Inside the Market’s roundup of some of today’s key analyst actions
Though he thinks potential average occupancy improvements could face further delays and 2020 hotel revenues are likely to experience large declines due to the spread of COVID-19, Industrial Alliance Securities analyst Brad Sturges raised his rating for Slate Office Real Estate Investment Trust (SOT.UN-T) on Thursday.
Moving the Toronto-based REIT to "strong buy" from "buy," Mr. Sturges said he's "balancing more muted FD AFFO [fully diluted adjusted funds from operations] growth expectations due to the global pandemic, and higher financial leverage employed (pro forma debt to EBITDA: 10 times), with the REIT’s deep relative discount valuation, attractive 12-per-cent distribution yield, and initial expectations for limited rent deferral exposure."
"SOT’s relative P/AFFO multiple discount has somewhat narrowed in recent weeks," he said. "However, like a number of Canadian REITs/REOCs, the large pullback in SOT’s unit price has led to a sizeable NAV discount valuation. SOT’s low 2020E AFFO payout ratio provides ample cushion, while Canadian suburban and secondary office market rents have been relatively stable in recent history. SOT’s low 2020 estimated AFFO payout ratio provides cushion should SOT suffer any unexpected vacancies in the next 12 to 24 months. SOT’s units yield 11.5 per cent and trade at 6.4 times 2020 estimated FD AFFO versus 9.9 times for its Canadian-listed office and diversified commercial REIT peers on average, and 55 per cent below our estimated NAV of $7.75 (employing a 6.50-per-cent average cash NOI cap rate)."
Mr. Sturges thinks Slate's exposure to potential rent deferrals stemming from the fallout of COVID-10 "appears to be relatively muted," noting its commercial tenant base leans heavily on government and credit rated companies and includes very few retail tenants.
However, he thinks the REIT is unlikely to reach its goal of improving its average physical occupancy rates to the 90-92-per-cent range from 87 per cent at the end of 2019.
Accordingly, he trimmed his target for Slate units to $6.25 from $6.50. The average on the Street is $5.82.
Even though the impact of COVID-19 on its sales and margins appears to be worse than the Street anticipated, Desjardins Securities analyst Chris Li thinks Dollarama Inc.'s (DOL-T) underlying business model “remains strong.”
On Wednesday before the bell, the discount retailer released fourth-quarter 2020 financial results that largely fell in line with Mr. Li’s expectation. However, though it did not provide 2021 guidance, the company provided a pessimistic view of the impact of the coronavirus pandemic.
That led Mr. Li to cut his 2021 earnings per share projection to $1.80 from $1.95. He also trimmed his 2022 estimate to $2.20 from $2.26, expecting "business to largely return to normal next year."
"Given all the disruptions related to COVID-19 this year, we believe the market is valuing the stock based on next year’s (FY22) earnings," he said. "Our base case assumes market conditions improve post-COVID 19, resulting in strong EPS growth of 22 per cent year-over-year in FY22. In particular, for FY22, we expect: (1) SSSG [same-store sales growth] of 5.5 per cent (vs down 0.9 per cent in FY21), driven mainly by store traffic improvement (up 2.5 per cent versus down 3.0 per cent in FY21); (2) gross margin growth of 70 basis points year-over-year (vs down 80 basis points year-over-year in FY21) as DOL laps the COVID-19-related cost and margin mix pressures; and (3) SG&A rate improvement of 60 basis points year-over-year as DOL laps higher labour costs related to COVID-19."
Keeping a “hold” rating, Mr. Li also reduced his target for Dollarama shares by a loonie to $44. The average on the Street is $44.75.
“In our view, DOL’s essential business status, strong management team and solid financial position make it a good defensive investment,” said Mr. Li. “But we believe the risk of prolonged shelter-at-home measures, limited near-term earnings visibility, lack of share buyback support and general market volatility will potentially weigh on valuation. Taking into consideration these risks and the current valuation, we would be opportunistic and take advantage of market volatility at the mid-C$30 level (our downside valuation).”
Elsewhere, Industrial Alliance Securities’ Neil Linsdell expects “turbulence” in the first and second quarter, but said his “longer-term positive outlook remains unchanged.”
He kept a "buy" rating and $41 target.
“We believe that Dollarama is well-positioned, as an essential service, and discount retailer, to continue to deliver value to Canadians,” said Mr. Linsdell. “With well-managed supply chains, and a national footprint, we expect Dollarama to be a preferred choice for investors through this difficult period.”
RBC Dominion Securities analyst Steve Arthur made "sharp" cuts to his 2020 financial projections for Canadian auto parts suppliers in a research note examining both near-term stress tests and longer-term opportunities.
Though he thinks Magna International Inc. (MGA-N, MG-T), Martinrea International Inc. (MRE-T) and Linamar Corp. (LNR-T), all possess balance sheers that “should withstand a steep downturn,” Mr. Arthur sees earnings forecasts for 2020 being “crushed,” particularly in the second quarter, before a “gradual” recovery being in the fourth quarter.
"With massive market uncertainty and more ‘bad news’ to come for autos, we see little urgency to immediately buy a full position in any stock," he said. "However, with these heavily discounted valuations on quality businesses with balance sheets to survive, we would suggest accumulating over the coming weeks/months as the COVID-19 situation plays out."
For Magna, Mr. Arthur dropped his 2020 and 2021 earnings per share estimates to US$2.72 and US$5.89, respectively, from US$3.41 and US$6.76.
He kept an "outperform" rating for Magna shares with US$57 target, down from US$64. The average on the Street is US$51.71.
“With MGA’s earnings outlook, diversification, global footprint, dividend, and balance sheet, we believe that MGA should trade at least inline to a small premium to this group,” the analyst said.
Mr. Arthur lowered his EPS projections for Linamar to $2.27 and $5.15, respectively, from $4.44 and $6.34.
With an "outperform" rating, his target slid to $37 from $44. The average is $40.33.
“LNR (and all other auto) shares have been hard hit, down 43 per cent year-to-date,” said Mr. Arthur. "On a sharply depressed earnings outlook, LNR now trades at 3.8 times 2021 estimated EV/EBITDA [enterprise value to earnings before interest, taxes, depreciation and amortization], or 5.4 times P/E [price to earnings]. Even on depressed forecasts, these multiples are near trough levels for suppliers through the 2008/9 financial crisis.
“Coming out the other side of COVID-19, with a more gradual forecast we still see strong torque in the shares over the mid- to longer-term. Our 5-year earnings and share price scenarios point to an implied total return CAGR of 20 per cent.”
The analyst now projects EPS for Martinrea of 52 cents and $1.79, respectively, from $1.10 and $2.54.
He kept a "sector perform" rating with a $16 target, down from $19. The average is $12.86.
“Martinrea’s manufacturing operations will mirror those of its OEM clients, with temporary shutdowns now widespread across North American and European facilities,” he said.
Corus Entertainment Inc.'s (CJR.B-T) outlook is “significantly blurred by the virus,” said Desjardins Securities analyst Maher Yaghi following the release of “decent” second-quarter results on Wednesday.
Though he said the company will benefit from a rise in television viewers due to the impact of COVID-19, a decline advertising revenue continues to be an area of significant concern.
“In our note [released Tuesday] on the telecom sector, we assumed [BCE Inc’s] and [Rogers Communications Inc.'s] advertising revenue could decline 30 per cent year-over-year in the next few quarters,” he said. "We now assume CJR’s advertising revenue will decline 15–20 per cent as the company does not have exposure to sports, which we believe will be more heavily affected by COVID-19. We have also assumed slight growth in subscriber revenue as people have more time to watch TV, resulting in a total TV revenue decline of 10 per cent year-over-year in the next few quarters. We assume radio revenue could decline by 30 per cent in the near future.
"The company still has about $250-million undrawn on its revolving facility, with a 1.0 times leverage turn before reaching its covenant limit. While it is difficult to estimate how the outbreak could affect access to cash, we do not see any immediate risk on this front."
Mr. Yaghi lowered his earnings and revenue estimates for both 2020 and 2021, leading him to drop his target for Corus shares to $4.50 from $7.25. The average on the Street is $5.53
Keeping a “hold” rating, Mr. Yaghi said: “Visibility in the advertising market was already limited and the COVID-19 outbreak has now brought it to new lows. Moreover, the current situation has also made the cost side less predictable, even though we believe expenses should be lower in the months to come. Until we get a handle on the magnitude of the decline in advertising, we prefer to wait on the sidelines as we believe the business could be quite exposed to COVID-19.”
Elsewhere, Canaccord Genuity's Aravinda Galappatthige lowered his target to $6 from $7 with a "buy" rating (unchanged).
Mr. Galappatthige said: “While we know (and knew before the Q2 call) that ad revenues will be materially affected, there still appears to be minimal colour on the extent of the downswing. Management indicated that the sectors that are directly and most severely impacted (e.g., Travel, Hotels) have essentially cancelled their ad campaigns, while others are reducing spend and retooling their messaging. Against that backdrop, we are now projecting a 35-per-cent decline in ad revenues for TV in Q3 and 23 per cent in Q4. With that said, there are cost containment options available to management, including within segments of programming costs which will become clearer in the coming months based on episodic delivery by the studios.”
Scotia Capital's Jeff Fan lowered his target to $4 from $8 with a "sector outperform" rating (unchanged).
Mr. Fan said: “Media companies are dealing with many moving pieces on revenue and programming cost with limited visibility. We have made our best attempt at assessing the impact of COVID-19 on CJR estimates. Our assumption is that Canadian TV ad market will decline approx. 20 per cent in calendar 2020 (resulted in CJR ad revenue decline of 35 per cent in Q3 and 25 per cent in Q4), which resulted in the following estimate reductions: 11 per cent on total revenue, 19 per cent on total EBITDA, and 25 per cent on FCF. Based on our new estimates, we estimate CJR will reach peak leverage of 3.7 times in Q4F20, and will remain at that level until the 2H/F21, which is below its covenant of 4.0 times. If our 20 week duration assumption turns out to be longer or the ad market turns out to be worse than expected, we believe CJR will have to receive government reliefs, consider further programming and production cost reductions, and/or a dividend revision to maintain its covenant.”
Calling it “a benefactor of the stay-at-home trade,” Raymond James analyst Michael Glen initiated coverage of Goodfood Market Corp. (FOOD-T) with an “outperform” rating on Thursday.
“In particular for Goodfood, while they have yet to specifically quantify the benefits to revenue and subscriber count, we have seen some updates which clearly indicate to us that they are seeing an uptick in results,” he said. “This includes the announcement regarding the hiring of over 500 employees to support operations and raises. From our perspective, while we recognize the ‘stay-at-home’ dynamic spurring the recent rally in meal-kit stocks is a less than favourable situation overall, we believe that we stand to see at least 2-3 quarters of momentum in results from the company. Importantly, given a meaningful increase in customer demand and word-of-mouth, we would be under the impression that the company’s associated marketing expense and related subscriber acquisition cost stand to materially reduce in coming quarters. We will look to get more information on this dynamic during the company’s upcoming earnings report on April 8.”
Mr. Glen set a target price for shares of the Montreal-based company of $4.70, exceeding the current average on the Street of $4.13.
“Relative to the overall market through the turmoil created by the COVID-19 crisis, Goodfood shares have performed quite well,” the analyst said. “In particular, in the period beginning February 24, Goodfood shares are up 17 per cent, versus the S&P/TSX down 24 per cent and the S&P/TSX Small Cap Index down 38 per cent. This significant outperformance has stemmed from Goodfood’s positioning / strong market share in the very nascent Canadian meal-kit market, coupled with a view that the ‘stay-at-home’ dynamic (i.e. people cancelling vacations, working from home, using less restaurant product) spurred by the current situation will lead to sustained demand for such meal-kit / grocery delivery services. Indeed, we have seen confirmation of a positive trend in results communicated by Goodfood competitors and peers, with associated global meal-kit stocks moving materially higher over the same timeframe, with HelloFresh (HFG-XG) up 40 per cent, Blue Apron (APRN-NYSE) up 350 per cent, and Marley Spoon (MMM-AU) up 196 per cent.”
Teck Resources Inc. (TECK.B-T) presents “deep value,” said Citi analyst Alexander Hacking, who warned that met coal exposure remains a significant risk.
"Teck is currently trading at deep value with market cap less than US$4-billion but there is no imminent catalyst for re-rating with M&A not possible given share structure," he said. "P/NAV [price to net asset value] is less-than 0.5 times on our model, the lowest in our entire coverage. To re-rate & outperform peers, Teck needs to first rebuild investor confidence by delivering operating results; and then deliver QB2 on budget to re-balance portfolio away from met coal."
Following Wednesday's operational update and QB2 budget and after incorporating Citi's latest commodity price deck update, Mr. Hacking trimmed his target for Teck shares to $21 from $27. The average is $22.64.
"We remain at Buy given deep value and enough medium-term liquidity," he said. "The main risk is a material decline in met coal prices as ex-China steel demand declines – although company noted that they have yet to see any impact."
"Investment positives include a solid portfolio of mining assets including the world's second biggest export met coal business; a solid balance sheet; increased capital returns in recent years and a good record on ESG relative to peers. Negatives include risk of lower met coal demand in future; a history of mistimed M&A and dual class share structure. On balance we see more upside than downside at current levels."
Elsewhere, Raymond James analyst Brian MacArthur raised his target to $17.50 from $17.
“We believe Teck offers good exposure to coal, copper, and zinc, and is able to convert EBITDA from its Canadian operations efficiently given its large Canadian tax pools,” said Mr. MacArthur. “Given Teck’s long life, low jurisdictional risk, diversified asset base, and valuation, we rate the shares Outperform.”
In other analyst actions:
TD Securities analyst Tim James raised CAE Inc. (CAE-T) to “buy” from “hold” with a $24 target, down from $32. The average is currently $32.50.
TD’s Sean Keaney cut Yangarra Resources Ltd. (YGR-T) to “hold” from “buy” with a 40-cent target, down from 75 cents. The average is $1.70.
National Bank Financial analyst Greg Colman raised Pason Systems Inc. (PSI-T) to “outperform” from “sector perform” with a $13 target, down from $15. The average is $15.42.
BMO Nesbitt Burns raised New Gold Inc. (NGD-T) to “outperform” from “market perform” with a $1.50 target, rising from $1.25. The average on the Street is $1.30.
Scotia Capital raised Pan American Silver Corp. (PAAS-T) to “sector perform” from “sector underperform”