Inside the Market’s roundup of some of today’s key analyst actions
Canaccord Genuity analyst Jenny Xenos raised her rating for Canacol Energy Ltd. (CNE-T) in reaction to last week’s announcement that the work associated with the expansion of the gas pipeline between its operated Jobo gas processing facility and Cartagena has been completed.
Calling the news “a significant milestone long awaited by the market,” Ms. Xenos upgraded the Calgary-based natural gas exploration and production company to “buy” from “hold.”
“As a result of additional transport capacity being brought online, CNE’s gas takeaway capacity will increase by a total of 100 mmcf/d [million cubic feet per day], to 215 mmcf/d,” the analyst said. "Pressure testing of the new line is underway, planned to be completed by the end of July. CNE anticipates beginning to inject natural gas into the new pipeline in early August, ramping up to full capacity by August 11. Our assumptions are slightly more conservative, anticipating a more gradual ramp up to full capacity by early September.
“Once full capacity is reached, CNE is expected to have a stable rate of gas sales of 215 mmcf/d. We forecast its annual EBITDA to increase from $120-million to $230-million, and cash flow to grow from $100-million per year to $170-million per year. Assuming yearly development and exploration capital expenditures of $110-million. CNE could be generating $60-million of free cash flow each year, implying a free cash flow yield of 9 per cent, among the highest of its peers. We expect the extra cash to be directed towards accelerating exploration, share buybacks, debt repayment, a potential dividend, and possibly, acquisitions to expand the company’s portfolio.”
Ms. Xenos said Canacol has made a number of positive changes and “significant” achievements since she lowered her rating for its stock almost two years. Those included “refinancing outstanding debt with a more flexible, lower-cost alternative, renegotiating work commitments, selling non-core assets to strengthen the balance sheet and refocus the business, maintaining disciplined spending, expanding reserves and resources and delivering a number of infrastructure projects.”
With the expansion to its system, she pointed to several catalysts that could push Canacol shares higher in the coming weeks. Those included a ramp-up in sales and cash flow, deleveraging of its balance sheet, an enhanced buyback program and the potential for a declaration of a dividend.
Ms. Xenos raised her target for the company’s shares to $6 from $5. The current average target is $6.19, according to Bloomberg data.
“The stock is trading at 4.3 times 2020 estimated EV/DACF [enterprise value to debt-adjusted cash flow], compared to the peer average of 3.6 times,” she said. “Considering CNE’s stable, strong-margin business model, good track record of execution and a number of significant potential catalysts on the horizon, we believe a premium to the group is justified.”
Citing improving fundamentals in its core business and a “higher probability” of value creation amid news it is in talks involving London Stock Exchange Group PLC acquiring Refinitiv Holdings Ltd. in a US$27-billion deal, Credit Suisse analyst Kevin McVeigh upgraded Thomson Reuters Corp. (TRI-N, TRI-T) to “outperform” from “neutral”.
“While TRI has not commented on proceed uses, our analysis suggests they could pay an $8 special dividend among other options,” said Mr. McVeigh. “This deal is consistent with our market data consolidation sector thesis, underscoring intrinsic value in the space. Additionally, we see the core Thomson story improving as the company accelerates organic growth through new products [Westlaw Edge], pricing, and strategic M+A amid margin expansion [500 bps+] on stranded cost runoff through 2020 [we do not believe mid-30-per-cent margins (ex-low margin print/news contract) are a ceiling for the business].”
Mr. McVeigh called Thomson Reuters’ fundamentals “strong and improving,” noting: “We are increasingly bullish on the core TRI story as legal [40 per cent revenue] + corporate/accounting [40-per-cent] benefit from accelerating, relatively recession resistant organic growth — core accelerates to 3.5 per cent or more in 2020 [0-2 per cent prior] — and accretive deals [boost 2020E EPS 5¢ to $2.00 on recently closed $375-million Confirmation deal + estimate 2¢ accretion from the HighQ acquisition (not in CS estimates pending close)].”
Calling the Refinitiv deal consistent with its consolidation theme and believing it is not likely to be the “last value enhancing action,” he hiked his target for Thomson Reuters shares to US$80 from US$70. The average is US$65.60.
Meanwhile, BMO Nesbitt Burns analyst Tim Casey downgraded Thomson Reuters to “market perform” from “outperform” with a $94 (Canadian) target, up from $87.
Canaccord Genuity’s Aravinda Galappatthige raised his target to US$59 from US$58 with a “sell” rating (unchanged).
Mr. Galappatthige said: “In our view, the potential transaction metrics as disclosed in the press releases reinforce our belief that while TRI is a solid operator, valuations are currently stretched, particularly the implied valuation of Refinitiv.”
Though he said the bull case for Cargojet Inc. (CJT-T) is "widely understood, generally accepted, and reflected in the current share price,” Raymond James analyst Ben Cherniavsky thinks its valuation is “ahead of itself.”
Accordingly, he initiated coverage of the stock with a “market perform” rating and encouraged investors to “wait for a more attractive entry point.”
“As Canada’s leading provider of time sensitive overnight air cargo services, we believe Cargojet is uniquely positioned to benefit from the long-term secular growth in e-commerce spending,” said Mr. Cherniavsky. "Cargojet has grown its total revenue at a CAGR of 20 per cent since 2013, driven primarily by a combination of industry growth and new customer acquisitions. As a result, Cargojet now represents roughly 90% of the overnight air cargo industry in Canada. Since 2013, Cargojet’s stock has risen over 950 per cent, outperforming the TSX (up 33 per cent) by a remarkable margin.
“Cargojet commands a strong competitive moat in the overnight air cargo industry and is extremely well positioned to benefit from growth in e-commerce spending, in our view. The most compelling aspect of Cargojet’s competitive advantage relates to the size of its network and the associated economies of scale. Cargojet’s dominant market share and its base of high-volume customers (under long-term contract) enables it to fill planes more reliably than competitors. As a result, the company operates at a better load factor and a lower break-even price point than competitors. Additionally, Cargojet provides an extremely reliable service judging by its on-time performance stats. Reliability is critical in the overnight air cargo business and, in our view, Cargojet has the expertise and culture required to satisfy the rigorous expectations of its customers. Ultimately, we expect Cargojet’s many competitive advantages to translate into higher utilization rates, profitable growth, and strong free cash flow going forward.”
Mr. Cherniavsky set a target price of $90 per share, which falls below the $100 consensus.
“Cargojet currently trades at 53 times 2020 consensus EPS and 12 times 2020 consensus EBITDA, which we consider rich considering the capital-intense nature of the business and the cyclical risks that lie ahead,” he said. “Even based on more mature and normalized earnings, the current valuation looks amply fair, in our view. For example, if Cargojet as a mature, capital intensive and cyclical business should trade at an 18 times P/E multiple, we estimate the company must generate $5.20 per share to justify its current valuation. This implies pre-tax earnings of roughly $95 mln based on the current shares outstanding and statutory tax rate. We believe this is possible, but remain unsure how long it will take the company to get there. Based on our current 2020 EPS and EBT estimates of $2.02 and $37-million respectively, there is still a long way to go. As a result, we believe investors can afford to watch Cargojet put together a couple more quarters of strong earnings growth before stepping into the name.”
Following the release of “solid” second-quarter financial results, Desjardins Securities analyst Benoit Poirier thinks Aecon Group Inc. (ARE-T) is “on plan and on budget to create further shareholder value.”
After the bell on Thursday, the Calgary-based construction company reported revenue and adjusted EBITDA of $867-million and $57-million, respectively, exceeding Mr. Poirier’s projections of $746-million and $42-million. The company also reported a backlog of $8.6-million, which was essentially flat but deemed “robust” by the analyst.
“ARE reiterated its positive outlook for 2019, as its record backlog, robust pipeline of opportunities and ongoing concessions should lead to revenue and adjusted EBITDA growth (excluding the contract mining business),” said Mr. Poirier. “We now forecast revenue of $3.3-billion (up 10 per cent year-over-year excluding the contract mining business) and adjusted EBITDA of $223-million (implying an EBITDA margin of 6.7 per cent, up 80 basis points year-over-year). Interestingly, management also highlighted that the solid momentum should extend into 2020 as the nuclear contract at Bruce Power starts ramping up.”
With the results, he raised his 2019, 2020 and 2021 adjusted earnings per share projections to $1.27, $1.16 and $1.19, respectively, from $1.12, $1.13 and $1.18.
Keeping a “buy” rating, he increased his target to $24 from $23. The average is $24.45.
“Overall, we are maintaining our bullish stance on ARE due to its strong operational track record, solid balance sheet, robust backlog and healthy market conditions across a diversified range of sectors,” said Mr. Poirier. “In the long term, we believe ARE could replicate its success in the U.S. through M&A — a potential catalyst for the story.”
Elsewhere, Canaccord Genuity analyst Yuri Lynk bumped his target to $27 from $26 with a “buy” rating (unchanged).
Mr. Lynk said: “We believe Aecon is well positioned to secure large, complex new awards in 2020, especially with competitor SNC-Lavalin retreating from fixed price construction work. We understand the industry is nearing capacity resulting in jobs being re-tendered due to a lack of bids (such as the Edmonton Valley Line LRT) or sole sourced (such as the Lafontaine Tunnel). This is clearly positive for Aecon as it can pick and choose the projects it feels offer it the best potential reward, likely to the benefit of margins.”
Gilead Sciences Inc.'s (GILD-Q) valuation discount is “too big to ignore,” according to RBC Dominion Securities analyst Brian Abrahams, leading him to upgrade his rating for the U.S. biotech giant to “top pick” from “outperform.”
“Given our high conviction that with new leadership and many overhangs out of the way, shares will begin to better reflect the value of future cash flows from their marketed products and pipeline, which we believe is worth $91,” the analyst said.
Mr. Abrahams emphasized his “increasingly high confidence” in Gilead’s HIV franchise, which he believes will provide “steady” annual revenues of US$16-billion over the medium term.
He added: “After years of HCV declines compressing revenues and EPS, we believe there is finally line of sight into earnings stabilization (est. $6-7 per share range over next 5 years) -- which should make the company more attractive to investors and provide a base upon which bolt-on acquisitions/partnerships should be accretive to growth. And the company is now through multiple other overhangs we believe have weighed on shares, including management transitions, HIV competitive/pricing concerns, and pipeline uncertainties. Yes despite that, and likely because larger-cap biotechs remain out of favor, GILD shares remain significantly discounted (10 times) relative to large pharma (12 times) peers with similar growth profiles, even with its 3.8-per-cent dividend yield.”
He maintained a US$91 target. The average is currently US$80.59.
“We see attractive risk-reward on OpenText shares heading into Q4 results," he said. "First, Q4 is one of OpenText’s strongest quarters and the company has historically reported results above Street estimates. Second, OpenText is likely to increase its margin targets. Third, unlike prior years, the next OpenText event is likely to be a positive rather than negative catalyst for the stock.”
The Waterloo, Ont.-based software company is scheduled to release fourth-quarter financial results on Aug. 1 after the bell.
Mr. Treiber said the company has historically rallied following Q4 results, rising by an average of 7.7 per cent over the last five years.
“OpenText is trading at 12.6 times FTM EV/EBITDA [forward 12-month enterprise value to earnings before interest, taxes, depreciation and amortization], which is a discount to Canadian software consolidators at 18.5 times,” he said. “We believe OpenText’s stock price offers attractive risk-reward, as the stock is not pricing in upside from potential acquisitions, further margin expansion, or sustained/higher positive organic growth. Unlike prior years, the next event following OpenText’s Q4 is its NYC investor day in September, which may be another positive catalyst for the stock.”
He maintained an “outperform” rating and US$47 target, which tops the consensus of US$46.38.
The macro environment is expected to “continue to be supportive of current valuations” for Canadian power companies, according to Desjardins Securities analyst Bill Cabel.
“The stocks in our coverage universe continue to perform well this year, with our IPP coverage up 27.0 per cent year-to-date on average vs 17.1 per cent for the broader S&P/TSX Composite Index,” said Mr. Cabel in a research note previewing second-quarter earnings season.
“We continue to believe that rates will be lower for longer with a downward bias, which should continue to be a tailwind or, at the very least, supportive of current valuations for our coverage universe. We believe 2Q19 generation for wind assets in Ontario and Québec could be decent (possibly above LTAs) and, due to the wet spring, it could be a good quarter for hydro assets in the northeastern US, Ontario and Québec. We are expecting generation from wind assets in the U.S. to come in light, whereas we believe wind speeds in France suggest wind farms could generate in line to slightly below LTAs.”
Mr. Cabel raised his target price for shares of Algonquin Power & Utilities Corp. (AQN-N, AQN-T) to US$14 from US$13 with a “buy” rating (unchanged) after increasing his valuation multiple to fall closer in align with its peers. The average on the Street is US$13.40.
He maintained his targets for the following stocks:
Brookfield Renewable Partners LP (BEP-UN-T, “hold”) at $45. Average: $46.83.
Boralex Inc. (BLX-T, “buy”) at $25.25. Average: $23.91.
Innergex Renewable Energy Inc. (INE-T, “hold”) at $15.50. Average: $16.11.
Northland Power Inc. (NPI-T, “buy") at $28.50. Average: $27.80.
Pattern Energy Group Inc. (PEGI-Q, “hold”) at US$23. Average: US$23.53.
TransAlta Renewables Inc. (RNW-T, “hold”) at $13. Average: $13.88.
Valener Inc. (VNR-T, “tender”) at $26. Average: $26.
“Based on our outlook, relative growth profiles, valuation and potential catalysts, our preferred names continue to be AQN, BLX and NPI,” said Mr. Cabel.
Raymond James analyst Brenna Phelan said she’s forecasting “another strong” quarter for goeasy Ltd. (GSY-T) ahead of the release of its financial results on Aug. 7 after market close.
“Goeasy is a uniquely high-growth story, catering to an underserved market with significant demand and little competition, and executing with effective and reliable credit adjudication and underwriting," she said. "The profitability inherent in its operating model affords goeasy uniquely high returns on its equity, and correspondingly strong capital returns for shareholders. After a hiccup late last year, we think operations in Quebec are performing better, and the Senate bill is on hold for the foreseeable future - further de-risking our forecast of accelerating profitability through 2020 via a more diverse and lower credit risk product suite. Our 2020 EPS forecast comes up to reflect the lower share count resulting from the quarter’s share repurchases.”
Ms. Phelan is projecting earnings per share of $1.20 for the quarter, which is 3 cents below the average on the Street but represents an increase of 39 per cent year-over-year.
“Our quarterly forecast reflects seasonally elevated ad spend and 6 new easy financial openings,” the analyst said. “Importantly, 3 of 6 locations opened were in Quebec, bringing total store-count in the province to 17, indicating to us that management is comfortable with the results from its refined credit adjudication and underwriting model for that market.”
With an “outperform” rating, she hiked her target to $64 from $60. The average is $64.67.
“Looking to valuation, we highlight that goeasy’s last five years have featured a 22-per-cent EPS CAGR, a 30-per-cent dividend CAGR, and a steady march higher in ROE,” said Ms. Phelan. “We think that this performance and the current composition of and outlook for goeasy’s more diverse and lower-risk loan and earnings growth support a multiple closer to the top of its historical range at 9.5 times, not a stretch in our view.”
In other analyst actions:
JPMorgan analyst Jeremy Tonet initiated coverage of Kinder Morgan Canada Ltd. (KML-T) with a “neutral” rating and $12 target, which sits 75 cents lower than the consensus.
Accountability Research analyst Harshit Gupta upgraded PrairieSky Royalty Ltd. (PSK-T) to “hold” from “sell” with a $17 target, down from $18.50. The average is currently $21.28.