Inside the Market’s roundup of some of today’s key analyst actions
After “sizable” outperformance and a “major” share price rally recently, Goldman Sachs analyst Michael Lapides sees the risk/reward proposition for Enbridge Inc. (ENB-N, ENB-T) “more unfavourable now," emphasizing his earnings before interest, taxes, depreciation and amortization (EBITDA) estimates now fall below the consensus on the Street.
Accordingly, he downgraded his rating for its stock to “sell” from “neutral” on Monday
“In the last 6 months, ENBs shares outperformed the Midstream Energy (AMNA) and the broader Energy Sector (XLE) by 30 per cent and 24 per cent, respectively,” said Mr. Lapides in a research note released Monday. “We base our downgrade on (1) continued delays for the $9.1-billion Line 3 Replacement (L3R) project, a key driver of earnings growth, largely due to permitting and other bottlenecks, (2) downside risk and a regulatory overhang as ENB negotiates with shippers and before the Canada Energy Regulator (CER) over the tolls on its large oil Mainline pipeline — with many key large cap producers pushing back against ENB’s proposals, (3) ongoing challenges and the potential need for re-routing ENB’s Line 5 oil pipeline in Michigan/Wisconsin — downside risk not in our forecast, but representing material tail risk to EBITDA, (4) significant contract expiration on US gas pipelines (Alliance, Southeast Supply Header, East TN Gas, Algonquin) — indicating pricing or re-contracting risks as existing or legacy contracts expire, and (5) recent multiple expansion relative to peers and ENB’s own trading history, which we view as unjustified given these risks.”
His target for Enbridge shares slid to $51 from $52. The average target on the Street is $57.36.
“Our 2020E and 2021E EBITDA estimates appear 1-5 percent below FactSet consensus, and our 2020 and 2021 EPS estimates come in 4-9 percent below consensus,” he said. “We largely attribute our lower estimates to a later in-service date for L3R (beginning of 2022), and our estimated tariff decline on the Canadian Mainline oil pipeline system.”
Conversely, Mr. Lapides raised his rating for TC Energy Corp. (TRP-T) to “neutral” from “sell,” citing “lower balance sheet concerns due to asset sales, a high proportion of EBITDA from its low risk, but solid growth gas pipeline business in Western Canada, and to reflect more accurately historical trading trends.”
“Since adding TRP/TRP.TO to the Sell list on Jan. 2 2019, the shares have outperformed the Midstream Energy (AMNA), the Energy Sector (XLE), and broader market (S&P 500/TSX Comp) by 40/40 per cent, 58/58 per cent, and 22/25 per cent, respectively,” he said.
“We base our upgrade on (1) lower equity financing risk given the sale of non-core assets and strategic partnerships on large-scale growth projects, and (2) a higher applied valuation multiple, to more accurately reflect a sustainable premium relative to peers, especially given TRP’s lower risk business model. We lower estimates slightly, but raise our target multiple given lower expected financing needs — and we note if the Keystone XL project does not move forward, TRP will maintain an even more solid balance sheet position, albeit with less growth.”
His target rose to $80 from $64, which tops the consensus of $73.47.
Though its fourth-quarter results finished off a “strong but abnormal year,” Industrial Alliance Securities analyst Elias Foscolos feels it’s the appropriate time to take a “more conservative” stance on Enerflex Ltd. (EFX-T), leading him to lower his rating for the Calgary-based company to “buy” from “strong buy.”
On Feb. 20, Enerflex, which supplies natural gas compression, gas processing, refrigeration systems and electric power generation equipment, reported earnings before interest, taxes, depreciation and amortization (EBITDA) of $95-million after adjusting for IFRS 16 lease payments and impairment charges, which represents a rise of 47 per cent year-over-year.
“2019 was an exceptionally strong year for EFX, as the company was able to convert substantial Engineered Systems backlog at high margins and put cash back into organic asset ownership,” said Mr. Foscolos.
However, he expressed concern about a slowdown in Engineered Systems booking in the quarter. The company finished the year with a $468-million backlog, down 67 per cent year-over-year.
“U.S. shale market dynamics have shifted, as independents have exited and production growth has slowed,” he said. “We agree with EFX’s assessment that growth going forward will be more measured, and driven by majors and large independents. As such, we expect lower bookings levels to persist, resulting in lower run-rate Engineered Systems revenue after large projects are completed in early 2020.”
After lowering his 2020 and 2021 financial estimates and reducing his long-term discounted cash flow (DCF) rate, Mr. Foscolos dropped his target price for Enerflex shares to $13.50 from $17. The average on the Street is $13.35.
“Going forward, a low growth outlook in North American oil & gas investment will most likely constrain bookings, and we expect a drop off in near-term results,” he said. “Asset ownership opportunities remain strong both internationally and in the U.S., and the Company can generate high returns and utilization off of these assets, offsetting part of the decline in Engineered Systems. However, we are lowering our outlook for the Company.”
In a separate note, Mr. Foscolos lowered his rating for Strad Inc. (SDY-T) after it announced late Sunday that it a group of insiders have proposed to take the Calgary-based energy service company private.
The group, which includes director Lyle Wood, president and chief executive officer Andrew Pernal, chief financial officer Michael Donovan and chief operating officer Shane Hopkie, currently owns 21.4 per cent of outstanding shares. They propose to acquire the remaining shares at a price of $2.39 in an all cash transaction.
“The offer is backed by a formal valuation which values the Company between $2.10-2.45 and is unanimously supported by SDY’s independent board members,” said Mr. Foscolos. “Although the offer is below our previous $2.80 target, we believe the price is fair. However, at this time, we cannot rule out the possibility of competing offer. We expect that the stock will spike towards the offer price [Monday] morning.”
In response to the news, Mr. Foscolos lowered his target to $2.39 from $2.80 and reduced his rating to “hold” from “buy.” The average target on the Street is $2.72.
Citing its current valuation, Canaccord Genuity analyst Dalton Baretto downgraded his rating for Vancouver-based SSR Mining Inc. (SSRM-T, SSRM-Q) to “hold” from “buy” in the wake of the release of its financial results for the fourth quarter last week.
“Revenue was largely in line with our estimates as sales were pre-released,” he said. “However, EBITDA was slightly below our estimate due to higher-than-expected G&A and exploration expenses. Q4 production results and 2020 guidance were pre-released; for a detailed look, please refer to our note here. Along with Q4 earnings, SSRM released a mineral reserve and resource update that was largely positive, with a significant increase in mineral reserves at Marigold and M&I resources at Seabee (detailed below). We note that our estimates already assumed mine life extensions to the previous reserve base at both assets (to 2033 at Marigold and 2025 at Seabee).”
Though he narrowly lowered his 2020 sales and earnings expectations, Mr. Baretto maintained a target price of $26 per share. The average on the Street is $27.55.
“We continue to like SSRM for its strong operational performance, low geopolitical risk profile, as well as the strength of its balance sheet and management team. However, given the limited implied return to our target price, we are downgrading SSRM,” he said.
Though he acknowledges the potential for near-term volatility given macro “uncertainty” and the upcoming update to its Quebrada Blanca Phase 2 project in Chile, RBC Dominion Securities analyst Sam Crittenden said he continues to see potential for improved performance in the second half of 2020 for Teck Resources Ltd. (TECK.B-T, TECK-N) “with better execution and improving sentiment toward China.”
He added Teck shares “already seem to be pricing in a bearish scenario.”
Mr. Crittenden expressed the optimism despite lowering his financial expectations in the wake of “disappointing” fourth-quarter results.
“After updating our model to reflect updated guidance, our NAVPS declines by 4 per cent, our 2020 EBITDA estimate by 3 per cent, and our price target to $29 from $30, so the 15-per-cent drop in the shares seems to be an overreaction,” the analyst said. “However, we understand why investors are reluctant to step in now given uncertainty around the QB2 update in March, weaker coal operations to start 2020, and macro uncertainty.”
With his target price adjustment, which remains above the consensus on the Street of $27.72, Mr. Crittenden maintained an “outperform” rating for Teck shares.
“We believe Teck provides investors exposure to long-life, high-quality coking coal, copper, zinc, and bitumen production in a diversified Canadian mining company with a low geopolitical risk profile,” he said. “Teck has a portfolio of five copper growth projects at pre-feasibility to feasibility stages in the Americas and is in a strong financial position.”
Elsewhere, despite believing positive catalysts were “still limited," BofA Securities raised Teck to “neutral” from “underperform," believing its valuation appears more attractive following recent losses. The firm’s target is US$13.
Raymond James’ Brian MacArthur lowered his target to $27 from $31 with an “outperform” rating.
Mr. MacArthur said: “We believe Teck offers good exposure to coal, copper, and zinc, and is able to convert EBITDA from its Canadian operations efficiently given its large Canadian tax pools. Given Teck’s long life, low jurisdictional risk, diversified asset base, and valuation, we rate the shares Outperform.”
Pointing to its “consistent operating and financial track-record, best-in-class balance sheet, and capable management team,” RBC Dominion Securities analyst Greg Pardy said Enerplus Corp. (ERF-T, ERF-N) remains his favourite intermediate producer.
“These attributes appear to be eclipsed by market concerns surrounding the depth of its drilling inventory,” he said.
On Friday, the Calgary-based company reported fourth-quarter results that largely met with Mr. Pardy's expectations.
“Enerplus Corporation posted broadly in-line fourth quarter results, punctuated by $80-million of free cash flow, with $24-million directed towards share repurchases,” he said. “The company also reaffirmed its 2020 mid-point production guidance of 98,000 boe/d and $545 million capital program.”
“Enerplus’ impressive attributes are somewhat eclipsed by ongoing market concerns surrounding the depth of its drilling inventory. With roughly 410 drilling locations in the Williston Basin, the company has plenty of resource runway ahead of it. In our minds, the crux of the issue may have more to do with basin diversity rather than Bakken runway. Accordingly, if ever there was a time for Enerplus to add a leg to its resource stool, this year is as good as any, with the Permian offering one potential avenue.”
Based on those market issues, Mr. Pardy lowered his financial projections for 2020 and 2021, leading him to reduce his target for Enerplus shares by a loonie to $12 with an “outperform” rating (unchanged). The average on the Street is $13.14.
“At current levels, Enerplus is trading at a debt-adjusted cash flow multiple of 2.9 times in 2020 — a steep discount vs. our North American intermediate peer group avg. of 3.7 times,” he said. “We believe the company should trade at an average/above-average multiple given its track-record of consistent operating performance, solid execution, strong management team, and best-in-class balance sheet.”
Growing increasingly cautious on Canadian cannabis stocks, Cowen analyst Vivien Azer downgraded Aurora Cannabis Inc. (ACB-T), Sundial Growers Inc. (SNDL-Q), and Tilray Inc. (TLRY-Q) to “market perform” from “outperform”on Monday.
Seeing slower-than-expected growth of Canadian industry, Ms. Azer cut her forecast for 2020 legal market cannabis sales by 32 per cent to $3.5-billion, pointing to several headwinds, including price concerns stemming from a “significant influx of value-based brands in the market” and a “glut of mid-priced inventory.”
“We are downgrading ACB, SNDL and TLRY to market perform, all from outperform, as we grow increasingly cautious on the outlook for cannabis in Canada,” the analyst said. “Headwinds that have plagued the industry (pricing, stores, inventory) do not appear to be fading as anticipated, while 2.0 is likely not the elixir that the market was hoping for. Canopy Growth remains our only outperform rated stock among the Canadian LPs.”
“While industry challenges around doors [a marijuana strain] and high quality flower supply are well understood, we now believe that the slower than expected rollout of cannabis 2.0 products will also prove as a headwind to revenues.”
Her target for Aurora fell to $2.50 from $6. The average is $2.59.
Ms. Cowen dropped her target for Tilray to US$20 from US$40 (versus US$22.22), while her Sundial target is US$1.50, which is the current consensus, sliding from US$10.
Several analysts on the Street lowered their financial expectations and target prices for shares of CCL Industries Inc. (CCL.B-T) following Friday’s release of weaker-than-anticipated fourth-quarter results.
Laurentian Bank Securities analyst Furaz Ahmad dropped his target to $60 from $67, keeping a “buy” rating. The average target on the Street is $60.06.
“CCL reported Q4/19 results that were below expectations. Management highlighted a cautious growth outlook for 2020 due to the uncertain global macroeconomic environment and the expected economic impact of the coronavirus in Q1/19E. While the company’s short-term performance may be rocky, we continue to believe CCL is well-positioned in the industry longer-term.”
Raymond James’ Michael Glen moved his target to $57.50 from $65 with an “outperform” rating.
Mr. Glen said: “We continue to view CCL as an exceptionally high-quality company from an operational and management perspective, and we see a strong, tangible track record in terms of acquiring and integrating potential M&A to support growth. That said, while we had previously discussed 2020 as representing the return to stronger earnings growth, we have now pushed this expectation out by 6 months. In the interim, with leverage at 1.6 times, free-cash-flow of $400-million per year, and US$600-million in available credit, we anticipate management will be opportunistic on M&A tuck-ins in their core markets, with a more acute downturn potentially offering an opportunity for something larger.”
“After nearly a year of asset integration, as we had expected, the last overhang from the Goldcorp transaction has been put to bed, with NEM taking a 27-per-cent haircut to the reserves at the Goldcorp assets,” she said. “Partially offsetting this decline in reserves was improvement at the NGM assets and NEM assets reserves, particularly Carlin, Turquoise Ridge, Tanami and Boddington. We view the NEM revision to reserves as a positive step, positioning the company for longer-term success and better margins at all its assets. Overall, our NAV declined from $29.67 to $27.94 per share. CFPS [cash flow per share] increased as a result of the impact of the share buyback programme.”
Ms. Soni increased her target to US$58 from US$48. The average is US$49.61.
In other analyst actions:
* TD Securities analyst Sean Steuart lowered Canfor Pulp Products Inc. (CFX-T) to “hold” from “buy” with a $9 target, falling from $11 and below the consensus of $10.65.
* TD’s Timothy James raised Exchange Income Corp. (EIF-T) to “buy” from “hold” with a $51 target, rising from $48. The average is $51.71.
* Wells Fargo analyst Praneeth Satish upgraded Keyera Corp. (KEY-T) to “overweight” from “equal weight” with a $39 target, up from $36 but below the average of $40.35.