Inside the Market’s roundup of some of today’s key analyst actions
Superior Plus Corp.'s (SPB-T) current share price has limited downside, said Industrial Alliance Securities analyst Elias Foscolos, who expects the company to reveal whether it plans to move forward with the sale of its Specialty Chemicals business in the next few weeks.
In early June, the Toronto-based company announced it was exploring a potential sale of the segment, which is expected to contribute $159-million in earnings before interest, taxes, depreciation and amortization in 2019 (or approximately 30 per cent of total corporate EBITDA).
“In our view, the sale of the SC business should be very positive for Superior, at the right price,” said Mr. Foscolos. “The disposition would (1) quickly deleverage SPB, (2) remove cyclicality, allowing SPB to accelerate tuck-in acquisitions, and finally, (3) provide a significant multiple boost. We believe that there is a robust enough trap line of propane acquisitions that by 2023, a large percentage of the EBITDA (post-synergies) lost from SC will be made up. We believe the sale will go ahead if the price is right.”
Mr. Foscolos emphasized the short-term impact on the company of a sale would depend almost entirely on price. He projects the lowest price at which Superior Plus would proceed with the sale is $837-million.
“In the longer term, this depends on how well SPB can re-invest in Energy Distribution (Propane) assets, the potential multiple bump, and target Debt/EBITDA,” he said. “We believe SPB as a pure-play Energy Distribution company would deserve an EV/EBITDA [enterprise value-to-EBITDA] multiple of approximately 10 times and can support a higher D/EBITDA [debt-to-EBITDA] multiple than the current 3 times. Therefore, in both a short-term and long-term scenario we think a price above $800-million (depending on the sales structure) would be positive.”
If Superior Plus decides against a sale, he said: “At the moment, we think the market has pretty much priced out the sale of SC as SPB’s stock is trading at the preannouncement price. Although there may be some modest downward reaction, our projections and model assume no sale of SC.”
Mr. Foscolos maintained a “strong buy” rating and $15 target for Superior Plus shares. The current average on the Street is $14.94, according to Bloomberg data.
Chevron Corp.'s (CVX-N) safe-haven status is “overplayed,” according to Citi analyst Alastair Syme, who downgraded the U.S. energy giant’s stock to “neutral” from “buy.”
“The 14-month underperformance of energy equities has been acute: global IOCs have lagged global equities by 20 per cent, while for U.S. E&P and Services, it has been over 50 per cent,” he said.
“Within this mayhem, CVX has emerged as a relative safe haven (TSR up 3 per cent), benefiting from balance sheet strength and clear capital allocation. But we think that safe-haven status might now be overplayed. 2019 has seen CVX’s returns (cash return on capital invested and return on equity) fall as much as most IOC peers; 2019 estimated ROE of 8 per cent says that more action is needed.”
Mr. Syme also said he’s taking a “cautious stance” in the wake of Chevron’s early November announcement of cost overruns for its Tengiz expansion project in Kazakhstan.
“The economics of the Tengiz Expansion was always based on exploiting the benefit of high well productivity to ensure recovery of costs and an economic return before the license expired in 2033,” he said. "That is why the operating leverage to the cost overruns is so high. In our view, it will be a struggle to fully recover costs if oil prices remain around current levels. Unfortunately, the problems may not be fully over. Kazakhstan has some previous form when it comes to digging its heels in over contractor performance; we believe that there is a chance that the government might push back on allowing full cost recovery.
"The challenge, of course, that CVX now has is in restoring that trust with investors. Maybe this links back to our observation on returns: does the company need a more aggressive overhaul of its operating model to drive more self-help and better execution?"
Those concerns prompted him to trim his target price for Chevron shares to US$120 from US$135. The average on the Street is US$136.54.
“Perhaps more importantly, we are worried that the combination of anemic returns and signs of problematic project execution reflects growing complacency,” said Mr. Syme. “This is a criticism we also have of many of CVX’s peers, but the problem is that CVX used to look to be on a different trajectory. We think that this is a fragile period for equity investors in energy; better alignment with investors will come by corporates taking tougher action.”
Desjardins Securities analyst Justin Bouchard thinks the funding concerns surrounding Inter Pipeline Ltd.'s (IPL-T) Heartland Petrochemical Complex are likely to persist in the near term in the wake of last week’s release of its 2020 budget.
The analyst said the company’s $1.195-billion capital expenditure guidance, which includes $935-million (or almost 80 per cent) for the Alberta project, fell just short of his expectation.
“The bigger question, in our view, is the ultimate funding mix,” he said. “The Bulk Liquid Storage sale could meaningfully derisk the company’s funding plan but there was no update, although as far as we know, the process is still underway.”
Emphasizing leverage remains a key question, Mr. Bouchard added: “IPL reiterated its plan to fund capex via undistributed cash flows, the $1.5-billion syndicated credit facility (only $290-million drawn as of 3Q19), the DRIP and the issuance of new term debt/hybrid securities. Absent dispositions, assuming IPL refinances the $825-million in notes coming due over 2020–21 and factoring in the DRIP (through to year-end 2021), we estimate IPL may need to layer in up to $1.0-billion in debt between 4Q19 and year-end 2021. Still, we think the company should be able to stay within its maximum debt/total capitalization covenants (variously 65–75 per cent) under this scenario. That said, the sale of the Bulk Liquid Storage business could help shore up the balance sheet and remove the funding risk overhang in one fell swoop; we estimate that IPL should be able to secure $1.0-billion in the event of a sale but there has been no update on the process.”
With the announcement, Mr. Bouchard trimmed his 2020 adjusted EBITDA and funds from operations per share estimate.
However, he maintained a “hold” rating and $24 target for Inter Pipeline shares. The average is $24.06.
Bloom Burton Securities analyst David Martin sees “upside disproportionately greater than downside” for shares of HLS Therapeutics Inc. (HLS-T), estimating the Toronto-based company’s “'most likely’ scenario” valued at more than 55 per cent higher than its current share price.
“We continue to believe that investment risk/reward with HLS is compelling,” said Mr. Martin in a research note examining the impact of its Vascepa cardiovascular drug.
On Nov. 15, the company announced the Endocrinologic and Metabolic Drugs Advisory Committee of the U.S. Food and Drug Administration voted unanimously that Amarin Corporation PLC (AMRN-Q) provided sufficient evidence of efficacy and safety to support the approval of Vascepa.
HLS possesses exclusive rights to Vascepa for the Canadian market and has filed a New Drug Submission with Health Canada.
Mr. Martin thinks there’s a 90-per-cent chance of approval when Health Canada releases its decision later this month.
“Scenarios range from Best Case ([competitor AstraZeneca’s] STRENGTH [trial] fails and Vascepa is priced at $3,600 per year) which generates a target price of $84.25 per HLS share, to Worst Case: Vascepa fails to win Health Canada approval, Amarin’s patents are invalidated in the U.S. and Canada, or pricing is not profitable, which would result in an HLS target price of $8.50 (the estimated value of HLS’ schizophrenia drug portfolio; link),” the analyst said. "We believe the most likely scenario includes Vascepa approval for treatment of patients with TG>150 mg/dL; history of cardiovascular disease or at high risk of cardiovascular disease; gross price: $2,190 per year; average gross to net: 25 per cent; and patent protection to 2029.
“Bloom Burton’s valuation for this base case scenario is $26.75 (4.5 times peak sales discounted 5 years at 12 per cent; DCF 12-per-cent discount rate), if STRENGTH results are positive in 2H-2020 (with Vascepa facing competition post-2021).”
Based on this view, Mr. Martin hiked his target for HLS shares to $27 from $21, maintaining a “buy” rating. The average on the Street is $24.56.
“If STRENGTH fails in 2H-2020, this would leave the market almost exclusively to Vascepa and our valuation would be C$50.60 per HLS share,” he said. “We are leaving this as potential upside to our target price a year from now.”
Despite its third-quarter results exceeded his expectations, Raymond James analyst Steve Hansen sees Toronto-based Itafos (IFOS-X) “backed into a corner," expecting its financial outlook to be strained by sustained pressure on global phosphate prices.
Currently the lone analyst on the Street covering the stock, he lowered his target to 50 cents from $1.25 with a “market perform” rating (unchanged).
Goldman Sachs analyst Alexandra Walvis lowered Macy’s Inc. (M-N) to “sell” from “neutral” on Monday, seeing "significant additional downside to M’s retail operations” which she feels will offset any upside from cost-saving efforts.
Her target fell to US$12, matching a Street-low, from US$17. The average is US$15.87.
In other analyst actions:
Citing "good deleveraging progress” and an upside case containing M&A, J.P. Morgan analyst Phil Gresh raised MEG Energy Corp. (MEG-T) to “neutral” from “underweight” and increased his target to $7 from $6. The average on the Street is $7.18.
National Bank Financial analyst Mike Parkin raised Detour Gold Corp. (DGC-T) to “sector perform” from “underperform” with a $27 target, up from $21.72. The average is $26.17.
Jefferies analyst Janine Stichter dropped Roots Corp. (ROOT-T) to “hold” from “buy” with a $2 target, falling from $5 and below the $3.09 consensus.
Compass Point Research & Trading analyst Rommel Dionisio initiated coverage of Charlottes Web Holdings Inc. (CWEB-T) with a “buy” rating and $15.91 target. The average is $17.64.
PI Financial analyst Chris Thompson initiated coverage of New Pacific Metals Corp. (NUAG-X) with a “buy” rating and $5.25 target. The average is $5.50.
PI Financial’s Justin Steves initiated coverage of Silvercorp Metals Inc. (SVM-T) with a “buy” rating and $7.60 target. The averagew is $6.17.