Inside the Market’s roundup of some of today’s key analyst actions
Scotia Capital analyst Sumit Malhotra thinks Canadian life insurers "have come a long way" from the market downturn of 2007-09.
“The adoption of the risk-based LICAT regime to start 2018 (which received a very good ‘stress test’ via the Q4/18 ‘late-cycle’ sell-off) as well as the significant reduction in the level of balance sheet leverage (sub-25 per cent to end 2019) provides the industry with a greater level of capital flexibility with which to face the upcoming headwinds,” he said. “To that end, while share repurchase activity was abruptly halted via regulatory mandate in mid-March (which we expect will remain the case until 2H/21), we are confident in the ability of the sector to sustain their dividend payouts in this stressed environment for earnings power.”
In a research report released Monday before the bell previewing the coming earnings season, Mr. Malhotra thinks the near-term results for insurers are likely to “look better” from a credit and capital perspective than those of Canadian banks.
He expects the impact of the COVID-19-related market downturn on capital and credit is likely to be "less pronounced" in the near term, however he thinks rate "drag" is a long-standing issue.
“The macro backdrop that the lifecos encountered in Q4/18 (treasury yields down 40 basis points, equity markets down 10 per cent plus, corporate spreads widened by 30 basis points) has turned out to be a good ‘warm-up act’ for what the sector has faced to start 2020,” he said. "As was the case in that period, we expect that the combination of reduced macro sensitivity, favourable positioning with respect to corporate spreads and C$ depreciation, and a step-back in the base solvency buffer will result in sequential increases in both the LICAT ratio (6 points) and BVPS (4 per cent) for each name in Q1/20.
“Similarly, while we expect that investment experience for the lifecos will deteriorate as the level of fixed income downgrades & defaults accelerates in the coming quarters, the initial move in credit costs should be less pronounced than we will see for the banks. ‘Even lower for even longer’ is the mantra with respect to our outlook for both interest rates and energy prices, and the drag on lifeco profitability resulting from the record-low level of long yields is reflected in a few key components of earnings power (expected profit, earnings on surplus, new business strain). While product re-pricing helps, this is clearly offset in the near term by the combination of weaker investment returns and higher claims, and as such we expect operating EPS for the sector to decline by 9 per cent in 2020.”
Mr. Malhotra upgraded Sun Life Financial Inc. (SLF-T) to “sector outperform” from “sector perform” with a $58 target, down from $71. The average on the Street is $56.75.
“Bottom line, in an investing environment in which we think absolute valuations are much more important than relative, we want to take a ‘barbell’ approach to lifeco stocks by moving SLF up to a SO (sector-best capital position, balanced business line mix, consistency of performance under the tenure of CEO Conner) alongside MFC,” said Mr. Malhotra.
He also made the following target price c changes:
- Manulife Financial Corp. (MFC-T, “sector outperform”) to $22 from $32. Average: $24.20.
- Great-West Lifeco Inc. (GWO-T, “sector perform”) to $27 from $36. Average: $28.45.
- iA Financial Corporation Inc. (IAG-T, “sector perform”) to $55 from $79. Average: $57.50.
“Our pecking order on the stocks ranks them as MFC, SLF, IAG, and GWO, with our SO-ratings on MFC and SLF reflecting the combination of (1) the ‘valuation barbell’ comprised of the highest-and-lowest multiple stocks in the sector; (2) business mix diversification in terms of both geographies and products; and (3) a strong balance sheet position with which to begin this period of economic and market uncertainty,” said Mr. Malhotra.
RBC Dominion Securities analyst Paul Treiber feels the majority of Canadian software and technology services stocks in his coverage universe are “likely well positioned to weather economic disruptions related to COVID-19.”
In a research note previewing the upcoming earnings season for the sector, Mr. Treiber updated his financial expectations and price targets to reflect the impact of the pandemic, emphasizing firms with a higher mix of hardware revenue are “likely to experience greater headwinds.”
He deemed two stocks as the most defensive in the sector:
Seeing it as “one of the best positioned in our coverage universe to benefit over the long-term from the global supply chain uncertainty related to COVID-19,” Mr. Treiber raised his target for Kinaxis Inc. (KXS-T, “outperform”) to $140 from $125. The average is $129.33.
“We believe Kinaxis is one of the best positioned in our coverage universe to benefit over the long-term from the global supply chain uncertainty related to COVID-19,” he said. “Regarding Q1, we expect a healthy quarter, in line with the Street, given Kinaxis’ high mix of recurring revenue and large backlog.”
At the same time, he maintained a $1,700 target for Constellation Software Inc. (CSU-T, “outperform”). The average is $1,619.10.
“Constellation is likely one of the more resilient companies in our coverage universe to COVID-19,” he said. “However, we are slightly adjusting our estimates to reflect a likely deceleration in non-core professional services revenue and a slowdown in M&A due to COVID-19 travel restrictions. In time, we believe that Constellation’s capital deployed on acquisitions would accelerate as restrictions are lifted.”
Mr. Treiber called the following stocks “middle of the road:"
* CGI Group Inc. (GIB.A-T, “outperform”) to $110 from $125. The average on the Street is $103.63, according to Thomson Reuters Eikon data.
"We believe the deceleration in CGI’s organic growth is likely to be less than peers, given CGI’s more resilient revenue mix. Moreover, cost reductions and share buybacks should mitigate the impact on earnings," he said.
"While OpenText’s organic growth is likely to decelerate in CY20, we believe that the company’s cashflow would be resilient, given its high mix of recurring revenue and large enterprise customer," he said.
* Altus Group Ltd. (AIF-T, “outperform”) to $47 from $50. Average: $42.67.
"We are adjusting our estimates to reflect the likely impact from COVID-19 on Altus’ software bookings and CRE [commercial real estate] consulting revenue," he said. "Property tax settlements may be delayed in this environment. Regarding Q1, we expect adj. EBITDA and adj. EPS slightly below the Street. With our expectations for cloud bookings to ramp in 2020, we believe Altus’ valuation rerating would be sustained."
* Information Services Corp. (ISV-T, “sector perform”) to $15 from $16. Average: $15.25.
“We expect ISC’s Q1 results to be resilient to COVID-19 related disruptions given the company’s high mix of transactions conducted online and the timeframe to process existing transactions,” he said. “However, we are adjusting our estimates to reflect the probability that transactions decelerate through the remainder of the year.”
Mr. Treiber thinks the following will likely experience material headwinds:
“We are reducing our estimates to reflect further headwinds that have emerged related to COVID-19,” the analyst said. "Specifically, Boeing, numerous automakers and other manufacturers have stopped production, which is likely to lead to reduced orders for Celestica. We believe that Celestica is likely to continue trading near trough multiples pending better visibility to a rebound in growth.
“We reduced our estimates on March 19 to reflect likely contraction in automotive production," said Mr. Treiber. "Since then, numerous automakers and other manufacturers have stopped production, which is likely to weigh on Sierra’s revenue. We are leaving our estimates unchanged, which we feel already reflect these headwinds. We believe Sierra is likely to trade near trough multiples pending better visibility to revenue stability.”
On the heels of the release of “solid” first-quarter financial results that exceeded his expectations, Desjardins Securities analyst Benoit Poirier thinks Aecon Group Inc. (ARE-T) is providing investors with the “opportunity to invest in a strong operator well-positioned for the economic recovery at an attractive price.”
“ARE has a market-leading position in the growing infrastructure market in Canada, strong operational track record, solid balance sheet and unique portfolio of long-term concessions. We believe the current valuation gap versus U.S. peers — an implied 0.9 times EV/FY2 discount for the construction division after excluding the value of the Bermuda Airport concession — is unjustified and offers an attractive entry point for long-term investors.”
On Friday before the bell, the Toronto-based construction firm reported earnings before interest, taxes, depreciation and amortization (EBITDA) of $19-million, easily topping Mr. Poirier's $6-million projection. Earnings per share of a 19-cent loss also beat his estimate (a 34-cent loss).
Though its construction division delivered “another solid quarter,” Mr. Poirier warned of the impact of COVID-19 on short-term results.
"Management expects the COVID-19 outbreak to negatively impact operations and revenue until normal operations resume," he said. "The division reported an EBITDA margin of 2.2 per cent in 1Q, up 110 basis points year-over-year. Management also noted that future project margins could be impacted by a reduced level of construction activity. We have therefore revised our estimates for 2020 to account for this new reality, although our forecasts for 2021 are mostly unchanged as we expect ARE to leverage its strong backlog and pipeline of opportunities once business conditions normalize. For 2020, we forecast revenue decreasing by 5 per cent to $3.2-billion, mainly driven by a 39-per-cent reduction in 2Q to $516-million and a gradual recovery thereafter."
The analyst also pointed to short-term uncertainties for its concessions segment at the Bermuda Airport due to the pandemic.
Despite lowering his financial expectations for 2020 and 2021, he sees Aecon “well-positioned” to benefit from future economic stimulus in the form of infrastructure spending, and said its "solid balance sheet is “a key competitive advantage in terms of winning new projects and navigating through this crisis.”
Maintaining a “buy” rating, he reduced his target by a loonie to $20. The average is $23.
“Current valuation gap versus U.S. is unjustified and does not reflect ARE’s leading market position in Canada and its strong track record,” said Mr. Poirier. “ARE has once again demonstrated its ability to deliver solid financial results, despite the negative impact of COVID-19 on its business. 1Q20 marked the eighth consecutive quarter with an EBITDA beat.”
Elsewhere, AltaCorp Capital analyst Chris Murray also trimmed his target by $1 to $28, keeping an "outperform" rating.
Mr. Murray said: “While a few projects are seeing a slowing or suspension of work, the Company continues to operate in the majority of the jurisdictions that it serves, albeit in many cases on a modified basis. Management noted an impact from COVID-19 on the availability of labour and on the supply chain while adding that certain bids have also been delayed or suspended, although management believes that may also be related to a change in leadership at the Canadian Infrastructure Bank (CIB), which it sees as a significant positive. The majority of the impact of the pandemic has related to the suspension of commercial operations and construction at the Bermuda International Airport, the suspension of construction on the Montreal REM LRT and Site C projects, and delays in the ramp up of the next phase of work on a handful of nuclear projects, with management noting that it remains unclear whether the related costs will be fully recovered in the future. However, the Company has not seen any outright cancellations in its backlog to date and, supported by a strong backlog, a healthy level of new awards year to date and a solid pipeline of work, remains positive around demand for its services in 2020, particularly as federal and provincial governments across Canada begin to roll-out stimulus to fight the impact of the pandemic.”
Though he called it “represents one of the (relatively) safest — i.e. most defensive” companies in the Canadian cannabis sector, Raymond James analyst Rahul Sarugaser was prompted to lower his rating for Cronos Group Inc. (CRON-Q. CRON-T) by its decision to indefinitely delay its Peace+ brand of cannabidiol (CBD) products.
"With its 4Q19 earnings, CRON announced that it is shelving—indefinitely—its Peace+ CBD-only brand that it had planned to launch through Altria's (MO-N) network of up to 250,000 convenience stores (its prized "C-store" channel). Before this pause, our original estimates, and hence valuation, anticipated much of CRON's upside being driven by Peace+," said Mr. Sarugaser.
“In our analysis of CRON’s 4Q19 earnings, we pushed out our estimate of this product launch by one year, motivating a drop in our target price from $12.00 to $10.50. In light of intense current market uncertainty and management shifts within [partner Altria Inc., MO-N] — adding complexity, potentially, to decisions relating to CRON’s use of MO’s distribution network — we’ve decided to sharpen our pencils on this and have removed potential Peace+ revenues from our estimates entirely. Now, we drive our revenue estimates purely on CRON’s ability to generate sales in: i) Canada’s adult-use and medical markets; and ii) the U.S. from its ultra-premium, CBD-only Lord Jones brand.”
Moving Cronos to “market perform” from “outperform,” he lowered his target to US$6.50 from US$10.50. The average on the Street is US$7.48.
“With $1.5-billion (C$2.1-billion) on its balance sheet as at Dec. 31, 2019 (4Q19; up from 3Q19′s C$2.0-billion), CRON is a rare bird in the crowded, hyper-volatile aviary that is the Canadian cannabis sector,” he said. “Only Canopy Growth Corp. (WEED) touts a similar balance sheet (C$2.3-billion in cash as at Dec. 31, 2019), with the next best capitalized company, Aphria, Inc. (APHA) — as at Feb. 29, 2020 — sporting C$515.1-million in cash. Looking beyond these three, there is a precipitous drop in balance sheet strength, with Aurora Cannabis (ACB), Hexo Corp. (HEXO), and Tilray (TLRY), reflecting C$197.5-million, C$104.8-million, and C$96.8-million in cash, respectively.”
"While we are revising our revenue estimates, target price, and recommendation downward, for now, we fully appreciate that—based on the strength of its balance sheet — CRON remains a relatively safe, and hence, rare defensive play in the Canadian cannabis sector. Further, once CRON has reset its U.S. strategy and begins to announce—likely in 2021 — the relaunch of its Peace+ brand, among other initiatives we suspect are in the works, we would be motivated to augment the $6.50 baseline target price we've established today."
Citing a “significantly improved near-term FCF outlook, attractive valuation, takeover optionality, and leverage to copper,” Scotia Capital analyst Orest Wowkodaw raised his rating for Freeport-McMoRan Inc. (FCX-N) on Monday.
In the wake of the release of in-line first-quarter results last week alongside a revised operating plan "focused on cash flow preservation," Mr. Wowkodaw upgraded to "sector outperform" from "sector perform."
"While Grasberg ramp-up risks remain elevated, we believe the risk-reward makes sense at the current share price," he said.
"We view the update as positive for the shares."
On Friday before the bell, Phoenix-based company reported EBITDA of US$189-million, exceeding the analyst's US$88-million estimate. Adjusted earnings per share of a 16-US-cent-loss also met his expectations (14 US cents).
“Due to the current macro uncertainty, FCX reduced its 2020 Cu [copper] sales guidance to 3.1 billion pounds, or by 11 per cent, reflecting a 400-million-pound planned reduction in its higher-cost Americas asset base (Au guidance of 780 Moz was essentially unchanged)," said Mr. Wowkodaw. “Revised 2020 Cu cash cost guidance of $1.55/lb was substantially reduced from $1.75 per pound previously, while capex guidance was lowered to $2.0-billion (from $2.8-billion previously). FCX also lowered its 2021-2022 Cu sales guidance to 3.9 billion pounds and 4.2 billion pounds, both down 9 per cent per annum. Based on the revised operating plan, we now forecast 2020-2022 of -$0.5-billion, $0.7-billion, and $2.5-billion (vs. -$2.3-billion, $1.2-billion, and $2.5-billion previously), representing a $1.3-billion cumulative improvement.”
After raising his EBITDA forecast for 2020 through 2022, he increased his target for Freeport-McMoRan shares to $12.50 from $12. The average is US$11.88.
Hamilton Thorne Ltd. (HTL-X) appears set to benefit from organic growth in the Assisted Reproductive Technology (ART) market as infertility rates rising globally, said Industrial Alliance Securities analyst Chelsea Stellick.
"With product and service offerings provided to more than 1,000 fertility clinics in 75 countries, HTL is poised to grow organically in the more-than $17-billion infertility market where macroeconomic factors bode well for its exponential growth beyond," she said.
In a research note released Monday, she initiated coverage of the Beverly, Mass.-based company with a “buy” rating, seeing it positioned to make gains in a highly fragmented market.
“There is strong and growing demand for ART as infertility is becoming more prevalent,” said Ms. Stellick. “Globally, infertility impacts 15 per cent of couples, and over the past decade couples have looked to ART to fulfill their desires to start a family. With more than 160 companies operating in the field with less-than $20-million of revenue, and 8 companies, including HTL, with $20-40-million in revenue, there has been high M&A activity as companies grow their footprints via acquisition. Additionally, there is heightened interest from private equity (PE) firms seeking growth plays in the fertility clinic space, which may drive up asset bids. HTL has made five accretive transactions over the last five years (4-8 times EBITDA), and given the Company’s healthy balance sheet and sufficient liquidity ($12.8-million cash position, $7.5-million on its credit lines) at the end of Q4/F19, we see ample upside and opportunity for HTL to continue to acquire within the 4-8 times EV/EBITDA range every 12-18 months.”
Ms. Stellick touted the company's 55-per-cent recurring revenue and "high" margins, which she expects to resumed growth through its focus on accretive acquisitions.
She set a target of $1.60 per share, which exceeds the current consensus target by a penny.
“When looking at HTL’s peer group, we note an average 2020 EV/EBITDA multiple of 18.7 times,” the analyst said. “Currently, HTL is trading at 16.5 times, which we believe is unwarranted given its strong macroeconomic fundamentals supporting long-term organic growth in ART supply. We consider HTL’s positive track record of growth via acquisition to be an indicator for future upside as the Company can continue to grow its bottom line.”
Meanwhile, Acumen Capital analyst Jim Byrne maintained a "buy" rating and $1.40 target after hosting a conference call with Hamilton Thorne CEO David Wolf.
Mr. Byrne said: “In our view, HTL shares are attractively valued given the strong organic growth, profitability, and positive industry fundamentals. While there is a risk associated with the financial results through the pandemic, we believe the long-term outlook remains very strong.”
In a separate note, Ms. Stellick assumed coverage of Toronto-based Medical Facilities Corp. (DR-T) and maintained the firm’s “speculative buy” rating.
“Given the current environment, we are expecting depressed case volumes in Q2/Q3, which could result in pent-up demand at year-end where Q4 is MFC’s seasonally stronger quarter,” she said. “Facilities are continuing to provide essential procedures to patients who require immediate care. While near term we may see reduced volumes as a result of COVID-19 impacts, we do see opportunities in the long term, including the Company’s ASC partnership at St. Luke’s and other de novo opportunities with NueHealth.”
Ms. Stellick trimmed the firm’s target for Medical Facilities shares to $5.40 from $6.50. The average on the Street is $4.69.
Desjardins Securities analyst Chris Li expects trading in Gildan Activewear Inc. (GIL-T, GIL-N) to be volatile following a recent “strong” share price recovery from its recent lows, pointing to COVID-19 uncertainties “clouding earnings visibility.”
"But we remain positive on the stock’s longterm value, supported by its solid financial position and strong competitive advantages," he said.
Ahead of the release of its first-quarter results, Mr. Li lowered his financial projections to account for the pandemic's impact, cutting his 2020 and 2021 earnings per share projections to 36 US cent and US$1.13, respectively, from US$1.93 and US$2.15. Both fell well short of the consensus expectations on the Street of 85 US cents and US$1.42 previously.
"While a dividend suspension, weak 1Q and pessimistic near-term management outlook are likely expected, we believe they pose downside risk nearterm, especially with GIL recovering 46 per cent from its recent low (in line with S&P/TSX consumer discretionary index)," he said.
"But, we believe these risks are balanced against GIL’s solid financial position, unmatched low-cost manufacturing advantage and scale, share-gain opportunities (organic, M&A) as smaller and more leveraged competitors struggle, and attractive structural growth drivers (eg fashion basics, private label)."
Seeing Gildan’s main share price driver to be its earnings power in 2021, he slashed his target for its stock to $25 from $42, which is the current consensus.
He kept a “buy” rating.
In other analyst actions:
* Eight Capital initiated coverage of Absolute Software Corp. (ABT-T) with a “buy” rating and $12.50 target. The average is $10.17.
* The firm also initiated coverage of Photon Control Inc. (PHO-T) with a “buy” rating and $1.50 target. The average is $1.80.