Inside the Market’s roundup of some of today’s key analyst actions
A "solid" fourth-quarter earnings from Canadian midstream companies that exceeded the Street's expectations has now been "overshadowed by a bleak market outlook," said Industrial Alliance Securities analyst Elias Foscolos.
“Since the start of this week, stocks within the midstream sector have experienced dramatic declines with share prices declining by similar amounts to those suffered by senior E&P producers,” he said in a research note released Thursday. “This meltdown in prices has occurred despite the fact that the midstream sector has a much lower risk profile than producers. The sector as a whole has declined by 29 per cent since last Friday and the spread over the GOC 10-year bond has ballooned to 735 basis points which is nearly double its historical spread of 320 basis points.”
In explaining the "meltdown," Mr. Foscolos said investors are likely pricing in several new risk factors.
"First, will the credit quality of their counterparties deteriorate?," he said. "We believe that to some degree they will but at this point it would be premature to correlate E&P credit quality to midstream cash flow. Second, will midstream companies that currently have investment grade credit ratings lose their status? We believe this unlikely to occur due to the contractual nature of the majority of a midstream company’s cash flow. Finally, are there some fundamental factors caused by declining oil prices that will impact near-term cash flow? We believe those companies that have some marketing spread exposure could see some contraction and we have made adjustments. However, oil and natural gas will continue to flow through midstream infrastructure."
After reevaluating the sector, Mr. Foscolos lowered his target prices for stocks in his coverage universe. His changes were:
AltaGas Ltd. (ALA-T, “buy”) to $21 from $23. The average on the Street is $23.20.
Gibson Energy Inc. (GEI-T, “buy”) to $27 from $32. Average: $29.60.
Inter Pipeline Ltd. (IPL-T, “buy”) to $20 from $24. Average: $23.63.
Keyera Corp. (KEY-T, “strong buy”) to $36 from $41. Average: $40.11.
Pembina Pipeline Corp. (PPL-T, “buy”) to $51 from $56. Average: $56.20.
Parkland Fuel Corp. (PKI-T, “buy”) to $47 from $53. Average: $51.33.
Superior Plus Corp. (SPB-T, “buy”) to $12 from $14.50. Average: $13.73.
Tidewater Midstream and Infrastructure Ltd. (TWM-T, “hold”) to $1.05 from $1.70. Average: $1.85.
Concurrently, seeing a “worsening macro backdrop” weighing heavily on its 2020 earnings, Mr. Foscolos lowered Secure Energy Services Inc. (SES-T) to “hold” from “buy.”
"SES’s capital program of $80-million centres around the East Kaybob feeder pipeline (approximately $40-million), which, when operational in mid-2020, should contribute $8-million annualized EBITDA," he said. "Full-year contributions from other projects completed in 2019 will also aid EBITDA growth. However, we believe this growth will be overshadowed by a decline in drilling & completions which will impact all business segments."
“We believe that any growth from organic expansion will be more than offset by decreased drilling & completions activity, and we view the probability of SES selling assets at a price within its previous guidance range as increasingly unlikely. Market comparables have also substantially declined, and we are choosing to put more weight toward these multiples relative to SES’s historical trading multiples. Combined with company-specific factors, we believe it is appropriate to step to the sidelines.”
Mr. Foscolos continues to support Secure’s planned asset sales, but he now questions whether they can “realistically” be sold.
“On an EBIT basis, SES’s Technical Solutions (TS) and Environmental Solutions (ES) generate essentially no economic value,” he said. "However, given the gloomy outlook and constrained capital, we believe those businesses will not be disposed for even $100-million (SES’s low-end guidance). As a result, we have retained those assets in our projections. "
Also seeing the $250-million legal claim by Tervita Corp. as adding a “further level of complexity,” Mr. Foscolos lowered his financial projections through 2022, leading him to reduce his target price for Secure shares to $3.25 from $6.75. The average on the Street is $6.50.
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Equity analysts at Raymond James dropped their 2020 and 2021 oil and natural gas price assumptions in reaction to the steep drop endured this week.
“While we believe it is important to provide investors some context to what the go-forward outlook could be under the current price environment,we nevertheless feel it necessary to caution that these revised estimates reflect a ‘first crack’ at assessing our coverage universe under the current environment, as this remains a very fluid environment with a tremendous amount of uncertainty,” said Chris Cox and Jeremy McCrea in a research note released before the bell.
The firm's 2020 and 2021 WTI assumptions slid to US$38.46 and US$40.45 per barrel, respectively, from US$61.17 and US$55.62. Its long-term assumption fell to US$40.45 from US$55.62.
For natural gas, its NYMEX estimates for 2020 and 2021 dropped to US$2.11 and US$2.39 per thousand cubic feet, respectively, from US$2.25 and US$2.44. Its long-term assumption declined to US$2.40 from US$2.50.
With those changes, the analyst made a series of ratings changes to stocks in their coverage universe.
They downgraded the following companies:
Athabasca Oil Corp. (ATH-T) to “underperform” from “market perform” with a 0-cent target, down from 50 cents. The average is 65 cents.
Baytex Energy Corp. (BTE-T) to “underperform” from “market perform” with a 75-cent target, down from $2. Average: $2.47.
Cardinal Energy Ltd. (CJ-T) to “underperform” from “market perform” with a $1 target, down from $2.75. Average: $3.19.
Crescent Point Energy Corp. (CPG-T) to “underperform” from “market perform” with a $1.25 target, down from $6. Average: $7.54.
Paramount Resources Ltd. (POU-T) to “underperform” from “market perform” with a $1.25 target, down from $8.50. Average: $6.73.
Surge Energy Inc. (SGY-T) to “underperform” from “market perform” with a 50-cent target, down from $1.50. Average: $1.20.
Bonterra Energy Corp. (BNE-T) to “underperform” from “market perform” with a $1.50 target, down from $4. Average: $2.87.
Crew Energy Inc. (CR-T) to “underperform” from “market perform” with a 50-cent target, down from 75 cents. Average: 76 cents.
Painted Pony Energy Ltd. (PONY-T) to “underperform” from “market perform” with a 50-cent target, down from 75 cents. Average: 95 cents.
Petrus Resources Ltd. (PRQ-T) to “underperform” from “market perform” with a 10-cent target, down from 25 cents. Average: 39 cents.
Inter Pipeline Ltd. (IPL-T) “underperform” from “market perform” with a $13 target, down from $24. Average: $23.63.
“In most cases, the significant drop in oil prices will necessitates substantial capex reductions to manage funding profiles and the balance sheet, and we have adjusted spending profiles in anticipation of these budget adjustments over the coming weeks,” the analyst said. “Nevertheless, we still see challenged funding outlooks and stretched balance sheets for a large number of producers within this environment; in these cases, we believe further selling pressure is likely and we have moved the vast majority of names exhibiting projected D/CF above 4 times to Underperform. Specifically, we are downgrading the following names from Market Perform to Underperform: Athabasca, Baytex, Bonterra, Cardinal, Crescent Point, Crew, Surge, Painted Pony, Paramount and Petrus.
"On the Midstream-side, we have lowered our rating on Inter Pipeline to an Underperform (from Market Perform). The good news is that recent sector concerns with respect to counter party risks should be relatively minimal for IPL, largely owing to its strong Oil Sands Transportation segment.However, we believe direct pricing impacts within the NGL Processing segment are material and have not been adequately reflected in the share price, especially relative to the broader weakness in the Midstream sector (down 30 per cent over the past week, with IPL trading in-line). With our forecasts moving materially lower as a result, we now have IPL trading a sizeable 5.0 times above peers on 2020 estimated EBITDA (3.5 times if we adjust multiples for capital currently in-service on major projects, such as Heartland), which we believe will close as Street forecasts start to bake in the updated outlook.Furthermore, we see the drop in NGL Processing margins putting further pressure on the funding outlook, with the dividend payout on AFFO jumping to 150 per cent on average over ’20/'21.”
At the same time, the firm raised its rating for Seven Generations Energy Ltd. (VII-T) to “outperform” from “market perform” with a $5.50 target, falling from $10. The average on the Street is $11.33.
“While the outlook for Seven Generations is far from robust, our revised forecasts point to a story that should be able to keep spending roughly within cash flow over the next two years at strip pricing, while keeping leverage metrics below 2.5 times and a relatively flat production profile," they said. "VII has also been one of the hardest hit names in the sell-off over the past week, under performing the Energy Index by 20%. With the stock trading at only 3.5 times 2020 EV/DACF (ex-hedging) and with a relatively lower risk profile than peers, we believe the market will circle back to this story as one where the recent sell-off has been overdone.”
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Analysts at CIBC World Markets also lowered their commodity price projections on Thursday, leading to a series of rating changes for TSX-listed energy stocks in their coverage universe.
“Although one could argue that we really didn’t need to go here, we are here nevertheless,” they said. "As such, we are taking the opportunity to mark-to-market for the recent price action and dovetail what we view as a logical near-term macro backdrop across our coverage universe. We continue to evaluate and calibrate expectations for our coverage universe on two core scenarios: 1) the forward strip; and, 2) longer-term mid-cycle commodity price assumptions of US$55/Bbl WTI, US$60/Bbl Brent and US$2.50/MMBtuNYMEX.
“With that said, we have materially reduced our near-term assumptions in the latter case scenario to include US$30/Bbl WTI for Q2/20, US$35/Bbl WTI for Q3/20, US$40/Bbl WTI for Q4/20 and US$50/Bbl WTI for 2021 before reverting to long-term US$55/Bbl WTI in 2022+. We have also adjusted our capital spending, production and activity forecasts across our coverage universe to reflect this macro outlook. The impacts of such a macrooutlook across our coverage universe are obviously pronounced.”
The firm raised their ratings for the following stocks:
Freehold Royalties Ltd. (FRU-T) to “outperformer” from “neutral” with a $6 target, down from $9. The average on the Street is $10.38.
Imperial Oil Ltd. (IMO-T) to “outperformer” from “neutral” with a $35 target, down from $40. Average: $35.79.
PrairieSky Royalty Ltd. (PSK-T) to “outperformer” from “neutral” with a $12 target, down from $18. Average: $17.18.
The following were downgraded:
Baytex Energy Corp. (BTE-T) to “neutral” from “outperformer” with a $1 target, down from $3. Average: $2.47.
Bonterra Energy Corp. (BNE-T) to “underperformer” from “neutral” with a $1 target, down from $4.40. Average: $2.87.
Calfrac Well Services Ltd. (CFW-T) to “underperformer” from “neutral” with a 40-cent target, down from 90 cents. Average: $1.04.
Crescent Point Energy Corp. (CPG-T) to “neutral” from “outperformer” with a $2.50 target, down from $7.50. Average: $7.54.
Crew Energy Inc. (CR-T) to “underperformer” from “neutral” with a 25-cent target, down from $1. Average: 76 cents.
Ensign Energy Services Inc. (ESI-T) to “neutral” from “outperformer” with a $1.50 target, down from $4.50. Average: $3.30.
Frontera Energy Corp. (FEC-T) to “neutral” from “outperformer” with a $8 target, down from $20. Average: $13.70.
Gran Tierra Energy Inc. (GTE-T) to “underperformer” from “neutral” with a 50-cent target, down from $2.50. Average: $2.57.
Kelt Exploration Ltd. (KEL-T) to “neutral” from “outperformer” with a $2.50 target, down from $6.50. Average: $6.24.
NuVista Energy Ltd. (NVA-T) to “neutral” from “outperformer” with a $1.50 target, down from $4. Average: $4.09.
Painted Pony Energy Ltd. (PONY-T) to “underperformer” from “neutral” with a 50-cent target, down from $1. Average: 95 cents.
Paramount Resources Ltd. (POU-T) to “underperfomer” from “neutral” with a $1 target, down from $4.50. Average: $6.73.
Pason Systems Inc. (PSI-T) to “neutral” from “outperformer” with a $13 target, down from $18. Average: $16.08.
STEP Energy Services Ltd. (STEP-T) to “neutral” from “outperformer” with a $1.50 target, down from $3.50. Average: $1.91.
Vermilion Energy Inc. (VET-T) to “underperformer” from “neutral” with an $8 target, down from $12. Average: $16.19.
Western Energy Services Corp. (WRG-T) to “underperformer” from “neutral” with a 15-cent target target, down from 35 cents. Average: 29 cents.
Yangarra Resources Ltd. (YGR-T) to to “underperformer” from “neutral” with a 75-cent target, down from $2. Average: $2.07.
“At this stage it’s all about survivability and strategic positioning and, as such, we continue to have a strong bias to being overweight larger, more stable and less-capital-intensive platforms that have stronger margins of safety,” the group said. “This naturally includes bigger weightings in the Large-cap E&P, Integrateds and select Energy Infrastructure stocks. Said another way, we view the safety trade to be alive and well and we believe it will be logical to have any capital allocated in the sector on this basis. Of note, the highest number of downgrades across our coverage universe are within the Small/Mid-cap E&Ps and Oilfield Services sector, the latter of which will face the greatest pain from lower activity levels and what will be a fairly anemic activity outlook for the next six to 12 months.”
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Calling it a “high-quality stock with defensive-growth characteristics,” Scotia Capital analyst Phil Hardie raised his rating for Morneau Shepell Inc. (MSI-T) to “sector outperform” from “sector perform.”
"While the broad market sell-off has likely left no shortage of 'value' opportunities, we believe small-cap investors looking for a high-quality stock with rare 'defensive-growth' characteristics should add MSI to their portfolio given what appears to be an increasingly uncertain environment," he said.
"MSI has a proven track record of resilience and has demonstrated the ability to grow its revenues under a wide range of macroeconomic and financial market conditions and to deliver consistent returns to investors. High levels of recurring revenues, stable margins, and low capex requirements are reasons to like to story."
Mr. Hardie raised his target to $38, which is the current consensus, from $36.
“We estimate shares of MSI currently trade at 13.0 times EV/EBITDA (NTM), roughly in line with their three-year historical average, but above the longer-term mean,” the analyst said. “That said, given what we view as the stock’s distinctive “defensive growth” characteristic, we expect it to be able to continue to sustain a multiple in the 13.0-times range. The stock has fared relatively well through the recent sell-off but is trading below recent highs, offering investors a more attractive entry point.”
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Feeling its “adequately de-risked” following the release of fourth-quarter results that exceeded his expectations, Canaccord Genuity analyst Yuri Lynk raised his rating for Bird Construction Inc. (BDT-T) to “buy” from “hold.”
“By all accounts, Teri McKibbon, President & CEO, has put his stamp on the company by reducing Bird’s risk profile while improving margins,” said Mr. Lynk. "The company was already striving for wider endmarket exposure before Mr. McKibbon ascended to the top job in June of last year, and he fully supported that initiative. As a result, Bird has long-term contracts in non-traditional end-markets such as nuclear, transportation infrastructure, and LNG. Management has also diversified by contract type. While sticking to its preference for fixed-price work, Bird has also booked substantial construction management and integrated project delivery contracts, that should help it deliver more predictable results from quarter to quarter. In terms of growth, there’s a lot to like as well. Backlog ended 2019 19 per cent higher year-over-year, which we see translating into 7-per-cent revenue growth. With margin in backlog higher, we see 132-per-cent EPS growth in 2020, albeit against an easy comp featuring legacy project losses. Lastly, we see downside support in the company’s generous dividend of 3.25 cents per month (7.6 per cent annualized) and strong balance sheet ($130-million in net cash).
"In light of these positives and with a 43-per-cent total return implied by our unchanged $7.00 one-year target price, we felt it was time to move Bird to a BUY rating."
On Tuesday after the bell, the Mississauga-based company reported quarterly EBITDA of $16-million, exceeding Mr. Lynk's projection by 11 per cent ($14.4-million). Earnings per share of 19 cents topped his estimate by 2 cents.
“After adjusting for an alternative finance project, FCF was $24-million in 2019,” he said. We forecast another $25-million in 2020, reflecting management’s commentary that working capital should be roughly neutral while capex should be consistent year-over-year. Bird’s improved FCF profile has greatly increased the safety of the company’s $17-million annual dividend, in our view. On our 2020 FCF estimate, the dividend represents a 68-per-cent payout ratio, while the company’s balance sheet remains a source of downside protection, sporting net cash of $130-million."
After slight adjustments to his forward projections, Mr. Lynk maintained a $7 target for Bird shares. The average on the Street is $8.88.
Elsewhere, seeing a "once in a decade opportunity," Raymond James analyst Frederic Bastien raised Bird to "strong buy" from "outperform" with a $10 target (unchanged).
Mr. Bastien said: “There is some logic to how our coverage of infrastructure and property services firms have navigated one of the fastest market corrections in history. No stock has been spared, but generally speaking we have seen large, diversified and quality businesses hold their own better than Canadian small-cap stocks. On this basis, the 23-per-cent pullback in Bird Construction may not look that bad (it is ‘only’ three percentage points worse than the TSX over the last 13 trading sessions). But these losses come at a time when BDT’s diversification efforts are bearing fruit, its earnings per share are poised to triple in 2020, and the balance sheet is the strongest it’s been in three years. We see a disconnect, and it’s time for us to be more vocal about it. Accordingly, we are upgrading our recommendation to Strong Buy and adding BDT to Raymond James’ Analyst Current Favourites list”
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Touting its “powerful positives,” Credit Suisse analyst Andrew Kuske raised Brookfield Renewable Partners LP (BEP.UN-T) to “neutral” from “underperform.”
"Given the recent market downdraft, a significant impact on much of the hydrocarbon complex and continued declines in risk-free rates, we upgrade Brookfield Renewable Partners LP (BEP)," he said.
Citing “FX valuation impact, funding costs and, among other things, slight multiple expansion,” he raised his target to $64 from $60. The average is $62.96..
"As per past work, BEP faces a number of thematically positive trends given the firm’s large scale and global renewable power generation platform amidst the longer-term de-carbonization of the power system," said Mr. Kuske. "One near-term potential headwind is the stock split of Brookfield Renewable Power Corporation (BEPC) and those future shares being used for the acquisition of the shares not already owned in TerraForm Power (TERP). In terms of the valuation, the stock remains one of the more expensive stocks in our coverage universe; however, the current market environment tends to benefit Brookfield longer-term."
“We regard BEP as being a best-in-class developer of long-dated renewable power and a savvy purchaser of distressed assets.”
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The impact of COVID-19 makes Baylin Technologies Inc.'s (BYL-T) covenant situation “worse,” said Raymond James analyst Steven Li.
Accordingly, in the wake of the release of “OK” fourth-quarter results, Mr. Li lowered the Markham, Ont.-based wireless technology management company to “market perform” from “outperform.”
“Due to COVID-19, BYL`s manufacturing facility in Wuxi, China experienced a delay in reopening after the Chinese New Year,” he said. “After reopening on Feb 10, the facility continues to operate at a reduced rate and face labor shortages. In addition, customers and suppliers are also feeling the crunch. While it is expected the Wuxi facility gets back to full employment over the next few weeks, this has likely disrupted 1Q20 and potentially 2Q20 as well (including a delay in the ramp of the large Massive MIMO contract originally expected in F2Q20). The Wuxi facility manufactures for key high-margin segments, including Wireless Infrastructure and Embedded Antenna. Thus far, only Satcom sales have not been affected.”
Mr. Li lowered his target for Baylin shares to $2 from $2.80. The average is $3.10.
“If we thought it was tight to begin with, now that the China shut down will clearly hurt high margin infrastructure revenues in 1Q20 and possibly 2Q20, there is a higher risk those covenants are tripped,” he said. “We would expect BYL to be granted waivers in that scenario although there might be a cost to it. With little visibility as to how long before infrastructure gets back on track, we are moving back to a Market Perform.”
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Though he sees value in Canadian banks in 2-3 years, Desjardins Securities analyst Doug Young cautioned "between now and then there are headwinds that will likely make for a bumpy ride."
"In light of recent events (eg central bank rate cuts, tougher economic outlook, lower equity markets), we are resetting our estimates and target prices for the Canadian banks," he said in a research note.
Mr. Young reduced his cash earnings per share estimates for fiscal 2020 by 2 per cent and 2021 by 3 per cent.
“Our revised EPS estimates reflect the following: (1) 50 basis points rate cuts by the BoC and U.S. Fed and the potential for another 25 basis points cut; (2) higher performing loan PCLs related to potential adjustments to forward-looking indicators (FLI) such as GDP growth and WTI, along with potential shifts in weightings toward pessimistic scenarios; (3) higher impaired loan PCLs driven by O&G exposure, along with other bumps that could arise; and (4) a decline in wealth management assets, given the market correction so far in 2Q FY20. We would also caution that if conditions deteriorate further relative to what we have baked in, there is downside risk to our estimates,” he said.
With those changes, he dropped his target price for bank stocks by an average of 11 per cent as he raise risk discount.
“Given the tougher economic backdrop over the near term and the unknowns, we felt this was warranted,” he said.
Mr. Young's changes were:
Bank of Nova Scotia (BNS-T, “buy”) to $68 from $77. The average on the Street is $75.33.
Toronto-Dominion Bank (TD-T, “buy”) to $71 from $77. Average: $73.62.
Royal Bank of Canada (RY-T, “hold”) to $100 from $110. Average: $106.49.
Canadian Western Bank (CWB-T, “hold”) to $30 from $34. Average: $32.27.
Bank of Montreal (BMO-T, “hold”) to $90 from $103. Average: $97.75.
Canadian Imperial Bank of Commerce (CM-T, “hold”) to $100 from $112. Average: $109.41.
National Bank of Canada (NA-T, “hold”) to $62 from $72. Average: $69.15.
Laurentian Bank of Canada (LB-T, “hold” to $34 from $38. Average: $36.50.
“We are maintaining our neutral view on Canadian banks,” the analyst said. “We have only two Buy ratings (BNS and TD), which is partially predicated on sentiment being more negative for them, in our opinion, and on both stocks underperforming vs most peers in 2019 (reversion to the mean). BNS remains our top pick on the back of our belief that after a messy few years, results should start to clear up as we move through FY20. The bank’s earnings sensitivity to interest rates appears lower vs peers, and we like its focus on controlling expenses; it also offers a compelling valuation vs where the bank has traded historically.”
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Wesdome Gold Mines Ltd. (WDO-T) is “well positioned for growth,” said Canaccord Genuity analyst Tom Gallo.
Following the release of "strong" 2019 operational and financial results, he raised his rating for the Toronto-based company to "buy" from "hold" ahead of it embarking on "unprecedented" exploration.
“Across both properties, Wesdome plans to drill nearly a quarter of a million meters (240 kilometres to be exact), the most drilling ever undertaken by the company,” said Mr. Gallo. “They are fully funded out of the current treasury and projected cash flows.”
He raised his target to $11.50 from $10. The average is $10.97.
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Canaccord Genuity analyst Doug Taylor cut his financial estimates for Air Canada (AC-T) to account for reduced demand stemming from the fallout from the spread COVID-19.
“There is an exceptional amount of uncertainty in the near-term expectations. As such, we are reducing our capacity and yield forecasts substantially through Q3 and have reduced our mediumterm estimates as well,” he said.
Mr. Taylor reduced his 2020 EBITDA estimate to $2.819-billion from $3.798-billion, which sits well below the consensus projection on the Street of $3.236-billion. His 2021 estimate dropped to $3.789-billion from $4.497-billion (versus $4.14-billion).
The analyst said Air Canada's "robust" balance sheet is now a "saving grace" for the company.
“Air Canada, as of Q4, had $5.9-billion in cash of which $2.7-billion was considered ‘excess,’” he said. “The company has no dividend at present to be concerned with and net debt/EBITDA was at cycle lows at 0.8 times. Using our new forward estimates, this is now 1.2 times, for context (i.e. still quite manageable). Prior commentary from Air Canada management regarding recession-type scenarios suggested improved staffing flexibility and a higher number of owned aircraft, should make recessionary margin compression significantly better than the 500 basis points experienced in the last cycle. While COVID-19 adds other elements for consideration, our estimates already reflect a 290 basis points contraction. We note that the company cancelled 11 orders of the 737 MAX on March 11, which reduces capex burden in the near term.”
He also questioned the fate of its Transat deal, noting: "We won’t speculate on the probability for the Transat (TRZ | Not Rated) deal closing but note that the spread to Air Canada’s $18/share bid price has widened substantially (now 41 per cent). Some items to consider: 1) Our read of the agreement suggests COVID-19 does not trigger a material adverse impact clause given it is not specific to Transat; 2) The break fee is $40-million; 3) The degree of regulatory scrutiny regarding this deal and the implications for competition are likely to have shifted substantially given recent market conditions. Transport Canada and Competition Bureau approvals are the last significant hurdles to closing this deal (expected Q2).
Keeping a "buy" rating for Air Canada shares, he dropped his target to $40 from $55. The average is $49.64.
“While investment here may require bravery and the bottom will be tough to call, we believe this pullback will ultimately yield an extraordinarily attractive entry point,” he said.
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In the wake of Monday’s announcement that it plans to merge with Fairfax Financial Holdings subsidiary Dexterra Integrated Facilities Management, Raymond James analyst Frederic Tremblay lowered his rating for Horizon North Logistics Inc. (HNL-T), seeing a lack of company-specific catalysts to drive its stock higher in the short term.
“We expect the combination of these complementary businesses (expected to close in 2Q20) to yield a leading Canadian support services firm with significantly broader scope, competitive advantages and enhanced long-term growth opportunities,” said Mr. Bastien. "Although HNL will also see its financial leverage and energy exposure dramatically reduced in the process, its shareholders will shoulder the cost in the form of heavy dilution. That may still be their best alternative, in our opinion, considering Monday’s historic plunge in crude prices and the suddenly bleaker outlook for Canada’s small-cap industrial sector
He added: " With a workforce of 6,800 employees and 48 Indigenous partnerships across Canada, the new HNL will not only serve more clients via complementary recurring FM and modular services businesses, but also lead an established workforce accommodation provider that is less exposed to the oil and gas industry’s boom and bust cycles. The company will be expected to exit 2020 with a net debt-to-EBITDA ratio below 2.0 times and consistently generate healthy cash flows from operations. We believe those will be used to both sustain the existing dividend and fund the expansion of the Modular Solutions segment — no longer leaving management at the mercy of the capital markets for growth."
Moving Horizon North to "market perform" from "outperform," the analyst trimmed his target to $1 from $1.35. The average is $1.52.
“Our new target is based off an EV/EBITDA multiple of 5.5 times our pro-forma estimates for the combined operations for 2020, which sits as the low end of the stock’s 5-year historical trading range of 5-9 times,” said Mr. Bastien. “There is potential for HNL’s valuation to expand as it starts generating more consistent FCF, but we aren’t ready to go there at this juncture.”
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In other analyst actions:
* After lowering his estimates “considerably,” CIBC World Markets analyst Scott Fromson dropped IPL Plastics Inc. (IPLP-T) to “neutral” from “outperformer” with an $8 target, sliding from $11. The average is $10.70.
“In the current environment of volatility and a deteriorating macro outlook, we do not think the market will take IPLP’s Q4/19 miss well,” he said. "Revenues, adjusted EBITDA and EPS all fell short of both our estimates and consensus; one could argue a lower adjusted EBITDA figure taking away the addback of this quarter’s business re-organization charge. In any case, these certainly are not the results to regain investor confidence in the management’s ability to execute and expand the stock’s valuation.
“IPLP has unfortunately produced a number of quarterly misses since its June 2018 IPO, has been challenged to achieve both revenue and EBITDA margin growth and still has an over-leveraged balance sheet (3.2 times net debt-toEBITDA on a TTM basis). We are lowering our estimates considerably and are downgrading IPLP .... This reflects the risk of IPLP’s strategy and execution challenges, evidenced by the pattern of lumpy results.”
* TD Securities analyst Steven Green cut TMAC Resources Inc. (TMR-T) to “hold” from “speculative buy” with a $1 target, down from $7. The average is $3.11.
* Scotia Capital initiated coverage of Storagevault Canada Inc. (SVI-X) with a “sector outperform” rating and $4.25 target. The average is $4.13.
David Leeder