Inside the Market’s roundup of some of today’s key analyst actions
Following an “exciting” week for shareholders of Inter Pipeline Ltd. (IPL-T) that featured the release of in-line quarterly results as well as a Globe and Mail report on the possible sale of its Bulk Liquids Storage business and the acknowledgement of an unsolicited $30.00 per share offer for the company, Industrial Alliance Securities analyst Elias Foscolos lowered his rating for the Calgary-based company, believing “the time to accumulate shares in IPL has temporarily passed.”
“Up until last week, we believe that most market participants did not focus on IPL’s fundamentals, which we viewed as very attractive,” said Mr. Foscolos. “Only last week, when the rumours of an unsolicited $30.00/share offer were reported by the Globe and Mail, did the company’s stock take off. We continue to like IPL’s stock, as it has a relatively stable business that produces sufficient cash flow that supports its dividend. Furthermore, it is investing heavily in a propane conversion, PDH/PP facility that will take underpriced Alberta propane and transform it into a higher value plastic polypropylene.”
Mr. Foscolos said he pegs the likelihood of the sale of its fuel-terminal business at 50-50, acknowledging the difficult of assigned a value to it. In the end, he thinks the sale would bring $1.1-billion to $1.5-billion.
“We believe the exploration of a sale is a reaction to the unsolicited offer, or an offer for that business, not because of a desire to fund capital projects,” he said. “We make that statement based on the fact that (a) IPL acquired a business, NuStar, less than a year ago, and since that time, nothing would have precipitated a change in strategy as capital spending and corporate funds flow are within projection; (b) the sale of European storage, while reducing debt, also reduces distributable cash flow by 8-10 per cent and would push IPL’s payout ratio to over 90 per cent (15 cents per share); (c) the timing of this potential sale coincides with the unsolicited offer; and (d) the sale would be dependent on the price received (multiple impact) of the Company.”
He thinks the probability of a corporate sale is even lower, noting: “First, we believe a hostile offer from the unsolicited party is not likely. With the new takeover bid rules, hostile offers do not really work unless major shareholders are on side. Second, IPL’s asset base makes it a difficult initial fit. We can see many parties wanting the base Pipeline and NG Processing businesses, but we believe one party would be hard pressed to want both the PHD/PP plant and the European Storage business. As far as $30.00/share being a reasonable offer for IPL, if the unsolicited offer from is from an organization that is large and it can ignore the short-term capital drain from constructing the PDH/PP plant, $30.00/share is supported by our DCF model. In reality if we lower our risk free rate, currently at 1.5 per cent to 1.3 per cent, we could see additional upside of $30.00/share but that represents ‘full valuation’ in our view.”
Moving Inter to “hold” from “strong buy,” Mr. Foscolos raised his target for its shares to $26 from $25.50. The average on the Street is $24.42.
“We feel uncomfortable valuing IPL off a likelihood of a take-over offer,” he said. “While confirmation of an offer was finally acknowledged by IPL, the $30.00/share valuation seems rich to us based on fundamentals and the premium to market, which based on June’s closing price would be near 47 per cent. By placing a low probability of a takeover proceeding and a moderate chance that IPL sells its storage business we are compelled to lower our rating to Hold."
Meanwhile, Raymond James analyst Chris Cox raised his rating for Inter Pipeline to "market perform" from "underperform" with a target of $25, up from $20.
Mr. Cox said: “We continue to see a number of fundamental challenges with Inter Pipeline, primarily centere don the funding outlook, risks relating to Heartland and the elevated valuation. However,confirmation that the company has received an unsolicited offer changes the risk/reward balance, and we must acknowledge this. While our bias remains to the downside on a going concern basis, the possibility of a more credible bid emerging means that we can no longer maintain our Underperform rating; accordingly, we are upgrading the shares to Market Perform and increasing our target to $25.00. Put simply, the fundamental assumptions needed to justify this valuation - let alone the speculated $30/sh offer (Globe & Mail) - strain the limits of our model and require what is, in our view, an optimistic outlook on Heartland. We continue to see more attractive opportunities elsewhere, however the possibility of a potential bid should buoy the shares near current levels until more clarity around the M&A themes play out.”
CIBC World Markets analyst Robert Catellier raised the stock to “outperformer” from “neutral” based on the “possibility of faster price appreciation” with a $26 target.
“The admission of an offer is suggestive that the market may have been mispricing certain aspects of the company, such as the PDH+PP project,” he said. "Our view acknowledges that low-cost gas prices may make petrochemical assets in Alberta appealing to some buyers, but must be weighed against the fact that the industry has seen numerous strategic reviews and potential deals not lead to transactions (most recently KML). Renewed interest in petrochemical assets in Alberta is supported by recent media reports of a US$15B bid for Nova Chemicals. By extension, the company’s assets could attract similar attention. Whether or not one believes a transaction is consummated, renewed interest in the sector should lead to higher valuations for its PDH+PP project.
“Furthermore, the company is exploring the sale of the Bulk liquid storage business in Europe. If a successful transaction is concluded, the DRIP could be suspended, reducing shareholder dilution. While this would increase the payout ratio (by 650 bps to 81.7 per cent in 2020) until the PDH+PP project is placed into service, it is a worthwhile trade-off, in our opinion.”
Pointing to an improving outlook and “enticing” return, Mr. Foscolos raised his rating for CES Energy Solutions Corp. (CEU-T) to “strong buy” from “buy” in a separate research note.
After the bell on Thursday, CES released strong-than-anticipated second-quarter results, exhibiting improved margins and performance south of the border.
“The U.S. was firing on all cylinders, benefiting from increased Drilling Fluids market share, higher average rig count, and increased Production Chemicals treatment points,” he said. "Canada was negatively impacted by reduced drilling activity and a loss of market share (down 2 per cent year-over-year), which were partially offset by increased Production Chemicals treatment points.
"CEU reported Q2/19 Adj. cash EBITDA (EBITDAC) of $42-million, equating to a 13-per-cent margin. CEU was able to expand margins through a combination of economies of scale gained through additional infrastructure, completion of higher-margin work, and restructuring efforts in the PureChem division. CEU noted on the call that Canadian Production Chemicals is the only division not meeting the Company’s targeted 15-per-cent EBITDA margins."
With the results, Mr. Foscolos raised his revenue and operating income projections based largely on an improved outlook for its U.S. business.
He also increased his target for its stock to $4.25 from $4. The average on the Street is $4.41.
“CEU’s Q2/19 results represented a record Q2 for the Company and a substantial beat,” said Mr. Foscolos. “The Company’s expanded asset base is supporting growth and scale, while restructuring efforts and laser focus on reducing costs are resulting in improving margins. Both the U.S. and Canada performed well considering the decline in industry activity, and CEU is following through on its guidance of generating substantial FCF to go to the balance sheet and share buybacks.”
Elsewhere, RBC Dominion Securities upgraded CES Energy Solutions Corp. (CEU-T) to “outperform” from “sector perform.”
Following a further decline in same restaurant sales, BMO Nesbitt Burns analyst Peter Sklar cut Recipe Unlimited Corp. (RECP-T) to “market perform” from “outperform.”
"With heightened competition and deep discounting amongst its peers, we believe it could be challenging for Recipe to generate strong comps, manage cost pressures in the absence of menu board price increases, and meaningfully grow earnings," said Mr. Sklar.
“We understand Recipe is investing in renovations, technology, menu innovation, and improved quality of service; however, we note that these initiatives are longer term in nature and unlikely to have a notable impact on performance over our forecast horizon.”
His target for the stock is $29, which falls below the $30.40 consensus.
Though its first-quarter financial results topped his estimates, Raymond James analyst Ben Cherniavsky downgraded Heroux-Devtek Inc. (HRX-T) based on its “soaring" valuation.
"We believe that this company's growth profile remains very promising," he said. "However, in the spirit of maintaining a disciplined approach to valuation, we believe the market has now taken generous account of this growth by driving Héroux's stock price much higher. Specifically, since our Nov. 12, 2018 upgrade, which was also incidentally made in the spirit of valuation, the share price has increased 60 per cent (versus 8 per cent for the TSX). While a string of strong financial reports over the past few quarters has contributed to the appreciation, the majority of this lift is a function of multiple expansion. Specifically, over the past nine months our F20 EPS estimate has increased 10¢ to $1.00 while the P/E multiple on that forecast has risen from 13.7 times then to 19.6 times today.
"To reflect the longer-term value of recent acquisitions and contract wins, we continue to use a 'fully ramped' approach to our valuation, basing our official target price off a F22 EPS estimate and discounting it back to a present value. Nevertheless, this calculation still yields limited upside to the current price. We are also mindful of the cyclical risks, execution risks, and balance sheet risks that are inherent in this business, especially as it digests a series of recent acquisitions. In short, while Héroux's fundamentals remain promising, the risk-return profile of its stock has changed materially over the past few months, prompting us to change our view of it. Héroux will remain on the top of our 'watch list' as we look for another, more compelling entry point for investors. In the meantime, our rating is Market Perform."
Moving the stock to “market perform” from “outperform,” he raised his target to $21 from $19.50. The average is $22.64.
Citing an earlier-than-expected return to same-store sales growth, favourable year-over-year set-up for the coming quarters and a discounted valuation, CIBC World Markets analyst Matt Bank raised Sleep Country Canada Holdings Inc. (ZZZ-T) to “outperformer” from “neutral.”
“ZZZ is not out of the woods yet, but as a dominant retailer in a healthy (albeit cyclical) industry, supported by strong cash flows and balance sheet, we see an attractive risk/return, with upside room on estimates and valuation,” he said.
Mr. Bank raised his target to $24 from $20. The average on the Street is $23.71.
“While estimates are little changed and fairly modest, the biggest moving part is valuation, which is a key reason behind our upgrade,” he said. "Even after [Friday’s] 12-per-cent pop, ZZZ shares have significantly lagged the market this year (flat year-to-date versus S&P/TSX up 14 per cent and S&P 500 up 16 per cent), leading to an attractive valuation today at 12 times P/E. Setting our target multiple at a modest premium to the lower-quality home furnishings group and a discount to faster-growing U.S. mattress peers generates our $24 price target (was $20).
“We acknowledge potential downside should the economy turn, but the housing market appears to be past its trough, consumer confidence is inching up, and in our view the valuation is more likely to expand than contract in coming quarters.”
Desjardins Securities analyst Michael Markidis adjusted his target prices for several TSX-listed real estate investment trusts in separate research notes released Monday.
Despite reporting better-than-anticipated quarterly results, Mr. Markidis raised his target for shares of Cominar Real Estate Investment Trust (CUF.UN-T) to $13 from $12, keeping a “hold” rating, based on his valuation of its portfolio. The average on the Street is $13.42.
"The degree of change inside CUF over the past 18 months cannot be understated," he said. "Since late 2017, the company has (1) appointed a new CEO and CFO; (2) disposed of well in excess of $1-billion of real estate (including all assets outside of Québec and Ottawa); (3) unwound the REIT’s prior relationship with Groupe Dallaire; (4) enhanced the board of trustees; (5) rationalized the workforce; and (6) implemented a change management office. Most notable, in our view, is the recent creation of a dedicated asset management platform that will be led by newly appointed Executive Director of Asset Management Alexandra Faciu. This may not necessarily result in a material reduction in the REIT’s capital intensity; however, we are optimistic that it should lead to more effective allocation decisions and enhanced returns on capital.
"Leverage is elevated compared with most large-cap peers. Management has established a D/FV target of 50 per cent (from 54 per cent currently) by the end of 2021. Dispositions will likely continue to play a role; however, we believe increased emphasis is now being placed on NOI growth and other initiatives (including moving ahead with preliminary work on sites with intensification potential) that will drive future increases to the underlying value of the portfolio."
With an increase to his net asset valuation, Mr. Markidis raised his target for Crombie Real Estate Investment Trust (CRR.UN-T) to $16.50 from $16, maintaining a “buy” rating, following in-line quarterly results. The average is $16.44.
"With well above $300-million of liquidity and the pending disposition of an 89-per-cent interest in a second portfolio to Oak Street this fall, CRR has more than enough resources on hand to fund the active pipeline," he said.
Calling the amount of development planning happening within SmartCentres Real Estate Investment Trust (SRU.UN-T) “mind-blowing,” he raised his target to $34.50 from $34 with a “hold” rating. The average on the Street is $34.83.
"The existing portfolio is holding relatively steady while management charts a development and intensification course for the next five years," he said. "In the interim, investors can look forward to the 2.8-per-cent distribution increase scheduled to take effect in October and a meaningful increase in transaction income, which is expected to be more than 10 per cent of operating FFO next year."
"Thus far, management has identified 20 msf of viable space for mixed-use development across 76 properties that is expected to commence over the next five years. This is a massive amount of future development potential when considered in the context of SRU’s existing 34 msf rental portfolio composed primarily of Walmart-anchored, unenclosed shopping centres. Notable projects expected to have an impact on FFO and/or NAV in the next 30 months can be separated into two distinct categories: those that are expected to generate recurring rental income and those that are expected to generate transaction-linked development gains on closing, such as residential condominiums. The former includes (1) earnouts and on–balance sheet development of additional retail space (0.2 msf); (2) the PwC-YMCA tower at VMC; and (3) the first of two rental apartment buildings being developed in partnership with Jadco at Laval Centre. The latter includes completion/closing of the first three Transit City condominium towers at VMC, which at the midpoint are expected to generate a gross profit of $36-million (20 cents per unit)."
Mr. Markidis lowered his target for Northview Apartment Real Estate Investment Trust (NVU.UN-T) to $29 from $29.50 with a “buy” rating, saying its second quarter “wasn’t all that bad.” The average is $29.13.
"Same-property NOI from the multifamily segment (88 per cent of total same-property NOI) increased 2.9 per cent," the analyst said. "Performance in Ontario was stellar (up 11.8 per cent); unfortunately, Northern Canada was hurt (down 7.8 per cent) as extreme cold weather conditions, which were also experienced in several other regions in 1Q19, spilled into 2Q. We believe this shaved one cent from NVU’s 2Q19 FFO. Our forecast assumes margins revert to historical levels in 2H19 and through 2021."
Plaza Retail Real Estate Investment Trust’s (PLZ.UN-T) development completions “should contribute meaningful near-term NOI growth,” he said.
"2Q19 results were in line with our expectations. Development completions are expected to pick up in 2H19 and should drive better year-over-year comps in 4Q19 and early 2020. PLZ is a small cap that unfortunately flies under the radar of most. Our Buy thesis is predicated on (1) PLZ’s value-add business strategy; (2) substantial insider ownership (chairman and CEO); and (3) NCIB support."
Mr. Markidis kept a “buy” rating and $4.50 target, which is the average on the Street.
Following a “noisy” quarter, Mr. Markidis said Summit Industrial Income REIT’s (SMU.UN-T) leasing strategy is “shifting to a more patient approach.”
"Our positive stance reflects our view that the GTA and Montréal industrial markets are poised for a multi-year cycle of rent growth and continued cap rate compression. Beyond this, we note that SMU has the lowest cost of capital among Canadian REITs with industrial exposure, which puts it in a favourable position with respect to continued portfolio expansion," said the analyst.
Mr. Markidis increased his target to $14 from $13.50 with a “buy” rating. The average is $13.54.
WPT Industrial Real Estate Investment Trust (WIR.U-T) is “reaping the benefits” of its private capital platform, according to Mr. Markidis.
He raised his target to US$15 from US$14.75 with a “buy” rating. The average is $14.89.
Mr. Markidis said: “The portfolio is humming along nicely, as evidenced by mid-single-digit same-property NOI growth and cash leasing spreads. We are gaining more confidence in the value-creation potential inherent within the management platform, which includes the private capital business acquired in mid-2018. A continued ramp in this program could be a meaningful catalyst, in our view.”
Despite a second-quarter earnings beat, Raymond James analyst Steve Hansen reduced his financial expectations and target price for shares of Ag Growth International Inc. (AFN-T), citing a “tepid” outlook for the second half of 2019 both domestically and abroad.
“Management indicated that 2H19 EBITDA will likely ‘approximate’ 2H18 levels (inclusive of M&A), implicitly suggesting weakness across its core businesses,” said Mr. Hansen. “More specifically, these same headwinds appear to be impacting: 1)US storage (late plant, tentative farmers, high competition); 2) international projects (trade war tensions, Brazilian government changes); and 3) Indian sales (slow monsoon, banking liquidity). Notwithstanding these challenges, AGI’s backlog remains strong (growing), quoting activity is still robust, and 2020 fundamentals look far more positive.”
Keeping an “outperform” rating, he dropped his target to $62 from $70. The average on the Street is $64.31.
“We continue to recommend AFN shares based upon our constructive view of the firm’s medium-to-long-term growth prospects,” said Mr. Hansen.
Feeling its hard to ignore macro headwinds facing the Canadian agriculture industry “given the souring trading relationship between Canada and China,” CIBC World Markets’ Jacob Bout cut Cervus Equipment Corp. (CERV-T) to “neutral” from “outperformer.”
“While moisture levels have improved in Q3/19, in many areas the precipitation was too late to significantly impact the crop, translating into continued producer restraint through harvest," he said. "Lower net cash income from 2018, and continued trade tensions with China (the Canola Council of Canada said on August 8 that licenses of Richardson and Viterra to export Canola seed to China remain suspended) continue to weigh on farmer sentiment.”
He added: “CERV indicates that H2/19 ag. new equipment sales will likely be in line with performance of H1/19 (i.e., down 25 per cent year-over-year). We do not expect a meaningful rebound until mid-2020 (but status of Canada/China relations will ultimately determine this). The focus in the ag segment will be on keeping used equipment inventory levels in check and delivering on parts and service.”
Mr. Bout dropped his target to $13 from $16. The average is $14.85.
Following the release of weaker-than-anticipated first-quarter results, Echelon Wealth Partners analyst downgraded Wesdome Gold Mines Ltd. (WDO-T) to a “hold” from a “speculative buy” rating, “pending the Kiena updated resource and PEA.”
He maintained a $6 target, which falls 83 cents short of the consensus.
“WDO currently trades at 16.6 times our 2019 CFPS estimate and 1.47 times our adj. NAV5% estimate, compared with selected peers at 9.1 times and 1.20 times,” he said. “We contend that the deserved premium valuations reflect continued production growth at Eagle River, bolstered by significant exploration success at both Eagle and Kiena.”
In other analyst actions:
Eight Capital initiated coverage of Teranga Gold Corp. (TGZ-T) with a “buy” rating and $10 target, which exceeds the $7.67 average.