Inside the Market’s roundup of some of today’s key analyst actions
Canaccord Genuity analysts Mark Rothschild and Brendon Abrams see the questions surrounding Canadian real estate investment trusts amid the fallout from the spread of COVID-19 necessitating defensive positioning by investors.
“Canadian REIT unit prices remain well below the highs recorded in February, and many REITs continue to trade at sizable discounts to NAV [net asset value],” he said. "However, there remains significant uncertainty surrounding when the economy can resume functioning fully, and this will have a material impact on the ability of commercial tenants to restore much of their operations and pay rent. In addition, many residential tenants are negatively impacted with either job losses or reduced income.
"Ultimately, it will take a functioning economy for property transactions to resume and to have a clearer view of true cap rates and asset values. While it is premature to predict the full impact on Canadian REIT NAVs and cash flows, clearly the economy has weakened meaningfully, and this will negatively impact fundamentals for all real estate asset classes."
In a research report released Monday, the analysts made a series of rating changes to REITS in their coverage universe, pointing to the current economic environment “and factoring the significant uncertainty relating to the timeline to slow the spread of COVID-19.”
They expect REITS with “low leverage, high asset quality, and/or long-term contractual revenues with creditworthy tenants to continue to outperform over the medium term.”
The analysts raised two REITs to "buy" from "hold" ratings:
Crombie REIT (CRR.UN-T) with a $14.50 target, down from $17. The average on the Street is $15.42.
Mr. Rothschild: “We expect Crombie’s necessity-based portfolio, which largely consists of grocery-anchored shopping centres leased to Sobeys (54 per cent of rent), to perform well on a relative basis. This should translate to continued low vacancy levels, given the defensive nature of the REIT’s tenant.”
Killam REIT (KMP.UN-T) with a $21 target, down from $22. Average: $21.35.
Mr. Rothschild: “Killam Apartment REIT derives most of its income from rental apartment properties in Atlantic Canada and Ontario, where fundamentals are largely healthy. While there is likely to be some negative impact on NOI [net operating income] in the near term, demand should remain healthy, and we expect the REIT’s cash flow to prove resilient. Having said that, the pace of rent growth should moderate and this has a negative impact on both our estimates and the REIT’s valuation.”
They lowered three stocks to "hold" from "buy" ratings:
Choice Properties REIT (CHP.UN-T) with a target of $14.35, down from $15.75. The average is $14.25.
Mr. Rothschild: “With a portfolio that is primarily leased to Loblaw (56.3 per cent of base rent) on a long-term basis, we expect performance from Choice to be among the most stable in our retail coverage universe in the current environment. Although the REIT has some Alberta exposure (19 per cent of properties), we do not believe these properties will be significantly impacted by the province’s slowing economy as they are generally grocery-anchored retail or food-related distribution centres.”
Northview Apartment REIT (NVU.UN-T) with a $36.25 target (unchanged). Average: $34.67.
Mr. Abrams: “Northview announced February 20, 2020 that it had agreed to be acquired by Starlight and KingSett for a price that equates to $36.25 per unit. The transaction is scheduled to close by Q3/20, and we continue to believe that it will be completed as planned.”
Summit Industrial Income REIT (SMU.UN-T) with an $11.25 target, down from $14.75. Average: $13.94.
Mr. Rothschild: “We continue to have a positive view on Summit’s exposure to the Strong GTA and Montreal industrial markets, which represent 43 per cent and 19 per cent of total GLA, respectively. However, in the near term we believe the REIT is somewhat less defensive than other Canadian-listed industrial REITs given its greater exposure to smaller tenants, with an average tenant size of 54,000 sf. Further, the REIT recently increased its exposure to Alberta, which now represents 29.1 per cent of GLA.”
On the sector as a whole, the analysts said: “Our top picks in this environment are Minto, Sienna, CAP REIT, WPT and Brookfield Asset Management. We also highlight First Capital in the retail sector as a REIT that is extremely undervalued and should perform well as the economy recovers.”
Though he called its dividend reduction “prudent,” Raymond James analyst Jeremy McCrea downgraded Freehold Royalties Ltd. (FRU-T) to “market perform” from “outperform.”
On Thursday after market close, the Calgary-based royalty oil and gas company announced it has reduced its monthly dividend by 71 per cent to 1.5 cents per share from 5.25 cents.
It also withdrew its 2020 guidance, noting “the COVID-19 pandemic has crippled global demand for crude oil, with no immediate relief on the horizon.”
"Given current market conditions, we suspected a cut of this size was likely forthcoming," said Mr. McCrea. "Although dividend cuts are generally never viewed favorably, we believe management should be applauded in taking prudent steps to protect the balance sheet. Post the OPEC+ and G20 Energy Ministers meetings this weekend, it's likely we continue to see increased volatility to oil prices. Combined with reduced 3rd party operator activity and shut-in production increasingly likely as well, there is a high level of uncertainty surrounding FRU's funds flow. Although the dividend cut will save $51-million per year (new payout 41 per cent assuming $53-million in funds flow), the current level of leverage might start to make investors increasingly nervous in light of no guidance and funds flow uncertainty. Although FRU's balance sheet is considerably stronger than many of its E&P peers, it's likely not the 'go-to' safe haven for investors looking at the energy space today."
Mr. McCrea maintained a $5 target, which falls below the $6.56 consensus.
Elsewhere, Desjardins Securities' Chris MacCulloch maintained a "buy" rating and $7 target.
Mr. MacCulloch said: “We continue to highlight the stock as one of our favourite names for defensive smallcap oil & gas exposure. The dividend cut should help protect the balance sheet through a highly uncertain period for industry, resulting in a more sustainable monthly payout. Moreover, we see countless opportunities for strategic acquisitions during the eventual recovery.”
Industrial Alliance Securities analyst Elias Foscolos raised his rating for Strad Inc. (SDY-T) on Monday, expecting the move to take the Calgary-based oilfield services and equipment provider private to proceed.
On Feb. 21, Strad announced a group of senior leaders, including president and CEO Andrew Pernal, have entered into an agreement to acquire all of the issued and outstanding class A shares in a deal worth $130-million.
Mr. Foscolos anticipates shareholders will approve the deal during a special meeting next Monday, calling the decision a "foregone conclusion."
“Given the recent deterioration in macroeconomic conditions resulting in depressed oil prices, SDY’s stock has, and is, trading at a significant discount to the go-private price of $2.39,” said the analyst. "We are changing our outlook on the probability of the transaction closing based on several factors. Parameters we weigh include: (a) the mailing of the circular postpandemic; (b) the fact that the meeting is proceeding; and (c) other pipeline infrastructure projects are proceeding, partially negating the downturn in oil and gas. As a reminder, SDY’s revenue is not entirely dependant on the oil and gas business.
“We believe most investors have been assuming a binary outcome for SDY’s share price, either closing at the going-private price of $2.39/share or not closing at all. Our opinion is that even in the unlikely event the transaction does not close next week, eventually SDY will be sold or taken private. Those scenarios are complicated and numerous but they cannot be ignored.”
Mr. Foscolos moved Strad shares to “speculative buy” from “hold,” calling the potential 1-2 week return “too attractive to forego.”
He increased his target to $2.28 from $1.95. The average on the Street is $2.66.
“We are moving our target price to the midpoint of the established fairness range ($2.28/share),” he said. “We had taken a cautious stance in the previous weeks due to uncertainty, but as closing nears, we view the transaction proceeding at $2.39 as the most likely scenario.”
CIBC World Markets analyst Kevin Chiang sees 2020 " setting up to be a very challenging year" for the Canadian aerospace industry and believes balance sheet strength and liquidity will help “weather the storm.”
“The aerospace industry also faces unprecedented top line pressure as aircraft demand grinds to a halt as customers focus on liquidity preservation as well as a disruption to their manufacturing as governments halt non-essential businesses,” he said.
In a research note released before the bell, Mr. Chiang raised CAE Inc. (CAE-T) to “outperformer” from “neutral” with a $24 target, down from $43. The average on the Street is $26.20.
“We have had a favorable view on the company but our Neutral rating previously reflected its premium valuation,” he said. “Given the sell-off in its share price, we see this as an attractive entry point The company has a strong balance sheet and ample liquidity. We also view CAE as one of the least risky ways to play the rebound in the aerospace sector. It is the leading pilot training company in the world so it faces less geographic and specific OEM and airline risk.”
Conversely, Mr. Chiang lowered Bombardier Inc. (BBD.B-T) to “neutral” from “outperformer” with a 70-cent target, falling from $2. The average is $1.33.
“Our positive thesis on Bombardier was predicated on its ability to successfully restructure its organization resulting in an improved balance sheet and earnings power,” the analyst said. “Given the revenue pressures it is now facing, its elevated debt levels, and the cyclical nature of business aviation industry, we see the recovery in its share price now even further pushed out."
In a separate note, Mr. Chiang said the Canadian surface transportation sector is "better positioned for this downturn."
“While this downturn is unprecedented, we consider the Canadian surface transportation sector as better prepared to manage through it than was the case during the Financial Crisis,” he said. "We still expect freight volumes to be historically bad over the next few quarters but maybe not any worse than they were during the Great Recession. That being said, the shape of the recovery remains uncertain and, thus, we prefer names with a more defensive nature to their business models.
“While we expect certain commodities to be hit hard heading into this downturn, we believe that rails will benefit from the relative strength within their bulk franchises. We do not foresee the healthcare logistics industry or AND being significantly impacted by the slowing economy.”
Though he thinks TFI International Inc.'s (TFII-T) U.S. truckload “provides greater exposure to retail (i.e., movement of essential goods) and its Logistics division is tied to e-commerce, somewhat offsetting weaker volumes overall,” Mr. Chiang sees it having the most cyclical earnings stream within his coverage universe.
“As such, we are the most cautious on TFII relative to the other three names given expectations of a U-shaped recovery and concerns about the prolonged impact of COVID-19 on the North American economy,” he said.
That led Mr. Chiang to lower TFI “underperformer” from “neutral" with a $38 target, down from $48. The average is $47.81.
Desjardins Securities analyst Maher Yaghi thinks Shaw Communications Inc. (SJR.B-T) is likely to fare “relatively well” during the COVID-19 pandemic, see further indications of “the telcos’ likely controlled landing.”
Last Thursday, Shaw released second-quarter 2020 results that largely fell in line with the Street’s expectations. Revenue rose 3.7 per cent year-over-year to $1.36-billion, slightly exceeding the consensus estimate of $1.35-billion. Consolidated adjusted EBITDA of $600-million also met analysts’ projections ($596-million).
“Understandably, Shaw withdrew its financial guidance for FY20 due to COVID-19. While management expects the pandemic to impact revenue and EBITDA, it still expects positive adjusted EBITDA growth (adjusted for IFRS 16) in FY20,” said Mr. Yaghi. “As wireless market activity slows down, subsidy and marketing costs are expected to decline and therefore potentially improve wireless EBITDA growth for FY20 versus prior expectations. However, we believe wireline EBITDA could be negatively impacted as many SMB clients are expected to face challenges due to macroeconomic conditions. We expect this effect to be partly mitigated by the increased proportion of self-installs.”
"We believe the company’s liquidity position is relatively comfortable at this point. We therefore believe the dividend is safe if the confinement period is temporary as expected."
After reducing his 2020 forecast for Shaw on April 1 in response to COVID-19, Mr. Yaghi made further post-results adjustments. His 2020 earnings per share estimate is now $1.14, up a penny, while his 2021 projection slid to $1.25 from $1.31.
Keeping a “buy” rating for Shaw shares, he trimmed his target by a loonie to $27. The average on the Street is $27.63.
"The stock corrected heavily at the beginning of the pandemic as investors assessed the potential impact. It has since recovered a significant amount of the lost ground," he said.
“SJR.B has enjoyed the best stock price performance in the sector since the beginning of the crisis. This is consistent with our preliminary view that SJR’s FY20 EBITDA should be the least impacted among Canadian telecoms (except for CCA) from the virus outbreak ...That said, SJR and CCA are affected for only half of their FY20 vs 10 months for the other companies.”
Elsewhere, Canaccord Genuity's Aravinda Galappatthige maintained a "buy" rating and $25 target.
Mr. Galappatthige said: “Despite the economic pressures in Alberta coming to the fore, we still believe that Shaw has good value at these levels. First, Shaw has near zero exposure to overage (wireless and wireline) and roaming revenues vs. its incumbent peers. It also has a solid balance sheet, in fact one of the best in the sector at this point, which will serve it well in the present conditions. Looking beyond the near term, its wireless business is still very much in the early innings of its expansion both in the East and the West. Finally, we believe that Shaw’s underlying FCF level offers good sustainability for the dividend, which now yields 5.2 per cent.”
“Global food security has rapidly re-emerged as a critical issue in today’s hyper-volatile world—a theme we expect to resonate and ultimately favor NTR over time,” said Mr. Hansen. “At the same time, with the most significant lingering headwinds poised to fade (i.e. trade war, potash stalemate, etc.), and the stock trading at the depths of its historical range (5.0-per-cent dividend yield), we believe the recent pullback in NTR shares represents a compelling entry point for long-term, value-orientated investors.”
In a research note previewing its first quarter, Mr. Hansen thinks spring looks solid" for the Saskatoon-based fertilizer producer.
“By almost all accounts, spring 2020 stands to be a BIG year for North American planting activity, with initial U.S. farmer intentions pointing to sizeable increases in both corn (97.0 million acres, up 8 per cent year-over-year) and soybeans (83.5 million, up 10 per cent year-over-year),” the analyst said. "Having suffered less flooding/prevent acres last year, Canadian acreage is expected only modestly higher. Broadly speaking, we view this backdrop as highly constructive for NTR Retail/input demand—particularly vs. last year’s depressed levels. That said, we continue to monitor weather closely as soil conditions remain highly saturated following a wet winter and recent precipitation has already slowed initial planting efforts in key central/southern states.
“In the potash markets, there finally appears to be light at the end of a long, dark tunnel. While spot prices have fallen victim to an extended, almost methodical, decline over the past seven months in the wake of curtailed Chinese demand, we are increasingly optimistic that: 1) prices are close to reaching a bottom; and 2)prices are likely to gain/recover on the back of an eventual Chinese contract (RJL est.: $235/mt), with recent indications suggesting a signing could be in hand by early/mid-May.”
Keeping a “strong buy” rating, Mr. Hansen trimmed his target for Nutrien shares to US$48 from US$55 to account for revisions to his NPK forecast. The average on the Street is US$49.10.
Invesque Inc.'s (IVQ.U-T) suspension of its monthly dividend was a necessary move to preserve its liquidity position, said Industrial Alliance Securities analyst Brad Sturges.
On Friday afternoon, Invesque, a Toronto-based healthcare real estate company, revealed the move.
"Invesque’s balance sheet liquidity position was $35-million at December 31, which included cash of $12-million, and $23-million available to be drawn from its credit facilities," said Mr. Sturges. "Reflecting its dividend policy change, Invesque may retain $36-million in cash that could be utilized to repay amounts drawn from its credit facilities."
“Although Invesque’s revenues have not been materially impacted at this time, the Company is experiencing an increase in staffing, cleaning, medical supplies, and other operating expenses necessary in providing safety and healthcare during the global pandemic. To offset these increased expenses, Invesque intends to reduce non-essential capital expenditures and company overhead costs. Invesque initially estimates that it could achieve cost savings of $2.0-million to $2.5-million annually.”
Citing a “challenging” operating environment, after the company confirmed 16 of its 108 seniors housing and skilled nursing facilties have been directly impacted by COVID-19, Mr. Sturges cut his target for Invesque shares to US$4.50 from US$5.25. The average target is US$5.22.
“We believe that a change in Invesque’s dividend policy could spark a churn in the Company’s investor base, which may place further selling pressure on Invesque’s stock price in the coming months," said Mr. Sturges. “Furthermore, Invesque’s above-average investment risks such as greater financial leverage, low share liquidity, and a very challenging operating environment during the pandemic could limit the near-term upside in the Company’s share price until such time that Invesque’s earnings visibility improves. However, we view Invesque’s shares to be deeply undervalued relative to its estimated NAV. Furthermore, the utilization of newly retained cash flow by Invesque that is planned to repay outstanding debt and strengthen the Company’s balance sheet could better position Invesque to capture its longer-term growth prospects.”
Citing the recent “outsized pullback” in its stock and high visibility into its growth algorithm, Credit Suisse analyst Lauren Silberman raised Dunkin’ Brands Group Inc. (DNKN-Q) by two levels to “outperform” from “underperform” with a US$67 target, down from US$73 but above the US$65.37 average.
“DNKN has underperformed since the market selloff, down 23.5 per cent year-to-date relative to the S&P 500 - down 13.5 per cent, and is now trading near valuation lows on FY21 ‘fresh’ consensus estimates. DNKN’s pure-play 100-per-cent franchised business model is viewed as one of the most attractive in restaurants, warranting a premium to restaurant peers, and we see limited risk of mass closures given the health of its franchisee system, attractive category dynamics, what appears to be broad eligibility for franchisees to take advantage of benefits from the government stimulus and high US exposure (nearly 90 per cent of operating profit). DNKN has improved its positioning in recent years, with efforts around espresso, value, operations and digital. We believe DNKN could benefit from a sustainable increase in digital sales post-outbreak, supported by recent enhancements to its digital platform with multi-tender payment and expansion of On-the-Go. Should there be an economic downturn, we view DNKN’s value perceptions and business model as favorable.”
Analysts at CIBC World Markets downgraded a trio of TSX-listed consumer stocks in a research report titled “Pandemic And Recovery In Consumer” on Monday.
“Predicting how companies will fare in today’s environment already has myriad moving pieces and assumptions, and so guessing on the shape of that recovery is challenging,” said Mark Petrie, Matt Bank and John Zamparo. "To help frame the possibilities we have prepared two scenarios (optimistic and pessimistic) on top of our base case.
“Even with the recent rally, the market has rapidly priced in much of these changes, so while grocers are clear winners, for example, the upside appears modest. Our favourite stocks generally reflect companies that are hit hard in the shutdown - and have seen shares punished - but that we expect will perform relatively better in a recession. Our top picks are Restaurant Brands and Couche-Tard, followed by Aritzia, Boyd, Canadian Tire and Maple Leaf. We would also add Loblaw to this group as our preferred grocer, with its solid defensiveness offset by more limited upside.”
Pointing to “longer-term uncertainty around the dairy commodity market,” Mr. Petrie lowered Saputo Inc. (SAP-T) to “neutral” from “outperformer” with a $40 target, down from $47 and below the $43.19 average.
Meanwhile, Mr. Bank moved Sleep Country Canada Holdings Inc. (ZZZ-T) to “neutral” from “outperformer” with a $12 target, down from $23. The average is $17.67.
He also dropped AutoCanada Inc. (ACQ-T) to “underperformer” from “neutral” with a $5 target, down from $10. The average is $11.29.
“We concentrate our discretionary recommendations on companies we believe can recover the fastest and have sufficient financial flexibility to weather any near-term volatility,” he said.