Inside the Market’s roundup of some of today’s key analyst actions
In reaction to Friday’s announcement from Enbridge Inc. (ENB-T, ENB-N) that it now expects its Line 3 replacement to be operational almost a year later than anticipated, a trio of equity analysts downgraded their ratings for its shares.
The Calgary-based company said the pipeline, which was being counted on to help alleviate the bottleneck in Canadian oil, is now expected to be operational in the second half of 2020. The company pointed to a revised construction timeline stemming from a delay in the acquisition of necessary environmental permits from the State of Minnesota.
"We now have a firm schedule from the state on the timing of the remaining permits for our Line 3 replacement projects,” said chief executive officer Al Monaco in a release.
National Bank Financial analyst Patrick Kenny downgraded Enbridge to “sector perform” from “outperform” with a target price of $55, falling below $59 and just below the consensus target on the Street of $55.14, according to Bloomberg data.
Scotia Capital’s Robert Hope lowered the stock to “sector perform” from “sector outperform” with a $52 target, down by a loonie.
Seeing the narrative surrounding Line 3 shifting from a catalyst for the stock to an overhang, Evercore ISI’s Daniel Walk moved his rating to “in-line” from “outperform” while raising his target to $63.76 from $53.
Alaris Royalty Corp. (AD-T) offers an “attractive” investment profile stemming from both yield and multiple expansion, according to RBC Dominion Securities analyst Derek Spronck.
Emphasizing an improving partner portfolio is a “positive valuation driver,” he initiated coverage of the Calgary-based company with an “outperform” rating.
“After a period of partner redemptions, new investments, and portfolio rebalancing, Alaris’s partner portfolio has reemerged much healthier today,” he said. “There remain three partners that continue to experience financial challenges, but they represent just 4 per cent of partner distributions (versus 30 per cent in 2015). Furthermore, the majority of the portfolio is seeing positive rate resets leading to attractive organic growth of 4–6 per cent annually. With an improving partner portfolio and accelerating organic growth trends, we see a positive setup for expansion of valuation multiples and increasing book value for Alaris.”
He added: “The current rate environment and recent trends are a net positive for Alaris, in our view. A higher rate environment sets the stage for higher rates on new capital deployed. Higher rates and recent tax changes have also dampened the economics for traditional private equity firms due to refinancing risks — Alaris’s main competition for new capital deployment. And, combined with market expectations of slower rate increases over the next 12 months, which makes Alaris’s current dividend yield of 8.4 per cent more attractive, we see the current rate environment as generally more positive for Alaris over our forecast horizon.”
Mr. Spronck set a $24 target, which tops the average on the Street of $21.80.
“Alaris has found a way to differentiate itself and structure financing that is delivering higher returns than traditional junior capital lenders,” he said. “We believe Alaris will continue to find new partner opportunities, in particular in the larger U.S. market. And with an improving existing portfolio, we see both growth in book value per share (BVPS) and expansion of valuation multiples. We model Alaris’s BVPS multiple moving back toward 1.4 times (from 1.2 times currently), implying a 30-per-cent all-in potential return to our price target.”
On Friday, the company reported gross transaction values (GTV) for the quarter of US$1.338-billion, up 3 per cent year-over-year but below the analyst’s projection of US$1.363-billion. Adjusted earnings per share of 32 US cents was a 23-per-cent increase from the same period a year ago, but fell short of the consensus expectation on the Street by 4 US cents and Mr. Cherniavksy’s forecast by 3 cents.
“The company's 4Q18 results demonstrated some encouraging year-over-year progress, but still fell short of expectations,” he said. “Moreover, relative to the growth and synergies that the ~$800 mln acquisition of IronPlanet (IP) was designed to deliver, we believe results continue to underperform. Before we resume a more constructive view on the stock we want to see GTV growth, margins, and ROIC improve to levels that are closer to Ritchie’s historical performance and management’s Evergreen targets.”
“We expect further progress on both sales force integration and cost controls to effect a continued improvement in Ritchie’s financial performance for 2019. Some rebalancing of equipment supply/demand should also help, although we maintain a generally ‘agnostic’ view of these macro factors and prefer to frame the company’s growth potential as a “share of wallet” opportunity rather than a cyclical or counter-cyclical story. Partially offsetting these tailwinds is a higher than expected tax rate and some reported pressure on at-risk margins as equipment prices normalize. As always, we expect Ritchie to “pivot” and adjust its tactics to reflect the new market conditions. However, during these transitions, at-risk margins often compress, which is what we have assumed for 2019. As a result, our EPS forecast for this year has been cut as the full synergies of the IP acquisition get pushed further to the right.”
With a reduction to his earnings expectations, Mr. Cherniavsky lowered his target for the stock to US$34.50 from US$38. The average is currently US$35.30.
He kept a “market perform” rating.
Elsewhere, RBC Dominion Securities’ Derek Spronck lowered his target to US$35 from US$36 with a “sector perform” rating.
Mr. Spronck said: “Given the challenging equipment-supply environment and operational transformation, 2018 was an impressive year that came with improving financial performance. Upside from here we see coming from acceleration of earnings growth or better visibility around the sustainability of it. With supply challenges still present, higher tax rates, and tougher comps, the near-term earnings potential relative to the longer-term upside opportunity we see fairly priced at current valuations.”
Canaccord Genuity analyst Doug Taylor raised his target price for Air Canada (AC-T) following its Investor Day event, which he feels confirmed an upward trajectory for margins and returns.
“The presentation included updates on a number of key initiatives which reflect the transition from expansion mode with dramatic fleet additions to focus on optimization of the current network, improving revenue management systems, and re-integrating the loyalty program,” he said.
“We see the 19–22-per-cent EBITDA margin guidance, 16–20-per-cent ROIC [return on invested capital] target, and 1.2-times leverage ratio ending this year as positive vs. prior Street expectations.”
Mr. Taylor increased his fiscal 2019 earnings before interest, taxes, depreciation and amortization (EBITDA) forecast to $3.789-billion from $3.175-billion, exceeding the consensus on the Street of $3.567-billion.
His earnings per share projection dipped to $4.12 from $4.41 due to changes to his depreciation and amortization, interest and tax forecasts. The consensus is currently $4.10.
“Addressing what some view as the largest risk to the otherwise very strong Air Canada story, management laid out a number of updates on the strength of the Air Canada model against economic shocks or a downturn,” said Mr. Taylor. “The most meaningful number provided is that the company expects that the impact of a 2009-type recession (particularly hard on airlines) is expected to be roughly half what it was last time (which reduced EBITDA margins by 5 per cent). Put another way, Air Canada expects that the year-1 margin impact would be reduce EBITDA margins by 2.5 per cent to 16.5–19.5 per cent, which is a far more comfortable position than the last iteration. While there would also be a revenue impact, if we combined a more than 2.5-per-cent margin contraction (16.5-per-cent margin) with a 10-per-cent decline in revenue, our 2019 EBITDA estimate would decline 29 per cent to $2.683-billion. Against that the multiple would be 5.5-times EV/EBITDA and the company would still generate positive FCF in the subsequent years (2020 and 2021), by our count.”
Maintaining a “buy” rating, Mr. Taylor increased his target to $45 from $40. The average is now $40.86.
“Despite the extraordinary performance of AC shares, the stock remains inexpensive on an EV/EBITDA basis relative to peers. Air Canada currently trades at 4.0 times enterprise value-to-NTM [next 12-month] consensus EBITDA while U.S. network carriers trade at 4.9 times,” he said. “The reasons for the discount (leverage, loyalty, margins and returns) are subsiding as expected and Air Canada features an attractive competitive position relative to U.S. peers. We continue to see valuation upside as Air Canada continues to execute.”
Canopy Rivers Inc. (RIV-X) provides “compelling value for investors in the cannabis space, particularly for those concerned about sector valuations, which are approaching all-time highs,” said CIBC World Markets analyst John Zamparo in a research note emphasizing its “meaningful” exposure to cannabis markets south of the border.
“We consider RIV undervalued for two reasons,” he said. "First is a deemed lack of U.S. exposure, which we believe to be misguided. We count four main avenues to the U.S. First, RIV’s PharmHouse partners own a significant amount of greenhouse space in America, which could be converted quickly upon a legalization event, at an attractive cost. Second, RIV’s TerrAscend asset already generates U.S. revenues and EBITDA, and is accompanied by a leadership team with a solid track record in an adjacent industry. Recent investments in Greenhouse Juice and Headset comprise the final two avenues. These are relatively immaterial for now, but we believe they could grow substantially larger, particularly Greenhouse, following the 2018 Farm Bill that moves forward the production and sale of CBD-based beverages.
“The second reason is a technical matter: accounting rules obscure RIV’s true earnings generation. Since Canopy Rivers is not deemed to exert significant influence over most of its investments, its attributable revenues and EBITDA are not included in traditionally reported metrics, and we believe this results in an obscured view of the true valuation of the company—below each of the top-10 Canadian producers as measured on calendar 2020 estimated EBITDA — compared to others.”
Maintaining an “outperformer” rating, Mr. Zamparo increased his target to $8 from $7, which falls narrowly below the consensus of $8.94.
Melius Research analyst Rob Wertheimer initiated coverage of cannabis stocks by urging investors to take a “cautious entry” under the belief “the space seems to price in positives that only may come true.”
Comparing the sector to the tech bubble, he recommends “basket approach, narrowing as winners are identified.”
“The trend towards legalization is broad and becoming unstoppable," he said. "Cannabis will affect, then disrupt the beverage industry. Its wide range of potential medicinal uses holds potential to take share in the over-the-counter and pharmaceutical industries over time. As the industry surges in growth, Canadian cannabis companies have a window, opened by that country’s lead in legalization, which they can use to develop product, intellectual property, brand and distribution, reaching out into other, larger markets as legalization progresses. Our current view is that early leads are important in an industry that will develop and change quickly. As yet, most of that portfolio needed to capture sustained margin is in early stages or non-existent, making for a dynamic market with multiple layers of interacting uncertainties.”
Mr. Rob Wertheimer initiated coverage of four marijuana stocks on Monday.
He gave an “overweight” rating to Aurora Cannabis Inc. (ACB-T), which is his top pick based on “potential alliances, early scale in production and global reach.
He set a $17 target, which exceeds the consensus of $12.50.
He handed Tilray Inc. (TLRY-Q) an “underweight” rating with a US$48 target, which falls below the average on the Street of US$93.25.
In other analyst actions:
TD Securities analyst Graham Ryding downgraded Equitable Group Inc. (EQB-T) to “hold” from “buy” with an $80 target, down from $82 and below the consensus of $80.83.
Cormark Securities analyst Maggie Macdougall upgraded Savaria Corp. (SIS-T) to “buy” from “market perform” with a $15.75 target, rising from $15. The average is $17.63.
Cormark’s Gavin Fairweather lowered Tecsys Inc. (TCS-T) to “market perform” from “buy” with a $15 target, down from $17 and below the $17.38 average.