Inside the Market’s roundup of some of today’s key analyst actions
SNC-Lavalin’s (SNC-T) second quarter is “unlikely to be a turning point,” cautions BMO analyst Devin Dodge. He cut his price target on the stock by $2 to $33, prompting a 6.3 per cent drop in SNC’s share price Monday.
“We expect Q2 will continue the trend of weak financial performance, but suspect the apparent flushing out of margin risk across the business should be wrapped up,” the analyst said in a note.
“Valuation appears undemanding, but confidence in our earnings estimates remains low. Meanwhile, we remain concerned that the turmoil surrounding the company could result in employee retention issues and is a key risk to the anticipated earnings recovery in the E&C business.”
He continues to rate the stock “market perform.”
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Credit Suisse downgraded American Airlines (AAL-Q) due to risks related to labour issues and the 737 MAX grounding.
Credit Suisse downgraded American Airlines to “underperform” from “market perform” and sees the biggest risks to AAL’s earnings estimates are “driven by two primary (and mounting) headwinds: 1) the 737 MAX grounding; and 2) the ongoing mechanics labour dispute. While these issues may be transient, they add to an already-challenged 2019 cost outlook and unfortunately mask some of the progress that AAL is making on the commercial front this year.”
Analyst Jose Caiado lowered his target price to US$30 from US$32, and his revised 2019 EPS estimate, “which still excludes incremental downside from a potential new labour contract, is now about 8 per cent below Street. Risks include Fed rate cuts and a decline in fuel prices.” The median target price is US$41, according to Zack’s Investment Research.
Mr. Caiado expects that the grounding of the 737 MAX airplanes will likely continue into the fourth quarter and that could help non-MAX operators including Delta Airlines (DAL), Spirit Airlines (SAVE), JetBlue Airways (JBLU), and Alaska Air Group (ALK).
He upgraded JetBlue (JBLU-Q) to “neutral” from “sell” due to strength in summer leisure travel and its manageable 2020 expectations.
“By all accounts, peak domestic leisure demand has been robust (JBLU, ALK and LUV all raised Q2 guidance in June), and the pockets of weakness that weighed on Q1 (e.g. transcon, FL->Caribbean) appear to have stabilized. Meanwhile, JBLU continues to execute on its cost program and is on track to roll out new revenue initiatives by year end. Another concern of ours had been the risks to achieving JBLU’s 2020 EPS target of US$2.50-US$3 (CSe US$2.34), but considering that the buyside already expects JBLU to fall short, the bear case is becoming harder to advocate. Our target price rises to US$19 (from US$16). Risks include fuel price volatility and failure to deliver on new revenue initiatives.”
The median target price is US$20, according to Zack’s Investment Research.
“News emerged two weeks ago that the aircraft type may remain grounded until late 2019 (vs. the previous expectation of ‘late summer’) as new flight-control issues uncovered during simulated testing are remediated. Airline investors, perennially worried about elevated levels of domestic supply, seemed to welcome the latest delay, reasoning that an extended grounding amounts to ‘forced’ capacity cuts that will keep supply in check for a while longer and boost pricing. We lower our consolidated 2019 industry capacity growth forecast to 3.4 per cent from 4.0 per cent (and vs. industry growth of about 4.6 per cent in 2018). We expect the primary beneficiaries of these forced capacity cuts to be the non-MAX operators (DAL, SAVE, JBLU, ALK) – as evidenced by the 2.3 percentage point year over year increase in DAL’s Q2 domestic load factor, which contributed to a solid revenue beat” the analyst said.
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Credit Suisse lowered its estimates for Husky Energy (HSE-T) but kept its neutral rating on the stock.
Analyst Manav Gupta also cut his price target to $18 from $21. The median is $17.50.
“We are adjusting HSE’s 2Q19 CFPS [cash flow per share] estimate to $0.90 from $1.03 vs. consensus of $1.06. This is a heavy turnaround quarter for HSE in both the upstream and downstream segments that is impacting volumes and cash flows and resulting in negative estimates revisions,” he said.
“Within Upstream, we expect E&P [exploration and production] net earnings of $8-million in 2Q19 vs. $2-million in 1Q19 and $158-million in 2Q18. We expect upstream volumes of about 278kb/d [thousand barrels per day] vs. approximately 285kb/d in 1Q19, down quarter over quarter due to planned maintenance. Within Upstream, we expect I&M net earnings of about $108-million in 2Q19 vs. $123-million in 1Q19,” he said.
“Within Downstream, we expect Upgrading net earnings of $54-million in 2Q19 vs. $44-million in 1Q19. Wider differentials will be a sequential tailwind for the Upgrading segment. Within Downstream, we expect Canada Refined products net earnings of $3-million in 2Q19 vs. $22-million in 1Q19 and $32-million in 2Q18. Within Downstream, we expect U.S. R&M [repair and maintenance] net earnings of $139-million in 2Q19 vs. $172-million in 1Q19 (about $100-million FIFO [fly in fly out]) and $115-million in 2Q18. Higher cracks quarter over quarter are offset by lower throughput and no benefit from FIFO,” he said.
“Our revised $18 target price (from $21) is based on SOTP [sum-of-the-parts analysis] : 5.0 times EBIDAX [earnings before interest, depreciation, amortization and exploration] multiple on our $2.5-billion CY19 E&P, 5.5 times on our $0.6-billion CY19 I&M EBIDAX, 5.0 times EBIDAX multiple on our total downstream of $1.5-billion CY19, less corporate expenses and debt, which equates to $18 per share,” he said.
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Beacon Research initiated coverage on Burcon NutraScience Corp. (BU-T) with a “buy” rating and a $2 price target.
Burcon focuses on processes to make plant-based proteins. “Burcon has spent 20 years and about $72-million developing patented technology to process plant-based proteins. Major validation came in the form of a licensing deal for their soy technology with Archer Daniels Midland ADM (ADM-N), a global leader, signed in 2011,” said analyst Spencer Churchill.
He notes the recent changes in the industry. “The rise of the mainstream flexitarian, a greater focus on protein intake and heightened environmental/sustainable awareness has created very fertile ground for the plant-based food industry. Product advancements that have produced good-tasting alternatives to meat have set the stage for a cultural shift in what people eat and the supply chain required to satisfy this demand. Rapid adoption by consumers and the food service industry of plant-based alternatives has significantly increased the demand for proteins derived from a core group of high protein plants (soy, pea, canola) and is driving hundreds of millions of dollars of investment,” he said.
“The meat industry is one of the least penetrated by plant-based or other non-meat alternatives, estimated at less than 1 per cent globally and about 5 per cent of the retail channel in the US. If penetration of meat alternatives reached the current level of milk alternatives ( about 15 per cent) it would represent a approximately US$35-billion opportunity,” he said.
“Seemingly every day there is an announcement from a grocer or fast food chain launching plant-based meat alternatives and the big boys (i.e. McDonalds [MCD-N], Burger King [QSR-T], KFC [YUM-N], and Tim Hortons [QSR-N]) are now in the game. The industry has struggled to keep up with demand and there is a shortage of food grade plant-based processing capacity,” he added.
“Burcon and a group of seasoned agri-food executives have formed a joint venture to build a plant-based protein production facility. Burcon will contribute $8-million in equity (secured by a recent $15-million rights offering) for a 40 per cent share and their IP for a revenue royalty. The deal contemplates a relatively under sized phase 1 ($65-million total capex), hence here is significant upside through capacity expansion,” he said.
“Prior to the wildly successful IPO of Beyond Meat (BYND-Q) there had been no pure-play public vehicle in which to invest in the plant-based frenzy. Beyond IPO’d at US$25 and is up about 500 per cent since. Burcon rallied hard on the JV and rights announcement, but has since retraced with a market cap currently of about $61-million. We believe the name remains under the radar in the investment community and is the only public pure-play in Canada on the plant-based food industry,” he said.
“We value Burcon using a combination of 25 times EV [enterprise value]/2022E (FYE March) EBITDA and DCF [disounted cash flow]. Potential catalysts include JV debt financing partners, additional food and beverage industry partners, capacity increases and international expansion.”
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Canaccord Genuity is initiating coverage of Rhythm Pharmaceuticals (RYTM-Q), which “is developing therapies to treat rare, severe, early onset genetic obesity disorders.”
Analyst Arlinda Lee said the company currently has several trials going to treat certain genetic deficiencies and two obesity syndromes (Alstrom’s , a rare disease that feature childhood obesity, blindness and hearing loss, and BBS, Bardet-Biedl syndrome, which is a genetic disorder characterized by obesity and other issues).
“Rhythm’s rich clinical newsflow over the next 12-18 months could drive the stock higher. We are optimistic about setmelanotide [a peptide drug to treat obesity and diabetes] prospects and initiate coverage of RYTM with a “buy" rating and US$35 price target.”
The median price target is US$38.
Rhythm’s treatment has so far shown efficacy in phase 2 trials and show promise for other rare obesity indications. In addition, the company has the ability to fund its research as its ended the first quarter of 2019 with about US$222-million in cash. By year end Ms. Lee expects more data from clinical trials.
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Beacon Securities downgraded CannTrust Holdings Inc. (TRST-T; CTST-N) and cut its target price sharply after the company announced that Health Canada had found its Niagara greenhouse was non-compliant with certain regulations.
“CannTrust reportedly began cultivating in 5 of the 12 greenhouse rooms before those rooms were licensed for cultivation. Cultivation activity took place between October 2018 to March 2019, while the rooms were not licensed until April 2019. TRST employees were also found to have provided inaccurate information to Health Canada,” said analyst Russell Stanley.
As a result, “Health Canada has placed a hold on 5,200 kg of dried cannabis harvested from the facility, and TRST has voluntarily placed a hold on 7,500 kg of cannabis equivalent at its manufacturing facility in Vaughan, Ontario. The company has announced implementation of a number of corrective actions, but with the stock down 21 per cent as of writing, significant damage has already been done,” the analyst said.
He cut CannTrust rating to “hold” from “buy” and slashed his price target to $5.25 from $15.
“While we have little doubt that the product being held will eventually be released, and we stress that all 12 rooms are now growing, we believe TRST will (in the interim) need to source some product from 3rd parties in order to continue supplying provincial buyers. Given the well-reported supply shortages in the Canadian market, this could prove costly. More importantly, we believe this development could slow the company’s expansion plans. On July 3rd, the company announced that its outdoor grow operations in B.C. were still waiting on the licensing required to begin planting, warning that if the crop is not planted by August 5th, there will be no outdoor harvest in 2019. While licenses are issued by Health Canada on a site-specific basis, we would be surprised if the issues in Niagara do not somehow slow the licensing timeline for the outdoor grow in B.C.. As discussed in our June 19th note, we assumed that the 2019 harvest would contribute to 2020 revenue/EBITDA. We have therefore reduced our F2020 revenue/EBITDA estimates from $415-million/$96-million to reflect heightened uncertainty regarding the company’s growth profile. We have also reduced our valuation multiple from 23 times to 20 times EV/C2020E EBITDA. CannTrust has heretofore been regarded as one of the stronger Canadian producers from a Health Canada/compliance perspective, and we believe it could take quite some time for that image to heal from this morning’s news.”
Citi was more upbeat on the stock after the news. It has a “buy, high risk” rating on the stock and a target price of US$7.
“We cited that CTST has admitted to having had material weakness in its past financial reporting processes. However, we chose to recommend the stock with a Buy rating and a target price that represented significant upside because we believe that by having upgraded its mgmt team over the last year, CTST is on a path to becoming a more well-managed company. While CTST clearly has more progress to make in that regard, and we await its 2Q19 earnings report in mid-August for updates on the financial impact on these matters, we still believe that the growth potential for CTST (both sales and profits) is significant, and thus continue to recommend it with a Buy/High Risk rating,” said analyst Wendy Nicholson.
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Other analyst actions:
Agnico Eagle Mines Ltd: J.P. Morgan raises target price to $68 from $65
Franco-Nevada Corp: J.P. Morgan raises target price to $110 from $97.5
Rogers Communications Inc: J.P. Morgan cuts rating to “underweight” from “neutral”
BCE Downgraded to Neutral at JPMorgan; PT $60
Calfrac Well Services Cut to Underperform at Alta Corp; PT $2
Ensign Energy Services Upgraded to Buy at GMP; PT $7
Horizon North Logistics Downgraded to Hold at GMP; PT $2
PHX Energy Services Downgraded to Hold at GMP; PT $3.50
Rogers Communications Cut to Underweight at JPMorgan; PT $69
Trican Well Service Downgraded to Hold at GMP; PT $1.75
Darcy Keith