (GBR-X) with a “speculative buy” rating.
“While it still early days, we highlight the project’s comparable structural-geological setting, style of mineralization, and developing grade profile to that of many of the more established deposits within the camp,” he said. “While not definitive, we view these comparable elements as fundamental precursors for a potentially substantial discovery within the Red Lake camp.”
“Given the established milling capacity within the Red Lake camp (4,900tpd), we highlight Dixie as a potential future acquisition target in terms of a near-surface, high-grade feed source. While Dixie remains an emerging discovery, the associated potential synergies to multiple operators within the camp significantly de-risks the project’s development threshold, in our view.”
The lone analyst currently covering the stock, he set a target price of $4.75 per share.
“We rate Great Bear a SPECULATIVE BUY to reflect both the financing risk associated with a non-revenue generating company, and the technical risk associated with a project for which feasibility has yet to be demonstrated,” said Mr. MacKenzie. “We highlight Great Bear as a prospective investment for risk-tolerant investors.”
ConocoPhillips (COP-N) is a “free cash flow winner,” said Goldman Sachs analyst Neil Mehta, who thinks the Houston-based energy giant is likely to be able to cover its dividend and capital spending as long as Brent oil sits at US$40-US$45 barrel.
After hiking his cash flow forecast from 2019 through 2022, Mr. Mehta upgraded his rating for its stock to “buy” from “neutral,” emphasizing its long-term growth opportunities are currently underappreciated by the Street. His target for the stock rose to US$82 from US$76. The average is currently US$76.
CIBC World Markets analyst Bryce Adams downgraded Leagold Mining Corp. (LMC-T) to “neutral” from “outperformer” with a target of $3, falling from $3.50 and below the average of $3.73.
“We still view the management and operational team as capable of delivering value from its asset base, and Leagold offers leverage to a rising gold price environment. However, recent events along with share price appreciation (LMC shares are up 50 per cent since midDecember 2018) have shifted our view of the risk-reward balance for Leagold,” he said.
In other analyst actions:
GMP analyst Cody Kwong downgraded Gran Tierra Energy Inc. (GTE-T) to “hold” from “buy” with a target of $4.75, down from $5. The average is $5.32.
Cormark Securities initiated coverage of Charlotte’s Web Holdings Inc. (CWEB-CN) with a “buy” rating and target of $25.50. The average is $24.17.
Eight Capital initiated coverage of Zenabis Global Inc. (ZENA-X) with a “buy” with a $7 target, matching the consensus.
With a file from Bloomberg News