Inside the Market’s roundup of some of today’s key analyst actions
Monetary policy on both sides of the border is likely to remain “broadly accommodative” toward capital investment in energy infrastructure in 2019, according to Industrial Alliance Securities analyst Jeremy Rosenfield.
In a research note released Monday, Mr. Rosenfield said that environment should support equity market valuations for both Enbridge Inc. (ENB-T) and TransCanada Corp. (TRP-T) and their “self-funded organic growth plans,” leading him to give a “buy” rating to both stocks.
“We expect that macro-economic trends and the pace of central bank tightening will be key drivers of equity performance and relative valuation in the energy infrastructure sector in 2019,” said Mr. Rosenfield. “At this juncture, we expect overall largely accommodative monetary policy that supports fundamental growth in the sector, but with modest relative market valuations for energy infrastructure equities. We expect energy infrastructure companies to deliver sustainable mid-single-digit earnings and cash flow growth over the longer term, primarily driven by self-funded organic investments.”
“ENB and TRP are two of North America’s largest publicly listed energy infrastructure asset owners/operators, with a combined market capitalization in excess of $150B. The two companies pursue similar (but distinct) overall investment strategies that primarily focus on regulated or highly contracted investment opportunities in liquids & gas pipelines, storage, gas distribution, and power generation infrastructure. As a result of their investment discipline, both ENB and TRP offer investors access to large-scale, diversified infrastructure investment platforms that generate relatively stable earnings and cash flows, with limited overall exposure to commodity prices, volumetric risk, and other market factors.”
Mr. Rosenfield expects both Enbridge and TransCanada to see mid-single-digit growth in EBITDA, earnings per share and cash flow over the long term.
"Following several years of fast-paced growth fuelled by large-scale acquisitions (TRP/Columbia, ENB/Spectra), we see ENB and TRP re-focusing strategic attention on organic system expansions and tuck-in growth opportunities," the analyst said. "The net result is more sustainable long-term growth from both companies that should fall within the mid-single-digit range (i.e., 5-7 per cent per year, on average, over the next five years). Although certain large-scale projects are on the drawing board (e.g., TRP/Keystone XL), we believe that both companies are now mindful not to (once again) overextend their balance sheets."
Mr. Rosenfield set a target price of $60 for Enbridge shares. The average target on the Street is $55.67, according to Bloomberg data.
"ENB offers investors (1) stable earnings and cash flows, with an emphasis on crude oil & liquids infrastructure assets (50 per cent of EBITDA), (2) visible, low-risk organic growth (5-7 per cent per year DCF per share growth, CAGR 2018-23), driven by $16-billion of secured investment (2019-23), including the Line 3 Replacement, (3) upside associated with $5-6-billion/year of longer-term growth initiatives, and (4) attractive income characteristics (6-per-cent yield and long-term DPS growth in line with DCF/share growth)," he said.
He set a target of $70 for TransCanada shares, which exceeds the consensus of $64.22.
"ENB and TRP currently trade in line with their 10-year historical average valuation levels from both an EV/EBITDA perspective (12 times FYE2 [fiscal 2020 estimates] for ENB and 11 times FYE2 for TRP), and a P/E perspective (17-18 times FY2E for ENB and 16-17 times FYE2 for TRP), while Price/Distributable Cash Flow (or P/DCF) valuation multiples are also relatively in line with broader Power, Utility & Energy Infrastructure comparable companies (14 times FY2E for ENB and 11 times FYE2 for TRP)," said Mr. Rosenfield. "We would expect ENB and TRP to continue to trade in line with historical valuation levels in the current macro-economic context, with ENB at a slight premium to TRP."
In a research note entitled “Let’s Talk Torque to Liquids Price Appreciation,” Industrial Alliance Securities analyst Michael Charlton pointed to three companies poised to benefit from rising oil prices as “the bulls are gathering in the E&P space.”
“Early indications from OPEC show that the cartel produced 300,000 barrels per day less in March than in February which has started heating up crude prices,” he said. “Adding fuel to the fire is Venezuela, whose monthly production nose-dived on power outages that closed a key port and drove average March production of ~600,000 barrels per day compared to 1 million barrels the prior month, reducing global supply. On that note, news published in connection with the potential IPO of Saudi Aramco indicated the Ghawar oilfield’s maximum output is 3.8 million bbls/d, substantially lower than the 5 million bbls/d the market believed the field was capable of. All these events are trimming global crude supplies and have been providing tailwinds for increased oil prices. Further propelling prices are hopes that new provincial and federal governments may be more friendly towards energy developments.”
Mr. Chalton said the trio have "both substantial liquids weighted production and a lower amount of hedges, so that they will receive virtually all of the benefit from increasing prices."
His picks are:
Surge Energy Inc. (SGY-T, “buy” rating, $2.25 target, $2.04 consensus)
Analyst: “The Company has yet to fully recover from the fall 2018 sell-off when differentials expanded to unprecedented levels and investors were fleeing the energy space. We believe its optically high debt levels have slowed Surge’s stock from making a quick rebound as many other companies have done year-to-date, with the S&P TSX O&G EP Index up 10 per cent year-to-date and Surge still down 8 per cent on the year. With that being said, we believe that with a production mix tilted 84 per cent towards liquids, and hedges covering only 5 per cent of its production, Surge is poised to capture almost all of the commodity price appreciation we are currently seeing and could potentially make substantial debt repayments or increase its dividend with its excess cash flow.”
Tamarack Valley Energy Ltd. (TVE-T, “buy” rating, $4 target, $4.37 consensus)
Analyst: "With a track record of exceeding guidance and a diverse asset base, Tamarack maintains extreme flexibility to adapt its capital program to fit prevailing commodity prices and price differentials. We believe the Company’s high quality asset base will provide plenty of drilling opportunities with acceptable payback timelines in even the most challenging pricing environments, but note that management typically does not pursue any project not meeting its 1.5-year payout mandate. This 65-per-cent oil weighted company typically generates 90 per cent of its revenue from its liquids production with what looks to be declining production hedges through the balance of the year, leaving it well positioned to capture upside in a rising commodity pricing environment."
Yangarra Resources Ltd. (YGR-T, “buy” rating, $6.50 target, $5.98 consensus)
Analyst: "The third (alphabetically) in our top three company list of those poised to benefit most from rising liquids prices is Yangarra. The Company’s liquids rich Cardium development play continues to deliver increasing production rates and strong liquids cuts. Given its 61-per-cent liquids weighting that drives nearly 90 per cent of its forecasted revenue with minimal to none of its production hedged, Yangarra’s free cash flow could pop in Q2/19 and through the balance of the year if liquids pricing holds. The Company’s relatively active, $100-million 2019 capital program that looks to drill 24 wells should also provide for the potential to see significant reserve additions again this year."
Recipe Unlimited Corp.'s (RECP-T) “best-in-class” free cash flow yield is “difficult to ignore,” said Canaccord Genuity analyst Andrew Lawlor, believing it may be a “safe place to hide” for investors during a period of economic weakness.
Upon assuming coverage of the stock, he raised his rating for the Vaughan, Ont.-based company, formerly Cara Operations Ltd, to "buy" from "hold."
"Almost half of Recipe's EBITDA comes from the Franchise segment, which generates income from collecting royalties on franchised restaurants," said Mr. Lawlor. "This low-cost business model generates 92-per-cent EBITDA margins, which allows same restaurant sales (SRS) growth largely to flow to the bottom line. Further, 37 per cent of Recipe's EBITDA comes from the Corporate segment, which includes Recipe's owned and operated restaurants. Given the high fixed-cost nature of restaurants, we estimate 35 per cent of SRS growth falls to EBITDA. These characteristics help to generate high levels of FCF/sh growth while producing low single-digit SRS. For perspective, Recipe generated an FCF/sh CAGR of 29 per cent from 2015 - 2018, vs. an average yearly SRS growth rate of 0.7 per cent. Recipe could use this cash flow to pay down debt, repurchase shares, invest in its current restaurant portfolio, or continue to build its brand portfolio through acquisitions."
“Despite the discretionary nature of the restaurant industry, we believe certain aspects of Recipe’s business model can provide resiliency during downturns. Specifically, (1) the high-margin Franchise segment should continue to provide strong levels of cash flow (average EBITDA growth from Franchise peers in 2008 was 2.3 per cent); (2) low-price brands (Harvey’s, Swiss Chalet, etc.) tend to be more resilient as customers turn to lower-priced options; and (3) Recipe has a healthy balance sheet, with 1.7-times net debt to pro-forma EBITDA vs peers at 2.6 times. The company has stated in the past it is comfortable up to 3.0 times net debt to EBITDA.”
Mr. Lawlor lowered the firm's target for Recipe Unlimited shares by a loonie to $30. The average is currently $31.79.
"The upgrade follows recent weakness in the share price leading Recipe to appear undervalued relative to peers," he said.
2019 is likely to “mark a trough for profitability” for George Weston Ltd. (WN-T), said CIBC World Markets analyst Mark Petrie, who upgraded its stock to “outperform” from “neutral.”
“Weston Foods has suffered revenue declines and severe margin pressure for almost two years,” he said. "There are a number of drivers of this; though fundamentally, the company has been hurt by poor service levels and an elevated cost base exacerbated by a significant overhaul to many of its assets. We have limited visibility to the precise timing of a recovery, but the company has changed its structure and approach to servicing customers and along with more modern and scaled facilities, margins should improve with time.
“Beyond the weakness in bakery, the valuation of WN has been hampered by uncertainty around future capital allocation priorities, including acquisitions to further diversify the portfolio. We acknowledge that this remains in place, but in our view investors are more than compensated for this risk given the substantially discounted valuation. Furthermore, we believe the company has placed priority on the stabilization and improvement in bakery, which likely extends the timeline of the next deal.”
Mr. Petrie raised his target to $113 from $109. The average is currently $110.
“Though the superior liquidity of L [Loblaw] remains attractive, the valuation gap is simply too large to ignore, and we upgrade WN to Outperformer,” he said.
Following a December upgrade that helped turn sentiment toward its stock positive, JPMorgan analyst Stephen Tusa has once again turned negative toward General Electric Co. (GE-N), downgrading it to “underweight” from “neutral.”
"The driver of the downgrade is our view that the Street is significantly over projecting the bounce in FCF [free cash flow] in the coming years, off levels that we calculate at zero currently, as Power/Renewables remains weak, GECS (GE Capital Services) will likely consume material cash for the foreseeable future, Aviation fundamentals, as per underlying FCF, are weaker than meet the eye, while lingering sector high leverage including entitlements leaves the company vulnerable to liquidity issues in the event of a recession, for which a potentially dilutive sale of the rest of Healthcare may be needed," said Mr. Tusa.
His target dipped to US$5 from US$6. The average is US$11.04.
"We believe many investors are underestimating the severity of the challenges and underlying risks at GE, while overestimating the value of small positives, and with a 38-per-cent move in the stock year to date, and more than 50-per-cent cuts to forward fundamental FCF (free cash flow) anchors, we are cutting our [target] and moving to underweight," he said.
Believing the financial implications of the troubles surrounding its 737 Max aircraft are worse than anticipated, Bank of America Merrill Lynch analyst Ronald Epstein dropped Boeing Co. (BA-N) to “neutral” from “buy.”
"The reputational loss from these events could erode long-term market share and pricing power of the 737 MAX," said Mr. Epstein.
Anticipated delays in the production of the aircraft will extends to 6-9 months (more than the original 3-6-month estimate), he lowered his target to US$420 from US$480. The average is US$432.46.
"A six month delay also means lower margins due to penalties owed to customers, weaker negotiating position with airlines as airlines consider cancellations, and operational inefficiencies from the production disruption," he said.
On the heels of a “powerful” rally thus far in 2019, RBC Dominion Securities analyst Mark Mahaney upgraded Snap Inc. (SNAP-N) to “outperform” from “sector perform.”
He pointed to several factors in justifying the rating changes, including “early evidence that Android platform improvements are finally gaining traction, our long-standing appreciation for the high level of product innovation at SNAP, takeaways from Snap’s partner conference, and our belief that SNAP may have reached a fundamentals inflection point.”
After raising his revenue projection for fiscal 2019 by 4 per cent (to US$1.648-billion) and lowering his EBITDA loss estimate by 1 per cent (to US$357-million), Mr. Mahaney hiked his target for Snap shares to US$17 from US$10. The average on the Street is US$9.57.
“SNAP shares have rallied powerfully year-to-date (up more than 100 per cent), after dramatically underperforming in both 2017 (down 40 per cent) and 2018 (down 62 per cent),” the analyst said. “A series of execution errors (incl. a material delay in its Android platform improvements and jerkily executed UI redesign) and an initially highly demanding valuation (as high as 30 times next 12-month price-to-sales back in ‘17), created this early stark share price underperformance. The recent stock recovery has been driven by the potential for a fundamental inflection point (which we highlighted in our Feb 5th EPS report) and a much-less demanding valuation (as low as 5 times P/S at the end of 2018). We believe a series of factors can continue to power a rise to $17, our new PT.”
In reaction to a 110-per-cent year-to-date jump in share price, Citi analyst Mark May dropped Roku Inc. (ROKU-Q) to “sell” from “neutral.”
Mr. May explained: “Our ratings change for ROKU is for five main reasons: 1) at 11 times enterprise value-to-202020 Gross Profit (15 times ’19), ROKU is trading at 70-per-cent premium to comps and 80-90 per cent above its lows; 2) recent changes in the OTT landscape could create greater competition (e.g., new large-company apps being ad-supported, and being distributed directly on pay TV services and smart TVs; Android TV’s recent momentum; etc.); 3) While difficult to quantify, Roku’s Platform segment revenue growth could be impacted this year due to tough comps (e.g., the $14-million IP licensing gain in 1Q18; $25-million in ASC 606 benefits in CY18; $9-million accrual reversal in 2Q18; etc.); 4) our recent hiring forecast data (here) suggests that hiring growth at Roku remains on the uptick and shows that Roku has the highest number of job openings relative to its headcount of all companies in our coverage (consistent with mgmt’s guidance for a decline in earnings in 2019); and, 5) Roku’s 10-K shows a significant increase in the value of new RSU and option grants in 2018 ($239-million vs. $60-million in 2017), which increases dilution and could result in greater than previously expected future grants/dilution. Others may also point to recent insider selling as justification for a downgrade, though we see this reason as less compelling. Key risks to our downgrade include: 1) recent results have benefited from one-time gains within the Platform segment, which are hard to predict and could result in near-term upside to forecasts; 2) recent results have benefited from upside in Player segment revenue, which is low-margin but can be perceived positively; 3) ROKU has traded at a much higher multiple than it does today (see 1); and 4) Roku could be an acquisition target given the strategic value of OTT assets.”
His target dipped to US$50 from US$53, which falls short of the US$65.91 average.
“Re-rating hopes fizzle” for SNC-Lavalin Group Inc. (SNC-T) following its sale of a stake in Highway 407, according to Raymond James analyst Frederic Bastien.
“What should have given SNC-Lavalin’s stock a jolt of life struck like a wet towel instead,” he said. “On Friday the battered E&C company agreed to monetize more of Highway 407 than it first contemplated, but at a price that landed below consensus expectations. Although the cash infusion will soon allow SNC to pay down debt and even buy back stock, we believe it is still best to follow the story from the sidelines. With the company facing execution and macro headwinds abroad as well as political and legal controversy back home, it is hard for us to picture how its valuation materially improves in the short-term.”
Maintaining a “market perform” rating for SNC shares, he dropped his target to $40 from $43. The average is $45.58.
Meanwhile, AltaCorp Capital’s Chris Murray raised his target to $50 from $48, keeping an “outperform” rating.
Mr. Murray said: “We see the result as positive as the transaction provides additional liquidity protecting the Company’s credit rating, provides an opportunity to create shareholder value via a sizeable share repurchase program and the estimated value of $27.00 per SNC share is above our last published estimate of $25.24 per share reinforcing the value created in the asset.”
In other analyst actions:
National Bank Financial analyst John Hunt upgraded MEG Energy Corp. (MEG-T) to “outperform” from “sector perform” with an $8.50 target, rising from $6.50. The average is $7.78.
Scotiabank analyst Jeffrey Fan upgraded Corus Entertainment Inc. (CJR-B-T) to “sector outperform” from “sector perform” with a target of $8.40, rising from $6. The average is $7.91.
Wells Fargo Securities analyst Timothy Conder upgraded BRP Inc. (DOO-T) to “outperform” from “market perform” with a $47 target, rising from $39 but below the $55.27 average.
TD Securities analyst Sean Steuart resumed coverage of Northland Power Inc. (NPI-T) with a “buy” rating and $27 target. The average is $26.80.
With files from wires