Inside the Market’s roundup of some of today’s key analyst actions
Though its facing near-term weakness amid the energy sector’s recent struggles, Industrial Alliance Securities analyst Elias Foscolos thinks it’s time to buy Inter Pipeline Ltd. (IPL-T), citing its divestiture plans and outlook.
In the wake of last week’s release of in-line first-quarter results, Mr. Foscolos raised the Calgary-based company to “speculative buy” from “hold,” feeling the market should focus on its longer-term outlook rather than results of the next quarter or even 2020 as a whole.
In justifying his move, Mr. Foscolos thinks “something positive” will come from its search for a potential joint venture partner at its Heartland Petrochemical Complex, its integrated polypropylene plant (PP) and propane dehydrogenation facility (PDH), or the sale of its European Bulk Liquids Storage (BLS) segment. However, he cautioned it “will not happen overnight.”
“IPL emphasized that its top priority is to find a partner for its PDH/PP plant. Additionally, IPL confirmed that its European Bulk Liquids Storage (BLS) segment is not a core asset and at some point, it will likely be divested. We view both of the above statements as positive,” he said.
"By 2022, we believe IPL will have no more debt than today and 20-30 per cent more EBITDA through a combination of the disposition of the BLS segment offset by EBITDA contribution from the PDH/PP plant. We believe it is now time to upgrade IPL instead of sitting on the sideline."
Mr. Foscolos raised his target price for Inter Pipeline shares to $13.50 from $12. The average target on the Street is $12.76.
“The most important change to us is re-thinking our valuation approach,” he said. “We have elected to lower our EV/EBITDA multiple which is m more than compensate by finally valuing the PDH/PP asset. PDH/PP accounts for 50 per cent of IPL’s equity value but contributes no EBITDA. It eventually will, but even before that time, IPL has decided to seek a partner. Therefore, we should more fully value this asset.”
Desjardins Securities analyst Gary Ho raised his rating for IGM Financial Inc. (IGM-T) on Monday in reaction to the 5-per-cent reduction in its expense guidance, calling the drop a “positive surprise” and pointing to management’s “solid” track record of meeting such targets.
"Non-commission expense growth had been one of our concerns, particularly in a low or slow AUM [asset under management] growth environment," he said. "That said, the 5-per-cent SG&A reduction ($50-million cost savings vs previous guidance) is encouraging and resulted in our estimates moving higher for 2020. We would highlight that management has met or exceeded its guidance since it first provided this back in 2018. We acknowledge that a portion of this will likely reverse in 2021; however, we also expect further synergies from its IG transformation to materialize as a partial offset."
Moving IGM to “buy” from “hold,” Mr. Ho also said the fund performance of Mackenzie, its asset management segment, continues to “impress.”
"As at March 2020, 69 per cent, 69 per cent and 74 per cent of Mackenzie AUM were within the first and second quartile on a three-year, five-year and 10-year basis," he said. "In addition, 59 per cent of AUM is rated 4 or 5 star by Morningstar. We believe strong fund performance should lead to steady retail net inflows. On top of this, in April Mackenzie had $2.6-billion in institutional net inflows with four clients across four mandates. While these typically generate lower bps, they should incrementally contribute to earnings looking out."
Mr. Ho raised his earnings per share projections for 2020 and 2021 to $2.85 and $2.91, respectively, from $2.72 and $2.86.
That led him to increase his target for IGM shares to $33 from $31. The average on the Street is $29.88.
“Our investment thesis is predicated on: (1) increased cost containment focus, and management has delivered on previous targets; (2) solid MKF fund performance should drive future net inflows; and (3) IG transformation should yield results over the near term,” he said.
In the wake of its share price jumping 60 per cent since a March 23 upgrade (versus a 33-per-cent return for the TSX, Raymond James analyst Ben Cherniavsky reacted by returning his rating for Ritchie Bros. Auctioneers Inc. (RBA-N, RBA-T) to “market perform” from "outperform.
“Recall that this favourable change in our rating, just a little over six weeks ago, was a tactical trading call based on the share price of a company that we had previously considered too richly-valued coming back down to earth in the midst of a mad market panic,” he said.
“We also remind investors how we emphasized at the time that we were making this upgrade despite the COVID-19 lockdown and the related risks to our 2020 EPS estimates for the company. In fact, we explicitly warned in the aforementioned Comment that the market could ‘send this stock lower’ in the near-term as it digested the earnings revisions required for the pandemic. As it turns out, COVID-19 did cause Ritchie’s 1Q20 performance to fall short of our forecasts and gave management plenty of reason to temper expectations going forward. Specifically, the company has cut capex, suspended the buyback, and warned of possible revenue declines, cost reductions, and margin erosion in the coming quarters. Clearly, the global outbreak of the coronavirus is having a negative impact on their business. Yet instead of going lower, the stock price has moved higher. Much higher!”
Mr. Cherniavksy said he made the move despite acknowledging the "resilience" of its business model, "strong" cash flow characteristics and "its ability to thrive off major economic disruptions.
"In fact, these were the factors that gave us the confidence to upgrade our rating in the midst of what was arguably the greatest stock market sell-off of all-time," he said. "Nevertheless, the fact that the share price has since moved 60-per-cent higher while our 2020 earnings forecasts has moved 17 per cent lower puts us right back in the same valuation dilemma that we faced before."
Despite lowering his 2020 and 2021 earnings per share projections to US$1.25 and US$1.55, respectively, from US$1.50 and US$1.65, Mr. Cherniavsky raised his target for Ritchie Bros stock to US$44 from US$33. The average on the Street is US$43.31.
“We don’t want to sound too negative about Ritchie Bros.,” he said. “Indeed, the company’s financial performance is getting better; the new management team has an opportunity to enhance results further; and we still consider the core business fundamentals to be very attractive. However, at the end of the day it’s all about the risk investors assume relative to the price they must pay for a stock. Six weeks ago we liked how this trade-off looked; today we don’t. Market Perform.”
Touting its “complementary” portfolio of stable business and “solid” high single-digit organic growth, Industrial Alliance Securities analyst Naji Baydoun initiated coverage of Quebec City-based H2O Innovation Inc. (HEO-X) with a “speculative buy” rating, calling it a “one-stop shop for your water needs.”
In a research note released Monday, Mr. Baydoun said ageing infrastructure and growing populations support investment in water infrastructure.
“In developed economies, the majority of the current water infrastructure is estimated to be near the end of its useful life and could require trillions of dollars in investments to replace,” he said. “In developing economies, demand for water infrastructure is driven by (1) insufficient water availability, and (2) increasing water demand, mainly due to growing populations. Looking ahead, we believe that these factors will drive increasing water-related investments, supported by the low global interest rate environment, which could help stimulate investments in infrastructure assets.”
Mr. Baydoun noted more than 80 per cent of H20 Innovation's revenues are now recurring, rising from less than 50 per cent in fiscal 2017, providing stability and predictability for its portfolio and becoming a area of focus moving forward.
“HEO has taken several steps to improve its margins, including (1) strategically being more selective when pursuing new business mandates (focusing on higher-margin opportunities), (2) focusing on expanding the high margin SP [specialty products] business (through new product additions and a larger distribution network), and (3) realizing both cost and revenue synergies from recent acquisitions. Based on the growth outlook and improving profitability of HEO, we forecast high single-digit average annual AFFO/share growth through fiscal 2024.”
Seeing it trading at a small-cap discount to water-link companies, Mr. Baydoun set a $2 target for H20 Innovation shares. The average on the Street is $1.77.
"We believe that as the Company continues to execute on its growth strategy, adding scale to the portfolio and improving profitability, HEO’s shares could experience valuation multiple expansion over time," he said.
“HEO offers investors (1) solid high single-digit organic revenue growth (6-8 per cent per year, CAGR 2019-24), driven by its order backlog (more than $140-million), (2) improving profitability, driven by a changing portfolio mix (increasingly made up of higher-margin businesses), (3) a discounted valuation compared with peers, and (4) potential upside from additional bolt-on acquisitions and strategic M&A.”
Seeking more visibility on the resiliency of its retail portfolio, Industrial Alliance Securities analyst Frederic Blondeau downgraded Cominar Real Estate Investment Trust (CUF.UN-T) to “hold” from “buy” following the release of in-line first-quarter results.
“At present, based on the information we have today, we no longer anticipate CUF to transact in 2020 or 2021; consequently, we have conservatively put a halt to the debt reimbursement,” he said.
“We also adjusted our estimates to account for an assumption of 10-per-cent vacancy/bad debt for the remainder of 2020 and 5 per cent in 2021 due to the strong headwind faced by the retail portfolio. In addition, as per management’s inputs, we added 40 per cent of the REIT’s current cost savings for this year to our forecasted NOI. The expected cost savings represent $15-million in Q220 and $6-million per quarter for the remainder of 2020.”
Mr. Blondeau reduced his target to $10.50 from $15.50. The average on the Street is $12.22.
“We fully acknowledge CUF’s imbedded value at this stage,” he said. " That said, despite a 41-per-cent projected return, we are momentarily downgrading CUF ... while waiting for more visibility on the resiliency of the retail portfolio. In addition, in our opinion potential issues relating to succession might also mean a delay in the surfacing of the REIT’s hidden value."
Calling it a “favoured value story as catalysts approach,” RBC Dominion Securities analyst Tyler Broda raised Vale S.A. (VALE-N) to “outperform” from “sector perform.”
"Vale is emerging from the Brumadinho tragedy with management reshaping the company's culture," he said. "The tailings disaster and its lingering impacts, including its recent guidance downgrade, have weighed on the shares, but also make it inexpensive we think, even when iron ore price resilience turns."
Noting the FTSE350 mining index is now down 27 per cent thus far in 2020 in U.S. dollar terms, Mr. Broda thinks “value is beginning to emerge within the space as a whole, especially if commodity prices are able to continue their recent strength and as currencies and energy prices assist costs.”
He raised his target for the Brazilian giant’s shares to US$9.50 from US$9. The average is US$12.30.
“VALE is nearing a settlement with the Minas Gerais authorities to finalize total outstanding liabilities in relation to Brumadinho,” the analyst said. “Management has indicated once this occurs they will look to return excess cash accrued since the cancellation of the dividend to shareholders. VALE has $9-billion of total net debt (including various liabilities) which is below their target $10-billion level. We expect a settlement (delayed because of COVID-19) to come in the next 3- 6 months allowing for a Q4 dividend restart at a 50-per-cent payout ratio as well as the start of a buyback. On our base case we have added $3.6-billion in buybacks through 2021 but would need to be closer to $6.0-billion at spot to maintain target net debt levels in 2021. In our view, part of the relative share price weakness can be attributed to the suspended dividend, and false starts on the dividend restart expectations have also likely weighed. We see an eventual announcement as providing a key catalyst.”
Pembina Pipeline Corp. (PPL-T) has an “attractive risk-reward profile with a big focus on risk mitigation,” said RBC Dominion Securities analyst Robert Kwan, believing the market gave it a “free pass” following a “soft” reduction in its guidance given its history of being conservative with its projections.
“In the press release, Pembina re-affirmed its 2020 adjusted EBITDA guidance range of $3.250-3.550-billion, while maintaining its directional guidance to be near the lower-end of this range (this was initially provided on March 18) based on its ‘current estimates’,” said Mr. Kwan. "However, the company further noted that, ‘While factoring in reduced volumes and lower commodity prices..., the duration of the current situation and large-scale shut-ins could cause Pembina to fall below the low end of the guidance range.’
“... but was the disclaimer a function of Pembina being overly cautious? We think so following the conference call commentary. Only time will tell, but the conference call commentary led us to believe that the potential to fall below the low-end of the guidance range would likely come from a scenario that would be highly negative for almost all of our midstream coverage (and likely cause other midstreamers to have to revise their guidance downward). Specifically, factors that could cause a downward revision to guidance include a major producer bankruptcy or significantly higher oil sands production shut-ins than we are currently seeing for an extended period of time.”
Seeing Pembina as attractive compared to its WCSB-focused midstream peers, Mr. Kwan hiked his target for Pembina shares to $40 from $26, keeping an “outperform” rating. The average on the Street is $37.25.
“Although other WCSB-focused midstream peers may have greater upside potential in a market recovery, we believe that the market is also very focused on risk mitigation/downside protection,” he said. “On that front, we think that Pembina gets a lot of credit for being well-ahead of its peers with respect to taking swift and decisive action to protect the balance sheet and dividend. Specifically, Pembina decided to materially cut its growth capex (i.e., the ‘nice to do’ projects) and make it clear to the market that it is willing to make the hard decisions to protect the dividend.”
Elsewhere, Industrial Alliance Securities' Elias Foscolos moved his target to $35 from $34 with a "hold" rating (unchanged).
Mr. Foscolos said: “PPL’s Q1/20 results fell right in line with the projected guidance estimate and consensus. The key takeaways for investors are (a) PPL is playing the current economic situation very conservatively; (b) it will only go on the offense (reactivate deferred projects or acquire) when it sees stability; (c) EBITDA guidance will be maintained; (d) maintaining its credit rating appears to be of paramount importance; and (e) the current dividend is safe.”
Desjardins Securities analyst Michael Markidis lowered his target prices for a series of TSX-listed real estate investment trusts following the release of quarterly results in separate research reports released Monday following the
His changes included:
* Artis Real Estate Investment Trust (AX.UN-T, “hold”) to $9 from $12.50. The average on the Street is $10.94.
"The past week was not kind to investors" he said. "The strategic review concluded on May 5 without a transaction, 1Q20 results were short of expectations, and in an effort to preserve liquidity, the NCIB was temporarily suspended. The disposition program has abruptly been put on hold, delaying deleveraging efforts. A low payout ratio provides some comfort with respect to the distribution; however, above-average leverage and AX’s short liability duration elevate the risk profile, in our view."
* Cominar Real Estate Investment Trust (CUF.UN-T, “hold”) to $9.50 from $15.25. Average: $12.22.
“Owing to its enclosed malls (25 per cent of total assets), the impact of COVID-19 on CUF’s operating performance may ultimately be greater than for peers," he said. "The exploration of alternatives for CN Central Station has been put on hold and CUF has taken swift action to assist its tenants, find alternate sources of liquidity and address near-term debt maturities.”
* Crombie Real Estate Investment Trust (CRR.UN-T, “buy”) to $15 from $17. Average: $14.33.
“Strong sponsorship and an extended lease duration are key attributes that should defend CRR from potential income erosion due to COVID-19 over the next 12–24 months," he said. "Major development projects under construction will likely experience some delays; however, they should still provide earnings and value appreciation over time.”
* Dream Industrial Real Estate Investment Trust (DIR.UN-T, “buy”) to $12 from $14. Average: $12.33.
"The European expansion and debt optimization strategy that commenced earlier this year has been abruptly put on hold; however, we believe DIR has more than enough financial flexibility to absorb operating issues that have/will be caused by COVID-19," he said.
* Dream Office Real Estate Investment Trust (D.UN-T, “buy”) to $27 from $32. Average: $29.63.
“April rent collection was impressive (95 per cent)," he said. "More than 75 per cent of NOI [net operating income] is derived from downtown Toronto and only 6 per cent is generated from retail/food services/entertainment tenants. The company is well-capitalized. Debt-to-EBITDA is 9.0 times and liquidity stands at $220-million. D owns seven income properties in Calgary and Saskatoon (0.8 million square feet). Occupancy is only 75 per cent but the leases carry an average remaining term of 6 years.”
* Plaza Retail Real Estate Investment Trust (PLZ.UN-T, “hold”) to $3.50 from $4.75. Average: $3.80.
“COVID-19 has materially impacted the business; 26 per cent of April revenue was either deferred or withheld and developments nearing completion will likely experience delays,” he said. “Liquidity of $29-million compares with remaining 2020 maturities of $66-million.”
* SmartCentres Real Estate Investment Trust (SRU.UN-T, “hold”) to $23 from $33.50. Average: $26.94.
“We see several defensive attributes inherent in SRU’s portfolio and capital structure,” he said. “At the same time, April rent collection was only 70 per cent and we are concerned that the prospect of tenant failures (small, regional and national) will be an overhang on the stock for the foreseeable future.”
Calling it “a master of rapid strategic evolution, shifting in step with Canada’s moving-target cannabis regulations, and adjusting in real time with tempestuous market dynamics,” Raymond James analyst Rahul Sarugaser initiated coverage of Auxly Cannabis Group Inc. (XLY-X) with a “strong buy” rating.
“While it did take time for XLY to iterate toward its current focus on science and innovation-driven consumer products, and away from preceding incarnations of the business plan (i.e. its former streaming business: Cannabis Wheaton Income Corp.) for which — remaining with the hockey analogy  — we think XLY’s stock has been in the penalty box,” he said. “But today, with its very strong showing in the early days of Cannabis 2.0, combined with big-league support from its British tobacco giant partner, IMB, we are witnessing, in our view, a holistic renewal of XLY and believe now is the time for investors to take notice.”
Mr. Sarugaser set a target of 60 cents per share. The average is 73 cents.
“Noting XLY’s share price of 33 cents at the time of writing, combined with our estimation of material 1Q20 revenue — driven by XLY’s rapid launch of a robust Cannabis 2.0 portfolio — which we believe is has yet to be priced into the stock (the market seems, still, to hold XLY in the penalty box), we ascribe XLY a Strong Buy rating,” he said.
In other analyst actions:
TD Securities analyst Graham Ryding cut Morneau Shepell Inc. (MSI-T) to “hold” from “buy” with a $36 target, down from $38. The average on the Street is $37.20.
TD’s Daryl Young cut Badger Daylighting Ltd. (BAD-T) to “hold” from “buy” with a $30 target. The average is $31.75.
TD’s Steven Green lowered TMAC Resources Inc. (TMR-T) to “tender” from “hold” with a $1.75 target, up from $1 but below the $2.42 average.