Inside the Market’s roundup of some of today’s key analyst actions
In reaction to a period of relative outperformance versus peers since the start of 2019, Industrial Alliance Securities analyst Brad Sturges lowered his rating for Nexus Real Estate Investment Trust (NXR.UN-X) on Thursday, though he thinks its lower leverage and payout ratios help it “cushion” market challenges.
"We believe that Nexus is positioned to weather any negative near-term COVID-19 virus impact due to its below-average financial leverage metrics, and 2020 estimated FD AFFO [fully diluted adjusted funds from operations] payout ratios versus its small capitalization commercial REIT peers," he said. "In the medium term, Nexus could still benefit from positive catalysts such as a new TSX listing, and the execution of value creation initiatives including the completion and stabilization of its redevelopment Sports Mall project in Richmond, BC. Our revised Buy rating is also based on the REIT’s attractive yield and discount valuation, and its fully internalized management structure that aligns senior management with unitholders.
"The REIT’s investment risks or constraints would include high portfolio geographic concentration in Alberta and Quebec, expectations for a weaker Alberta economy due to lower energy prices that may impact commercial property values in the region, a challenging operating environment for retail property landlords, particularly for those with greater exposure to enclosed malls, and low unit liquidity risks."
Mr. Sturges thinks COVID-19 could negatively impact some of Nexus' smaller retail tenants, including restaurants, however he says it's "very difficult" to measure any effects at this point. However, he suggested Nexus could experience a near-term decline in its average occupancy rate, particularly in its shopping centre portfolio.
"While the recent energy price downturn and COVID-19 virus outbreak could have a negative impact on Alberta’s economy and commercial real estate values (e.g., lower market rental rates, and potential for cap rate expansion), we believe above-average NAV/unit [net asset value per unit] growth prospects at Nexus’ redevelopment plans in Richmond, BC, and within the REIT’s Quebec portfolio may more than offset possible Western Canada property value declines year-over-year," he said.
Moving Calgary-based Nexus to “buy” from “strong buy,” Mr. Sturges maintained a target of $2.30 per unit. The average on the Street is $2.37.
“From the start of 2019 to 2020 year-to-date, NXR has generated a negative total return of 5 per cent, outperforming the REIT’s Canadian diversified commercial REIT peers and the S&P/TSX Capped REIT Index that generated negative total returns of 27 per cent and 9 per cent, respectively, over the same time period,” the analyst said.
Desjardins Securities analyst Chris Li said Metro Inc.'s (MRU-T) “strong” same-store sales results even before the surge created by COVID-19 reflect “strong” execution, which he calls its trademark “for many years and a key reason for its premium valuation.”
However, with its stock trading at near peak valuation, he sees limited upside unless market conditions brought on by the pandemic deteriorate further.
"We expect [earnings per share] growth to moderate from 14 per cent this year to the mid-single digits as it laps COVID gains," said Mr. Li following Wednesday's release of its quarterly results.
The analyst raised his EPS estimates for 2020 and 2021 to $3.24 and $3.38, respectively, from $3.21 and $3.36.
Keeping a "hold" rating for Metro shares, he increased his target by a loonie to $61, however he noted he'd prefer " to wait for a more attractive entry point closer to our downside valuation in the low $50s." The average on the Street is $59.70.
“We believe MRU’s strong market position, consistent execution, shareholder-friendly capital allocation strategy and 14-per-cent EPS growth support its premium valuation (19 times fiscal 2020 estimated price-to-earnings versus peak of 20 times),” said Mr. Li. “Our reservation is that unless the market further deteriorates, upside is limited. We believe this was evident [Wednesday] when despite reporting strong SSSG [same-store sales growth], MRU was up only 1 [per cent vs L/EMP [Loblaw/Empire] at 3 per cent/5 per cent. We believe there is risk to its valuation multiple as EPS laps COVID gains next year and EPS growth slows to the mid-single digits. Increasing competition and higher costs pose downside risks.”
Citing recent price appreciation and a limited potential return to his target, Credit Suisse analyst Andrew Kuske lowered Canadian Utilities Ltd. (CU-T) to “neutral” from “outperform.”
"Very simply, over the last month CU delivered an 18-per-cent return and outperformed virtually all peers," he said. "From our perspective, the past de-rating was largely associated with negative energy market sentiment that cascaded into CU’s Alberta centric asset base versus the company’s fundamentals. Naturally, there are continued challenges in the energy market as partially witnessed by ongoing volatility in a number of hydrocarbon markets – largely the result of the current COVID-19 pandemic. Clearly, there is a lot to like with CU’s unique utility exposure in light of a pristine balance sheet along with excess capital to allocate towards new investments. With the recent performance, we believe better relative value exists elsewhere."
Mr. Kuske's $36 target falls a loonie below the consensus.
“Canadian Utilities possesses a pristine balance sheet; however, the Alberta centric exposure is likely to face some headwinds in the current market. Portfolio high grading in the past well positions the company for additional growth opportunities,” he said.
Concurrently, Mr. Kuske initiated coverage of ATCO Ltd. (ACO-X-T) with a “neutral” rating.
“ATCO is somewhat unique with a 52-per-cent holding in Canadian Utilities and a few wholly-owned legacy businesses. Yet, almost the entirety of ATCO’s value is underpinned by that CU value and, therefore, the remaining businesses provide option value along with an alternative way of owning the core utility business,” he said. “Beyond the core utility business, one may view ATCO as offering pro-cyclical exposure given Structures & Logistics segment’s dynamics along with the interest in South American port operator Neltume. In the near term, the COVID-19 environment looks to be a bit of an overhang on the Structures and Ports businesses. Additionally, CU’s impressive share price performance limits upside, in our view.”
He set a $44 target, which falls short of the $47.50 average.
“With a large holding in Canadian Utilities, ATCO offers a discounted way to own that utility company (albeit indirectly in a holdco form) with option value from other businesses," said Mr. Kuske. "Yet, the current COVID-19 environment along with CU’s relative valuation translate into more limited upside versus more pure-play entities.”
Rogers Communications Inc. (RCI.B-T) is a “constructive place to hide,” said RBC Dominion Securities analyst Drew McReynolds following its release of “mixed” first-quarter financial results.
“In the current environment, we believe Rogers is well positioned to be a ‘safe haven’ for investors reflecting the highest exposure to wireless and Internet revenues, an attractive dividend yield, the lowest dividend payout ratio among large cap peers and a portfolio of non- telecom assets that under certain circumstances could become a major source of funds for strategic initiatives and/or any desired bolstering of the balance sheet,” he said. “Looking beyond direct COVID-19 impacts, we see the potential for Rogers to narrow the lingering valuation gap to BCE and TELUS as Rogers is the first to exit the transition to unlimited plans/EIPs and once the CRTC wireless review is completed (H2/20).”
Mr. McReynolds feels the impact of COVID-19 on Rogers have been "largely" been as expected and consistent with peers Shaw and Cogeco, including lower demand as unemployment rises, reduced wireless activity and roaming revenues and hurt by the suspension of professional sports.
EmphasIzing he’s now been forced to update his Rogers financial forecast three times since the start of the pandemic’s spread and sees “the Canadian telecom earnings curve in 2020 comes into some focus,” Mr. McReynolds sees the second quarter “shaping up to be a very tough” one on revenue, though costs savings could mitigate some of the impact.
"We continue to support the operational pivot taken by the Canadian telecom industry in late Q1/20 (and what is likely to be through Q2/20 and potentially Q3/20) to prioritize employees, customers, Canadians and networks during the worst of the COVID-19 pandemic," he said. "As such, we caution investors that for a relatively defensive sector in the current environment, Q2/20 is shaping up to be a very tough revenue quarter for Rogers (and other Canadian telecom operators) and thus expectations should be moderated. Having said this, we reiterate our view from our Q1 preview that market expectations around the nature of the H2/20 recovery are likely to now drive sector performance with Q1/20 results largely “irrelevant”, and Q2/20 results a 'write-off' and likely getting a pass from investors who will be focused more on H2/20 when Q2/20 results are reported in July/August."
Pointing to revenue and EBITDA declines year-over-year, he trimmed his target for Rogers shares to $63 from $64, keeping an “outperform” rating. The average on the Street is $68.21.
Elsewhere, Canaccord Genuity's Aravinda Galappatthige raised his target to $60 from $57 with a "buy" rating (unchanged).
Mr. Galappatthige said: “Despite the pandemic, we believe there are a few positives to consider. First, in the current backdrop of weak energy prices and concerns around the Alberta economy, Rogers’ low exposure to the province is helpful on a relative basis. This could moderate the negative impact on financial results post-F2020. Second, management alluded to steady FCF trends in F2020, stating that they are aiming to produce FCF not materially off the original guidance, helped by a notable decline in capex. Third, a key impetus of Rogers (and the wireless incumbents in general) is the reduction of handset subsidies and COA, which appears to get a boost in the current backdrop. While promotional activity and volumes will naturally return post crisis, the progress made in the months prior to the COVID-19 outbreak, and the present competitive conditions suggest there is a genuine opportunity to make material and sustained progress on this front.”
TFI International Inc. (TFII-T) is a “resilient company with strong [free cash flow] generation capabilities, a strong balance sheet and an experienced management team,” said Desjardins Securities analyst Benoit Poirier following the release of “strong” first-quarter results after the bell on Tuesday.
The Montreal-based transport and logistics company reported revenue and adjusted earnings per share for the quarter of $1.241-billion and 83 cents, respectively. Both topped Mr. Poirier's expectations ($1.183-billion and 61 cents).
“While management refrained from providing 2020 guidance due to the unprecedented uncertainties associated with COVID-19, it gave a detailed update on the performance of each business segment during the first two weeks of April,” he said. “The most impacted divisions are the LTL [less-than-truckload] and package & courier segments due to their larger exposure to B2B segments while the TL and logistics & last mile segments are benefiting from stronger e-commerce and retail demand. Despite these challenging times, management noted that all business segments will remain profitable in 2Q and beyond as it remains highly focused on managing costs — a testament to management’s disciplined approach.”
Though he trimmed his 2020 earnings per share estimate to $2.11 from $2.30, Mr. Poirier raised his 2021 expectation by 17 cents to $3.21.
Keeping a “buy” rating for TFI shares, he increased his target to $46 from $40. The average on the Street is $46.77.
“The 1Q results give us confidence that TFII has what it needs to get through this crisis and emerge even stronger. With its solid balance sheet (funded debt/EBITDA of 1.99 times) and disciplined management team, we expect TFII to look for accretive M&A opportunities once market conditions stabilize to unlock value for shareholders,” he said.
A “brutal” oilfield markets has hurt demand for incinerators, said Raymond James analyst Andrew Bradford, prompting him to lower his rating for Questor Technology Inc. (QST-X) on Thursday.
“When Questor released its 4Q19 results (on Apr. 1) we noted that it was highly unlikely that it would be able to avoid the coming knife fight that would be North American oilfield services in 2020,” he said. It seems that fight is well-underway."
"It is clear now that the slow down in the North American oilfield is having a precipitous impact on the demand for QST rental units beyond what we were expecting."
Mr. Bradford now expects Calgary-based Questor to see a 70-per-cent drop rental revenue year-over-year as well as a "sharp" decline in unit sales in 2020. He's projecting 2020 EBITDA to fall to $4.1-million from $14.2-million during the same period a year ago.
"We believe Questor has the balance sheet to see them through at least 2021," the analyst said. "QST had $13.5-million in cash at the end of 2019, a figure we expect to grow in the 1H20 as QST sees a release in working capital. The Strategic Priorities in the operations update suggest that QST intends to use its financial position to retain key operational experience, focusing on growing market share in existing markets, while attempting to expand into other industries."
Moving Questor to “market perform” from “outperform,” Mr. Bradford reduced his target to $1.60 from $2. The average is currently $2.44.
Expecting the impact of COVID-19 to “linger longer,” CIBC World Markets analyst Scott Fromson lowered GDI Integrated Facility Services Inc. (GDI-T) to “neutral” from “outperformer.”
“One of the hallmarks of GDI’s business model is recession resistance: in times of financial slowdown, GDI is able to adjust its service offering in response to reduced customer needs,” he said. “Even in the midst of the COVID-19 crisis, GDI continues to provide crucial janitorial, decontamination and other cleaning services to a wide range of customers occupying multiple building types. That said, GDI isn’t insulated from the current widespread business shutdown and resultant recession.”
“Our expectation is for a recovery beyond Q3/20. Timing will depend on government-directed ‘openings’ – but even more so on consumers’ willingness to resume normal consumption patterns. We expect numerous pockets of softness, notably in commercial office buildings (for both janitorial and technical services), national retailers, shopping centres, manufacturing facilities, hotels, transportation facilities and stadiums/other event venues. Further, GDI has greater exposure to the more vulnerable Canadian economy: the revenue split is roughly 75-per-cent Canada and 25-per-cent U.S. We do see positive offset in healthcare, food and distribution facilities, as well as general disinfection services."
Mr. Fromson lowered his financial estimates for the Lasalle, Que.-based company, leading to a reduced target price for its shares to $33 from $39. The average is $38.79.
“Since hitting its pre-COVID high on February 20, 2020, the S&P/TSX Index is off 21 per cent,” he said. "In that same period, the GDI stock price is down 16 per cent (and down 20 per cent from its 52-week high). However, we don’t think the market is adequately factoring in the potential length of the recession and the slow pace of recovery of many industries within GDI’s customer base. We would think 'work-from-home’ arrangements will persist beyond the economy’s reopening, albeit at a declining rate, shrinking GDI’s addressable ‘square footage.’”
Ahead of the release of the release of its first-quarter financial results on April 29 after the bell, Canaccord Genuity analyst Derek Dley lowered his target for shares of Gildan Activewear Inc. (GIL-N, GIL-T), expecting “to provide a closer look at a challenging demand environment.”
Mr. Dley is projecting EBITDA and earnings per share of US$71-million and 8 US cents, below the consensus projections on the Street (US$79-million and 14 US cents) and lower than last year's results (US$83-million and 16 US cents).
He's expecting a year-over-year decline of 20 per cent, which he said reflects "severe" distributor point of sales (POS) due to the COVID-19 pandemic.
“As a reminder, on Gildan’s update call midway through March wherein the company withdrew 2020 guidance, management noted a POS decline of 50 per cent in the week leading up to the call, a dramatic decrease from the 15-per-cent decline seen in the week prior, and management was expecting the trend to worsen moving forward,” said the analyst. "Having said that, the company also noted that up until March, POS data was trending positively.
"Looking beyond Q1/20, we believe the company’s POS momentum in China is useful in setting expectations for Imprintables sales in North America moving forward. The company noted on the update call that POS in China began to decline in early February, ultimately declining 70 per cent for the month before moderating to 35 per cent partway through March. We expect POS trends within Gildan’s North American market will follow similar trends."
Also expecting a significant gross margins decline, Mr. Dley lowered his 2020 EPS estimate to 94 US cents from US$1.01 previously. His 2021 expectation dipped to US$1.56 from US$1.68.
Keeping a "hold" rating, his target for Gildan slid to US$13 from US$14, which fells well short of the US$19.84 consensus.
“We note Gildan’s balance sheet affords it the luxury of patience,” he said. “The company ended Q4/19 with 1.6 times net debt/TTM [trailing 12-month] EBITDA, within its comfort range of 1.0-2.0 times and well below its 3.25 times covenant. Subsequent to the quarter, the company drew on the remainder of its revolving credit facility, giving it $600 million in liquidity. With monthly fixed costs of $35-$40 million, we believe the company’s current cash position leaves it well positioned to handle an extended period of shutdowns.”
It's "not the time to start swinging for the fences" with TSX-listed equipment deals, according to Raymond James analyst Ben Cherniavsky, who reduced his earnings expectations for companies in his coverage universe to account for both the impact of COVID-19 and the correction in oil prices.
"With both of these events transpiring very quickly towards the end of the quarter, we expect 1Q20 to be much less affected than the rest of 2020 (esp. 2Q20)," he said. "Moreover, the unprecedented nature of this particular crisis, combined with its severity, creates huge challenges in our ability to construct reliable forecasts for the next 12-24 months (how deep is the recession and how quickly do we recover?). As a result, we encourage investors not to put too much faith in our current estimates or target prices as the only thing we know for certain is that they are wrong and will be subject to further review as events unfold and visibility improves."
With his estimate changes, he made the following target price changes:
- Finning International Inc. (FTT-T, “outperform”) to $21.50 from $24. The average on the Street is $22.22.
- Rocky Mountain Dealerships Inc. (RME-T, “market perform”) to $6.50 from $7. Average: $6.38.
- Toromont Industries Ltd. (TIH-T, “outperform”) to $66 from $82. Average: $73.57.
- Wajax Corp. (WJX-T, “market perform”) to $10 from $15. Average: $14.38.
He kept a $7.50 target for Cervus Equipment Corp. (CERV-T, “market perform”). The average is $7.63.
“We continue to have a positive view of Toromont’s shares, but we are mindful of the valuation dilemma it presents as our downward earnings revisions for the company this year outweigh its recent share price decline,” he said. “We believe quality comes at a premium that is worth paying, especially at a time like this. However, for investors who are willing to go further out on the riskcurve and skim the ‘bargain bin’ we continue to recommend the purchase of Finning shares. Based purely on valuation, we upgraded this stock to Outperform in late February when the market began to roll over in the wake of the Covid-19 crisis.”
In other analyst actions:
* Raymond James analyst Stephen Boland resumed coverage of Intact Financial Corp. (IFC-T) with an “outperform” rating and $148 target. The average on the Street is $148.43.
“We are resuming coverage on Intact Financial (IFC) at a unique time with the pandemic having an meaningful impact on claims and underwriting,” he said. "IFC is not only the market share leader in Canada, but an insurer that has outperformed the industry for a number of years ... We believe that IFC will continue to report underwriting profitability but it will be managed as lower claims will result in the insurer providing material rate reductions and rebates to its customers. We also believe the rebates and financing solutions offered by IFC are due to a combination of factors including optics, social responsibility, and the goal of retaining customers post the crisis.
“On April 14, IFC announced these types of measures would generate more than $150 million in relief to customers. We believe IFC will continue to report a double digit ROE but will ensure the overall underwriting results are not out of line compared to past years. That said, we believe IFC’s operational and underwriting excellence will allow the insurer to emerge from the crisis in a strong position."
* National Bank Financial analyst Michael Parkin upgraded Alamos Gold Inc. (AGI-T) to “outperform” from “sector perform” with an $11.75 target, rising from $10.50. The average target is $11.94.
* National Bank’s Don DeMarco lowered Pan American Silver Corp. (PAAS-T) to “sector perform” from “outperform” with a $36 target, up from $33 and above the $31.86 average.