Inside the Market’s roundup of some of today’s key analyst actions
Industrial Alliance Securities analyst Elias Foscolos expects the economic fallout from the spread of COVID-19 will not be visible in the first-quarter financial results for Canadian utility companies in “any significant manner.”
“The impact will likely be minor,” he said. "We anticipate that it will primarily be a function of the duration of the economic slowdown (or lockdown for those companies with exposure outside Canada). We do not believe that we will be able to assess any impact that investors might be hoping to discover from the first quarter financial statements, which will be released commencing this week. Therefore, colour in the quarterly MD&As and the investor calls will be critical in understanding both short- and long-term impacts.
“We see the COVID-19 slowdown affecting companies in four major ways. The first and most extreme impact will be felt by companies that do not have volumetric protection. Our analysis indicates that no company has complete immunity to volumetric exposure, but for those that lose commercial and industrial users, there should be some diversification as profit margins for residential customers (which should increase) have higher margins. The second impact will be in the ability to keep construction and maintenance crews in the field, particularly pertaining to construction and growth capital spending. There may likely be minor misses to capital spending in 2020 that should be made up in 2021. The investors’ key focus point, earnings, should not be materially impacted because we believe that delayed payments will not be categorized as bad debt and they will eventually be recovered. However, we expect that there will be an impact on cash flow. This could result in companies increasing debt to maintain capital growth, which would result in increasing debt ratios.”
In a research report released Monday, Mr. Foscolos assumed coverage of four companies, noting they sector has "held up very well" through the pandemic crisis.
"The reality is that utility stocks acted exactly as they should, as they did not decline at the same pace as the broader market," the analyst said. "Since the start of the year, the TSX has declined by 16 per cent, compared to the TSX S&P Utilities Index which has declined only 2 per cent. At the worst point in the market (March 23), the utility stocks, as measured by the TSX Utilities Index (Index), merely retrenched to the lows reached in December 2018, at which time the fear of recession was gripping the market. As of Friday’s close, the stocks are trading at levels last seen in August 2019. This highlights the conservative nature of the low equity beta utility stocks. The Index is currently yielding 4.3 per cent, which is in line with its historical average since 2012."
While several TSX companies have been forced to reduce or suspended their dividends due to the impact of COVID-19, Mr. Foscolos expects dividends for utilities to increase as expected.
“Rate base drives earnings, which in turn drives dividends. As rate base continues to grow, dividends should continue to increase,” he said. “Additionally, if 2020 turns out to be a ‘hiccup year’ in terms of earnings growth, we see the coverage universe as a whole increasing dividends by eating into their payout ratio reserve, at the cost of more modest increases in future years.”
In the note, Mr. Foscolos lowered the firm’s rating for Fortis Inc. (FTS-T) to a “buy” rating from “strong buy,” seeing limited upside since a mid-March upgrade.
“Our 2020 and 2021 estimates have been marginally adjusted due to the economic impact of COVID-19, which will likely be offset by a weaker Canadian dollar,” he said. “Looking into Q1/20, we anticipate FTS will report EPS of $0.75. Based on our projections and revised valuation methodology, we have elected to increase our target price ... but are lowering our recommendation”
He raised his target for Fortis shares to $58 from $56. The average on the Street is $58.33.
“Fortis has one of the most conservative EPS payouts at 72 per cent, providing safety and leaving more than ample room for dividend growth,” the analyst said. “With the Q4/19 $1.2-billion equity financing, FTS is structured to finance its aggressive $18.8-billion capital program. This should result in its regulated rate base growing at a CAGR [compound annual growth rate] of 7 per cent, which in turn will support the Company’s 6-per-cent CAGR projected dividend increase through 2024.”
Mr. Foscolos raised his target price for shares of the following companies:
Emera Inc. (EMA-T, “hold”) to $59 from $55. The average is $61.31.
“We believe EMA is well positioned to show modest dividend growth,” he said. “A projected 8-per-cent CAGR in regulated rate base (excluding Emera Maine) supports the Company’s projected 4-5-per-cent CAGR dividend growth through 2022 with moderate deleveraging.”
Canadian Utilities Ltd. (CU-T) with a $35 target, rising from $34. The average is $36.88.
"CU is no stranger to downturns and the Company has consistently performed," he said. "With the sale last year of its fossil fuel generating assets in Q4/19 and a partial interest in the Alberta PowerLine for over $1-billion, CU is positioned to redeploy its capital into other regulated assets. We view the Company’s dividend as safe."
Mr. Foscolos maintained a “hold” rating and $26 target for Hydro One Ltd. (H-T). The average on the Street is $27.46.
“Hydro One has no generation or commodity exposed pricing as it is deemed an essential service,” he said. “The impact of COVID-19 could put minor pressure on the company’s estimated 5-per-cent rate base growth perhaps pushing 2022 EPS guidance toward the low end of the Company’s $1.52-1.65/share range. With an EPS payout of 72 per cent, we believe the dividend is very safe and poised to grow as regulated assets underpin virtually all of H’s earnings.”
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Ag Growth International Inc. (AFN-T) is making “prudent moves to weather a cold spring due to COVID-19,” said Desjardins Securities analyst David Newman.
In response to its revised outlook, dividend cut and lower capital expenditure assumptions, Mr. Newman sees "more breathing room" on both its cash flows and balance sheet, prompting him to raise his rating to "buy" from "hold."
"AGI reiterated its essential status in North America and continues to operate with minimal COVID-19 disruptions," the analyst said. "It has implemented workarounds in facilities around the world, with few logistical challenges to date. Further, receivables are not a looming concern (creditworthy customers, low concentration).
"AGI’s International facilities have restarted production following 2–4-week temporary closures (engineering work continued). Italy and France should reach full production in 1–2 weeks; the facilities in India and Brazil are operating at 50 per cent. While this is encouraging, the production delays will have a material impact on 2Q20 results."
Mr. Newman said the the company is "confident" in its North American Farm outlook, pointing to "vastly better" weather than a year ago and expecting "minimal" delays in sales across all its product types.
“AGI’s North American Farm and Commercial backlogs are flat vs last year (U.S. Commercial slightly better; strength in food and fertilizer). Its International backlog is significantly higher vs last year, with sales skewed toward 2H20 (no cancellations),” the analyst said. “While its Farm business should remain resilient, the Commercial pipeline is active but could slow or be deferred.”
Mr. Newman trimmed his financial estimates for 2020, but he raised his 2021 projections, leading him to increase his target price for Ag Growth shares by a loonie to $29. The average on the Street is $35.57.
“We feel comfortable reinstating our Buy rating on AGI, especially given the essential nature of the company’s business and the reopening of its International facilities,” he said.
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Expecting COVID-19 to have a “material impact” on its financials, RBC Dominion Securities analyst Paul Treiber is taking a “conservative view” on Lightspeed POS Inc. (LSPD-T).
Accordingly, he initiated coverage of the Montreal-based retail and restaurant point-of-sale software provider with a "sector perform" rating, despite it with the resources to "weather the storm" in the near term.
"COVID-19 related shutdowns of non-essential retail and hospitality/ restaurants are likely to lead to deceleration (and possibly contraction) in Lightspeed’s organic revenue growth," said Mr. Treiber. "Payments revenue is likely to decline with lower retail sales. While recurring SaaS [software-as-a-service] revenue is high (67 per cent of Q3 revenue), free promotions, pricing concessions and higher churn are potential headwinds. Our financial estimates call for 22 per cent organic revenue growth in FY21, decelerating from 41 per cent TTM."
Mr. Treiber thinks COVID-19 is likely to accelerate the change in consumer behaviour from traditional retail stores to online shopping, which he thinks will reduce Lightspeed's addressable market.
“The transition from retail to e-commerce is less favourable to Lightspeed than peers because Lightspeed’s primary use case at this time is in-store POS [point-of-sale],” he said. “The potential benefit from COVID-19 to Lightspeed is that retailers may be more willing to adopt next-generation POS solutions to help better compete and launch their own e-commerce stores.”
Mr. Treiber set a $25 target for Lightspeed shares. The current average on the Street is $31.
“Our $25.00 price target is based on 11 times calendar 2021 estimated EV/GP [enterprise value to gross profit], which reflects a 40-per-cent discount to peers at 19 times due to Lightspeed’s narrower focus versus peers and likely lingering uncertainty regarding the retail end-market,” the analyst said. “While the reset in Lightspeed’s valuation (down 39 per cent from peak vs. peers down 14 per cent) and the 19-per-cent all-in return to our target appears compelling, we see better risk-reward in other stocks in our coverage universe, particularly given low investor visibility due to near-term and long-term uncertainties.”
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Citing the “outsized” decline in its share price over the past eight weeks and a view that it is “well-positioned to not only weather the storm, but also benefit over time,” Raymond James analyst Steve Hansen raised his rating for Parkland Fuel Corp. (PKI-T) on Monday.
“While the bravest members of Canadian society continue to man our critical/front-line services, the majority of non-essential workers (Equity Analysts included…) have been forced into home isolation under various ‘shelter-in-place’ directives, a push that’s slashed most non-essential transportation in recent weeks,” he said. "Google’s new ‘mobility reports’ support this dynamic, indicating Canadian movement (read: fuel demand) dropped between 40-70 per cent through April 5th (vs. January baseline, Avg: down 52 per cent), with some clear variances by province depending on the severity of their sheltering mandates.
"That said, the most recent (April 11th) report suggests the worst of these declines may already be in, with healthy upticks recorded across all major provinces. This stands to reason, in our view, with the data likely capturing the increased travel over the Easter long weekend & recent government musings that the most severe restrictions will be being scaled back (i.e. Quebec plans to reopen residential construction/mining/auto mechanics). Importantly, PKI shares already appear to be responding to similar indications."
Emphasizing its stock is down almost 40 per cent over the last two months, versus a 20-per-cent decline for the S&P/TSX composite, Mr. Hansen raised his rating to "strong buy" from "outperform."
At the same time, he lowered his target to $40 from $45, pointing to "the near-term impact of sharply lower driving activity and associated gasoline/retail demand stemming from the evolving COVID crisis." The average on the Street is $37.89.
“The stock currently trades at the lower-end of its 5-year trading range and boasts a solid 4.2-per-cent dividend yield, presenting an attractive entry point for long-term, growth-orientated investors, in our view,” the analyst said.
“While difficult to quantify at this juncture, we’re also mindful that Parkland stands to benefit from an impending surge in ‘summer staycation’ travel as families elect to avoid airlines in the immediate wake of the COVID crisis. Rather, we’re more inclined to believe that Canadians will be more inclined to hop in their cars and ‘Go Explore’ the country’s vast natural beauty. Time will tell.”
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Following last week’s release of an operational update prompted by COVID-19, Industrial Alliance Securities analyst Brad Sturges downgraded BSR Real Estate Investment Trust (HOM.U-T) and removed it from his high conviction list, noting its price-to-adjusted funds from operations multiple discount valuation versus its U.S. Sunbelt multifamily REIT peers has narrowed.
“Our revised Buy rating for BSR continues to reflect the REIT’s NAV [net asset value] discount valuation, ample balance sheet liquidity, the REIT’s fully internalized asset and property management trust structure with a significant retained interest by insiders, and its stable cash flow profile due to the REIT’s ownership of Class B multifamily properties in the U.S. Sun Belt,” he said. “BSR’s Class B multifamily real estate portfolio targets mid-market, necessity-based renters, the largest segment of the U.S. multifamily industry that benefits from historically stable leasing demand, and limited new supply. These investment considerations are partly offset by investment risks that include high geographic concentration, foreign currency exposure, and low unit liquidity risks.”
On Friday, Little Rock, Ark.-based BSR said it has collected 93.3 per cent of total revenue for the month as of April 15, versus 97.0 per cent normally, with average occupancy slipping to 94.2 per cent from 94.9 per cent at the same point a year ago. It has received 100 requests from residents for a deferral of April rent payments.
"In the near term, we expect slightly lower NOI [net opearating interest] margins for BSR due to the REIT’s recently executed recycling activities, and slower average monthly rent (AMR) growth over the next few quarters," he said. "As a result, we expect BSR to generate 2020 sameproperty rental income (SP-NOI) growth year-over-year of 1 per cent to 2 per cent (previous estimate: 2 per cent to 4 per cent year-over-year).
After trimming his 2020 expectations, Mr. Sturges reduced his target for the REIT's units to US$12.75 from US$13. The average on the Street is US$11.71.
“BSR has undergone significant transformation in 2019 due to its executed acquisition and capital recycling activities,” the analyst said. “BSR’s five core U.S. property markets now account for 79 per cent of the REIT’s pro forma NOI, including BSR’s core Texas market properties that account for 60 per cent of the REIT’s pro forma NOI. BSR is expected to continue to benefit from favourable multifamily demand fundamentals in the U.S. Sun Belt property markets that are supported by compelling longer-term population growth trends, which may support further increases in long-term rental apartment demand. U.S. government payments and unemployment benefits are expected to help renters pay on time, while the global pandemic could delay planned move-outs to the singlefamily home market given the affordability gap between home ownership and renting.”
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With more “turbulence ahead,” Citi analyst Jason Bazinet thinks the Street’s estimates for the U.S. Online Travel sector remain too high.
"We initiated coverage of the Online Travel sector as the COVID-19 pandemic was just starting to spread," he said. "A lot has changed over the past six weeks. Investors are asking us about balance sheets and liquidity rather than market penetration and room night growth.
"When we launched covered of the OTAs in early March, we were expecting a U-shaped recovery (or a bit more gradual than the MERS or SARS recovery cadence). However, the velocity and scale of the COVID-19 outbreak has been unprecedented. As such, we are expecting a more prolonged recovery."
Mr. Bazinet expects demand to be the most severe in the second quarter, projecting a drop of 85-90 per cent before a recovery begins in the third quarter.
"Based on commentary from United, we expect 4Q20 demand to be down 35 per cent year-over-year. We expect travel demand to continue to improve throughout 2021, barring any resurgence in infections. But, we expect overall demand in 2021 to remain below 2019 levels," he said.
Projecting a more gradual than previously expected recovery, he reduced his estimates "significantly."
"Based on current Street estimates, we do not believe the Street is properly reflecting the severity of activity declines in 2Q," said Mr. Bazinet. "The Street expects Booking’s 2Q20 gross bookings and revenues to decline 50 per cent year-over-year, whereas the company itself has stated that gross bookings were down 85 per cent in early April. Expedia estimates show a 40-45-per-cent year-over-year decline in 2Q20 bookings and revenue.
"While we believe the sell side’s 2020 estimates are too high, investors are looking through the downturn and into 2021 for a better reflection of a 'normal' state. The sell side’s 2021 estimates still look 5-10 per cent too high to us."
Expressing concern over Expedia Group Inc.'s (EXPE-Q) proposed purchase of its remaining 40-per-cent given a heightened focus on liquidity, Mr. Bazinet downgraded Trivago NV (TRVG-Q) to “neutral” from “buy”
"Expedia has a significant deferred merchant bookings position," the analyst said. "While we believe the company can mitigate some of the cash refunds and raise debt to provide additional liquidity, we do not expect Expedia to look to purchase the remaining share of Trivago in the near-term."
He lowered his target for Trivago shares to US$1.80 from US$2.15. The average on the Street is US$2.39.
Mr. Bazinet also made the following target price changes:
- Expedia Group Inc. (“buy”) to US$80 from US$130. The average is US$104.70.
- TripAdvisor Inc. (TRIP-Q, “neutral”) to US$19 from US$25. Average: US$28.43.
- Booking Holdings Inc. (BKNG-Q, “buy”) to US$1,700 from US$2,000. Average: US$1,706.79.
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It’s “time to step aside” on Gilead Sciences Inc. (GILD-Q), according to BMO Nesbitt Burns analyst Matthew Luchini.
He lowered its stock to "market perform" from "outperform" with a US$79 target (unchanged). The average is US$75.32.
“We believe recent share appreciation (up 28.8 per cent year-to-date vs. S&P’s down 11.8 per cent) reflects investor enthusiasm for remdesivir as a potential treatment for COVID-19,” said Mr. Luchini. "While we are encouraged by the latest anecdotal updates, we no longer see favorable risk/reward in shares given continued uncertainty around the remdesivir commercial opportunity.
“With upside from the base business unlikely given pre-COVID guidance called for essentially a flat top line, we recommend stepping aside ahead of a better entry point.”
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In other analyst actions:
* National Bank Financial analyst Zachary Evershed cut Intertape Polymer Group Inc. (ITP-T) to “sector perform” from “outperform” with a $14 target. The average on the Street is $15.94.
* TD Securities analyst Aaron MacNeil raised Tervita Corp. (TEV-T) to “buy” from “hold” with a $5 target, which falls 85 cents below the consensus.
* RBC Dominion Securities analyst Randall Stanicky raised AbbVie Inc. (ABBV-N) to “outperform” from “sector perform” and added it the firm’s “offensive positioning” list. His target jumped to US$93 from US$79, which falls 69 US cents below the consensus.
“We expect it to see greater 2020 COVID-19 impact than peers, with consensus still too high. But shares reflect that. And looking past near-term headwinds, we see a 2021 EPS step-up against trough valuation driving shares while imminent AGN deal close and likely reaffirmed dividend 5/1 add near-term support,” said Mr. Stanicky.
* Echelon Wealth Partners analyst Gabriel Gonzalez moved his rating for Ascendant Resources Inc. (ASND-T) to “under review” from “buy” and withdrew his target (previously 60 cents).
“The extensive productivity and cost improvements achieved at El Mochito since being acquired by Ascendant highlight the quality of the Company’s management team. We therefore also remain positive on Ascendant’s ability to continue developing Lagoa Salgada, a project that we consider has favourable long-term prospects. However, we are changing our rating to Under Review and withdrawing our price target and estimates pending further clarity of Ascendant’s strategic focus. Our prior rating, price target, and estimates should no longer be relied upon,” he said.
* Laurentian Bank Securities resumed coverage of Andrew Peller Ltd. (ADW.A-T) with a “buy” rating and $12 target. The average is $17.
Mr. Blake said: “Industry fundamentals have remained solid for the past 10 years showing consistent stable sales growth (4-per-cent CAGR) and even rising consumption volumes during the most recent recessions (2001 and 2010). ADW benefitted from these trends with sales and EBITDA having increased at a CAGR of 5 per cent and 10 per cent respectively over the past five years. However, looking ahead to FY2021 (CY2020), we believe the economic stoppage from mid-March to at least mid-May across Canada will result in industry consumption volumes declining 5 per cent year-over-year.”
David Leeder