Inside the Market’s roundup of some of today’s key analyst actions
Industrial Alliance Securities analyst Naji Baydoun advises investors to "never let a crisis go to waste."
In a research report released Thursday on the Canadian Power, Utilities & Infrastructure sectors, Mr. Baydoun said the potential near-term impacts from COVID-19 are not expected to have lasting long-term effects on the sector.
"Despite the swift and coordinated global monetary policy actions undertaken to help soften the potential impact of COVID-19, markets have so far continued to react negatively to developments related to this virus," he said. "So far in 2020, market expectations for potential supply chain disruptions from the impact of COVID-19 (e.g., material and equipment sourcing, EPC and O&M contracting), and the expected impact on companies’ ability to grow, have heavily weighed on equity performance. In our view, even if headwinds persist over the near term, they are likely to be transitory in nature, and should subside as markets and economies recover from the impact of COVID19 in due time. Over the long term, we continue to expect monetary policy to have a material impact on benchmark bond yields, and thus on equity performance in the Power, Utility & Infrastructure sectors (see here and here for more details on the impact of interest rates and benchmark bond yields on companies in the space."
Mr. Baydoun said the sharp selloff, which has seen stocks drop by an average of 30 per cent for the sectors, was driven by rapidly shifting market expectations for the pandemic. However, he stressed the importance of lower benchmark rates on both sides of the border and solid company fundamentals.
“In spite of the current macroeconomic developments, the overall outlook across the Power, Utilities & Infrastructure sectors remains healthy,” he said. “Companies in the space continue to exhibit (1) strong underlying fundamentals, and (2) the potential for sustainable high single-digit earnings and cash flow growth over the medium term. Therefore, we see the recent sell-off as a good long-term buying opportunity, particularly in stocks where valuations look more attractive, and for which growth remains relatively health.”
Though he lowered his target price for 17 of the 20 stocks in his coverage universe in response to recent declines, Mr. Baydoun upgraded his rating for five companies.
His changes were:
“TRP offers investors a combination of (1) stable earnings and cash flows (95 per cent regulated/contracted EBITDA), with an emphasis on gas infrastructure assets (70 per cent of EBITDA), (2) sustainable organic growth (5-7 per cent per year DCF [discounted cash flow] per share growth, CAGR [compound annual growth rate] 2019-24), driven by $30-billion of secured investment (2019-23), (3) significant potential upside from more than $20-billion of longer-term development (e.g., KXL), and (4) attractive income characteristics (6.5-per-cent yield and 8-10 per cent per year DPS growth through 2021, 5-7 per cent per year thereafter)," the analyst said. "Given the upside to our price target, we are upgrading TRP.”
“BIP continues to represent a diversified play on the broader infrastructure investment theme, with (1) access to a global infrastructure platform (ownership in more than US$30-billion of assets), (2) defensive regulated/contracted cash flows (95 per cent of FFO [funds from operations]), (3) visible cash flow growth (6-9 per cent per year, CAGR 2019-24), and (4) attractive income (6-per-cent yield, 60-70-per-cent FFO payout, and a 5-9 per cent per year dividend growth target),” said Mr. Baydoun. “We continue to see BIP as a standout growth vehicle for long-term shareholders in the current macro-economic context. We believe that BIP’s relatively stable and predictable cash flows and strong balance sheet offer downside protection; furthermore, we see potential long-term upside from the company’s ability to opportunistically deploy capital through M&A in volatile markets (a competitive advantage), with continued support from its sponsor Brookfield Asset Management (BAM.A-T/BAM-N, Not Rated, 30-per-cent ownership). Given the significant upside to our price target, we are upgrading BIP.”
Fortis Inc. (FTS-T) to “strong buy” from “buy” with a $56 target from $60. Average: $59.48.
“We continue to view FTS as a premium defensive utility and power growth play, with (1) stable earnings from a diversified portfolio of regulated utility investments (100 per cent of earnings), (2) healthy long-term EPS growth (5-7 per cent per year, CAGR 2019-24), driven by more than $18-billion of organic rate base investment, (3) solid dividend growth (6 per cent per year through 2024), and (4) potential upside from longer-term investment opportunities,” said Mr. Baydoun. “In light of the upside to our price target and the defensive investment characteristics of the company, especially in the current volatile market environment, we are upgrading FTS.”
“We continue to like BEP’s (1) high-quality global renewable power platform (19GW), (2) high degree of contracted cash flows (65-90 per cent or more through 2024), (3) long-term organic and M&A-based growth strategy (1.4GW under development, and more than 13GW of prospects), and (4) attractive income characteristics (6-per-cent yield and a 5-9 per cent per year dividend growth target),” he said. “We continue to see BEP as a premium brand in the sector, supported by premium value hydro assets. We believe that BEP’s relatively stable and predictable cash flows and strong balance sheet offer downside protection; furthermore, we see potential long-term upside from the company’s ability to opportunistically deploy capital through M&A in volatile markets (a competitive advantage), with continued support from its sponsor BAM (54-per-cent ownership). Given the significant upside to our price target, we are upgrading BE.”
Capital Power Corp. (CPX-T) to “strong buy” from “buy” with a $35 target from $40. Average: $38.20.
“CPX offers investors (1) a mix of contracted (more than 70 per cent) and merchant cash flows, (2) longer-term leverage to market recovery in Alberta, (3) healthy growth (mid single-digit FCF/share growth through 2023), and (4) an attractive income profile (9-per-cent yield, 7 per cent per year dividend growth through 2021, 5 per cent per year thereafter, with a 45-55-per-cent payout),” he said. “In light of (1) increasing exposure to contracted cash flows, and (2) further diversification outside of Alberta, we see potential for CPX’s shares to close some of the deep relative valuation discount versus IPP peers over time (4-times discount, vs. 2-3-times historical discount). Given the significant upside to our price target and the current relative valuation discount compared with IPP peers, we are upgrading CP.”
Seeing it as the most defensive stock within his coverage universe, RBC Dominion Securities analyst Geoffrey Kwan called Intact Financial Corp. (IFC-T) his “best idea in the current market environment,” leading him to raise his rating to “top pick” from “sector perform.”
“Positive P&C insurance industry fundamentals and IFC’s excellent long-term track record of outperforming the industry further support our thesis,” he said. “Finally, valuation was what previously held us back from being more positive on IFC’s stock, but the shares have now pulled back to 2.0 times P/BV [price to book value] from the recent peak of closer to 3.0 times. These factors drive our upgrade.”
Seeing little material exposure to the impact of the spread of COVID-19, Mr. Kwan added: “We think claims pertaining business interruption are unlikely as business interruption typically only applies when there is direct physical loss to the property (e.g., fire, flooding), not something like COVID-19 or similar situation. There are likely some instances where there could be claims for COVID-19 related reasons, but we understand these would be much less common.”
The analyst’s target fell to $140 from $153 and below the $156.54 average.
The analyst moved his rating for IGM to “underperform” from “sector perform.”
“We think the significant downturn in equity markets is likely to reverse IGM’s push towards returning to positive net sales and hurt Mackenzie’s positive net sales momentum,” he said. “Coupled with what we believe is reduced investor interest in the traditional asset management sector and ongoing investor concerns regarding fee pressure and to a lesser extent regulatory risks, we think these factors are likely to constrain IGM’s valuation in the near term. Furthermore, IGM’s shares have performed well during the downturn vs. asset manager peers and also vs. our broader coverage universe, which we think in part reflects stronger relative fundamentals vs. asset manager peers, but has also resulted in a valuation premium vs. asset manager peers that we believe leaves less (but positive) valuation upside over the next year.”
His target for IGM shares slid to $29 from $44. The average is $40.38.
Meanwhile, Mr. Kwan dropped Home Capital Group Inc. by two notches to “underperform” from “outperform” with an $18 target, down from $38 and below the $36.93 average.
“We think HCG’s CEO has make good progress turning around the company following its liquidity crisis a few years ago and seemed to be on the right track to continued steady and profitable growth,” he said. " However, the rapid deterioration in the macro environment presents an entirely new challenge that we think reduces earnings visibility and could see HCG’s valuation multiple driven by investor sentiment rather than actual fundamentals. We think these factors are likely to constrain HCG’s valuation in the near term, hence our downgrade."
Though he thinks its recent share price drop is “overdone,” Mr. Kwan lowered Onex Corp. (ONEX-T) to “outperform” from “top pick.”
“We view Onex as a contrarian best idea,” he said. "The shares trade at a 53-per-cent discount to NAV (42-per-cent discount to hard NAV, which assumes zero value for the asset/wealth management business and carried interest) AFTER adjusting for our estimate of the decline in asset values so far this year.
"We think the combination of: (1) Onex’s strong long-term investment track record; (2) opportunities in the current market environment to make acquisitions at potentially attractive prices and drive future NAV growth; and (3) a very significant discount to NAV, could provide significant valuation upside, particularly for those investors with a longer-term investment horizon."
Mr. Kwan dropped its target to $62 from $105. The average is $96.59.
Seeing an “attractive” valuation, CIBC World Markets analyst Cosmos Chiu raised Kirkland Lake Gold Ltd. (KL-T) to “outperformer” from “neutral.”
“Kirkland Lake Gold was once the darling of the gold industry, but that status was somewhat disrupted first by the acquisition of Detour Gold, followed by a disappointing update of its Swan reserves at Fosterville,” he said. “We downgraded Kirkland Lake Gold in November 2019 with the announcement of the Detour acquisition, but now believe the protracted weakness in Kirkland Lake Gold’s share price has created an attractive entry point: Kirkland Lake Gold shares currently trade at 0.9 times P/NAV [price to net asset value] and 6.4 times forward P/CF [price to cash flow] at spot prices, a discount to the peer group at 1.5 times P/NAV and 10.3 times P/CF.”
Mr. Chiu's unchanged current target is $62, which exceeds the $58.50 consensus.
“Looking ahead, Kirkland Lake Gold has key attributes that will attract the interest of generalist investors, with assets in tier-1 jurisdictions in Canada and Australia combining to produce 1.5 million ounces of gold at AISC [all-in sustaining costs] of $825/oz, representing a meaningful level of production at lowest quartile costs," the analyst said. "We expect Kirkland Lake Gold to generate more than $700-million in free cash flow in 2020, representing an 8.0-per-cent free cash flow yield. Kirkland Lake Gold is also in a strong position to benefit from a weakening Canadian dollar and weakening fuel prices, and our model shows that a 5-per-cent move in the USD/CAD exchange rate equates to a 10-per-cent move in the NAV, while a 25-per-cent move in fuel prices equates to a $25 per oz decrease in AISC at Detour Lake. "
The uncertainty brought by COVID-19 has brought an opportunity for investors to buy Boyd Group Services Inc. (BYD-T), according to AltaCorp Capital analyst Chris Murray.
Following Wednesday's release of better-than-anticipated fourth-quarter 2019 financial results, he raised his rating for Boyd to "outperform" from "sector perform."
“While we anticipate significant uncertainty we believe Boyd’s positioning and enhanced balance sheet place it in good stead among peers with valuations becoming attractive at current levels for a best-in-class growth at a now attractive price name,” he said.
Before the bell, the Winnipeg-based company reported revenue and adjusted EBITDA for the quarter of $586-million and $84.1-million, respectively, exceeding Mr. Murray's projections of $581.9-million and $82.3-million. Adjusted earnings per unit of $1.24 matched his expectations.
“Management noted that the company has added 18 new locations to date in 2020 while adding that it is halting acquisitions for the time being given uncertainty around the potential impact of COVID-19, although it has not seen a material impact on the business to date," the analyst said. "Management cited a number of potential impacts from the pandemic, including the impact on staffing and the pace of repairs, which could result in the temporary closure of facilities, the impact on the supply chain, which could result in the temporary closure of supplier facilities, and the impact of a potential weakening of demand as customers avoid commuting and defer repairs, with management adding that it has seen weaker demand in the past several days. While management is proactively preparing contingency plans and making changes, it believes that the company’s strong balance sheet and financial flexibility position the Firm well going into 2020, particularly with the increased and extended credit facility announced with results.”
Though he emphasized the potential disruptions brought by COVID-19, Mr. Murray said he believes that "he inherent flexibility in the Firm’s cost structure, which is heavily skewed towards variable expenses, provides it with the ability to react to shifts in market dynamics relatively quickly."
However, he now projects a 60-per-cent drop in same store sales in the second quarter year-over-year, noting its limited ability to reduce operating expenses. He then expects a "gradual" improvement through 2020 and a normalized 2021.
Based on that view, he lowered his adjusted EBITDA estimates for 2020 and 2021 to $276-million and $426-million, respectively, from $369.5-million and $410.1-million. His adjusted earnings per unit estimates slid to $2.23 and $6.55 from $5.93 and $6.61.
However, he raised his target for Boyd units to $205 from $200. The average on the Street is $221.83.
Elsewhere, Raymond James analyst Steve Hansen raised Boyd to "strong buy" from "outperform" with a $230 target, down from $250.
Mr. Hansen said: “Notwithstanding Boyd’s solid 4Q19 print, we are trimming our target ... in response to near-term potential headwinds associated with the evolving COVID-19 pandemic. That said, given our belief that Boyd is superbly positioned to weather this volatility, and likely to emerge even stronger in the aftermath, we believe the recent pullback in BYD shares represents a fantastic buying opportunity for long-term, growth-orientated investors, hence our decision to also upgrade our rating.”
Equity at analysts at RBC Dominion Securities say "improving gold equity trends are evident."
In a research note released Thursday, the firm raised his 2020 gold price assumption by 1 per cent to US$1,520 per ounce, while reducing their target prices for stocks in the sector by an average of 8 per cent to reflect lower valuation multiples and elevated equity risk.
"In response to changes in gold prices and the broader equity markets, gold equity valuation has improved and is now competitive on certain metrics relative to the broader U.S. equity market," the analyst said. "Constructively, the sector in recent years has also managed to contain costs and reduce leverage. These factors, in our view, substantially reduce sector downside risks, should lower gold prices emerge short-term. We calculate the relative merits of the sector could decline should gold prices average below $1,400/oz.
"Since 2013, gold companies have substantially reduced overall financial leverage. At current gold prices, we forecast the sector could be in a net cash position by year-end 2021. Even when assuming lower gold prices of $1,200/oz, we calculate that credit ratios would largely remain manageable and not be a concern for the vast majority of companies over 2020/21."
The analysts raised their ratings for a pair of stocks in the report.
Mark Mihaljevic moved Torex Gold Resources Inc. (TXG-T) to “outperform” from “sector perform” with a $23 target (unchanged). The average is $24.41.
Paul Kaner raised Australia’s Regis Resources NL (RGRNF) to “sector perform” from underperform."
Pointing to “three simple factors — financial liquidity, cost structure, and capital allocation,” the analysts said their top North American recommendations for the current environment are:
- Barrick Gold Corp. (GOLD-N/ABX-T, “outperform”) with a US$22.50 target, down from US$24. Average: US$21.59.
- Kirkland Gold Corp. (KL-T, “outperform”) with a $40 target, down from $42. Average: $58.50.
- SSR Mining Inc. (SSRM-Q/SSRM-T) with a US$18 target, down from US$20. Average: US$21.68.
- Dundee Precious Metals Inc. (DPM-T, “outperform”) with a $7 target, down from $7.50. Average: $7.47.
Scotia Capital analyst Konark Gupta raised CAE Inc. (CAE-T) to “sector outperform” from “sector perform” despite dropping his target by $20 to $23. The average is .$37.40.
“We are making significant initial cuts to our estimates for the Civil segment to reflect the potential impact of COVID-19 on the aviation industry," said Mr. Gupta. "Although our revised estimates are materially below consensus and the stock could be facing some more downside risk in the short term, we are upgrading CAE to SO from SP based on its defensive attributes and attractive valuation, along with our confidence in positive FCF generation (5-6-per-cent FCF yield) and steady financial leverage even during this downturn. We have also reduced our valuation multiples to 5-year averages, reflecting potential for more downside risk to our estimates, which along with our revised estimates lowers our target to $23 from $43. Our revised target implies an attractive 48-per-cent return, including 3-per-cent dividend yield. We view CAE as a high-quality growth compounder and thus expect a sharp rebound after the dust settles.”
Though it reported “relatively” strong fourth-quarter results and reserves on Wednesday, Acumen Capital analyst Trevor Reynolds lowered InPlay Oil Corp. (IPO-T) to “hold” from “buy” based on the uncertainty outlook for the market due to COVID-19 and the drop in oil prices.
“Given the current market environment no capital spending is expected for the foreseeable future with plans to focus on cost reductions and debt management,” he said.
Mr. Reynolds dropped his target for the Calgary-based company to 20 cents from $1.40. The average is 98 cents.
“With the current market outlook and prevailing Saudi/Russia driven price war we see a high level of risk and uncertainty for names with elevated levels of debt at this time,” the analyst said.
Scotia Capital analyst Patrick Bryden lowered Baytex Energy Corp. (BTE-T) to “sector perform” from “sector outperform” with a 75-cent target, down from $3.25 and below the $1.93 consensus.
“In response to extreme weakness in commodity prices, the company has materially lowered its 2020 budget, which results in dramatically lower activity for the remainder of this year, focused predominantly on U.S. development and minimal capital allocation to Canada,” said Mr. Bryden. “We see production fall 10 per cent lower in 2020 with double digit net D/CF [debt to cash flow] and, on strip prices minimal capital expenditures in 2021 result in further estimated financial and operational decay. Higher oil prices are necessary to alleviate intense pressures on the company and we therefore move to a neutral stance as we further assess our 2020-21 outlook for commodity prices. We further move our risk rating to Speculative.”
Mr. Bryden also lowered Cardinal Energy Ltd. (CJ-T) to “sector underperform” from “sector perform” after it suspended its dividend and cut its 2020 budget.
"Cardinal has reduced its 2020 budget by 54 per cent to $31-million and suspended its dividend in light of the deteriorating market environment," he said. "Fourth quarter production of 20.2 mboe/d was 1 per cent below our estimate of 20.4 mboe/d and in line with consensus of 20.3 mboe/d. Funds flow per share of $0.25 was 13 per cent above our estimate of $0.22 and 3 per cent below consensus of $0.26."
His target dropped to 50 cents from $3.25. The average is $1.67.
Mr. Nowak said: “[Wednesday] morning, IMV announced plans to pursue clinical development of a DPX-based vaccine candidate against COVID-19, termed, ‘DPX-COVID-19.’ Concurrently, the company announced a US$30 ATM. While IMV’s platform technology has indeed been utilized in a number of historical infectious disease development stage programs, including RSV, malaria, anthrax and ebola, the company’s primary utilization of its technology has evolved to focus on oncology indications. In light of the current COVID-19 vaccine development landscape and IMV’s relative position amongst further advanced, better capitalized competitors, we cannot justify attributing value to this program. With the company facing significant balance sheet risk, we believe current clinical programs, which we continue to view as encouraging, are at jeopardy of being delayed.”
Conversely, Mr. Novak raised Biosyent Inc. (RX-X) to “outperform” from “market perform” with a $6 target, down from $6.50. The average is $7.50.
Mr. Nowak: “[Wednesday] morning, RX reported 4Q19 financial results in-line with our estimates. In light of current market dynamics driven largely by COVID-19, we currently favour companies with a strong balance sheet, minimal leverage, limited supply chain risk, and favourable valuations. In that respect, we view RX, with its $22.0-million in cash and no debt as a suitable investment opportunity in today’s environment, particularly while trading at 2 times cash. With the company positioned to have 6-9 months of inventory on hand to weather the storm, we expect continued strong FCF generation. Thus, we are upgrading RX to Outperform on the back of [Wednesday’s] earnings.”
In reaction to the impact of COVID-19 on supply and demand, Canaccord Genuity analyst T. Michael Walkley lowered his financial expectations for Apple Inc. (AAPL-Q).
"Despite the near-term uncertain supply and demand environment for Apple’s hardware products, Apple is well-positioned to benefit from the long-term 5G investment cycle and anticipate recovering earnings in C2021 as 5G smartphones ramp," he said. "Further, Apple’s ecosystem approach, including an installed base that exceeds 1.5B devices globally, should continue to generate strong services revenue, and we expect the higher-margin services revenue growth to outpace total company growth. Ahead of the COVID-19 shock to global economies, we were encouraged by the strong demand for the iPhone 11 lineup and believe Apple will maintain its market share leadership of premium-tier smartphones that could be bolstered by a 5G upgrade cycle with potentially improved consumer demand longer-term. Apple has market share leading positions in wearables with Watch and AirPods, and both have recently had strong sales and growth momentum. With $99-billion in net cash, Apple has a strong balance sheet to continue to invest and support long-term growth.
“Following last month’s COVID-19 pre-announcement reductions to our estimates, we are further lowering our estimates given expectations for continued soft near-term results given the prolonged impact through at least Q3/F’20 on global smartphone supply and demand, resulting in our lowered price target from $345 to $300. However, with the 5G upgrade cycle a potential benefit during 2021 and continued business mix shift towards high-margin Services, we believe the share price is compelling for longer-term investors.”
Mr. Walkley trimmed his 2020 and 2021 earnings per share projections to US$11.95 and US$14.41, respectively, from US$13.32 and US$16.19.
That led to his target reduction to US$300 from US$345 with a “buy” rating. The average on the Street is US$320.99.
In other analyst actions:
- National Bank Financial analyst Adam Shine upgraded Thomson Reuters Corp. (TRI-T) to “outperform” from “sector perform” with a $93 target, down from $103. The current average on the Street is $106.30.