Inside the Market’s roundup of some of today’s key analyst actions
Expecting a “strong positive reaction” from the Street to its better-than-expected second-quarter results that displayed “visible growth and resiliency,” Industrial Alliance Securities analyst Elias Foscolos raised his rating for Keyera Corp. (KEY-T) to “strong buy” from “buy.”
On Wednesday after the bell, the Calgary-based midstream energy company reported adjusted earnings before interest, taxes, depreciation and amortization of $183-million for the quarter, exceeding Mr. Foscolos’s $168-million expectation and the $173-million consensus on the Street. All three of its segments - Gathering and Processing, Liquids Infrastructure and Marketing - topped estimates.
“KEY’s reported Adj. EBITDA of $183-million for Q2 represents a solid beat,” the analyst said. “This highlights the resiliency of not only the company’s business lines but also its operating philosophy as all three of its business segments performed better than expected. Keyera did not increase its dividend in conjunction with the Q2 results, however, we believe that an increase before year-end is possible if the current situation remains stable.”
Citing an increase to the company’s guidance for its Marketing segment and $45-$60-million in annualized cost savings expected, Mr. Foscolos raised his target for Keyera shares to $29 per share from $26. The current average target on the Street is $26.
“Keeping the upside/math simple … there is a lot of growth coming,” he said. “We believe KEY represents the most attractive stock within the pure midstream space. Annualized EBITDA from Q2 is $720-million. When we factor in contributions from the Wapiti Phase II gas plant (Q4/20), Pipestone gas plant (Q3-Q4/20), and Wildhorse terminal (Q4/20) along with annualized cost savings, we feel comfortable with our 2021 estimate.”
Elsewhere, Raymond James’ Chris Cox increased his target to $27 from $25.50 with an “outperform” rating.
Mr. Cox said: “While the headline beat on 2Q20 results was a nice surprise, in our view the highlight for the quarter was the unveiling of the company’s much-anticipated G&P Optimization strategy, along with disclosure of additional cost savings across the organization. In total, run-rate savings are targeted at $45-65-million, the majority of which are expected to be realized in 2021. While details of the G&P Optimization plans were a well-known catalyst, we believe the market was taking a wait-and-see approach, with very little if any baked into current Street forecasts; accordingly, we expect a positive reaction to the announcement. Looking ahead, with sanctioned growth plans nearing completion, and a more attractive set-up into 2021, we see Keyera as well positioned to restart the KAPS pipeline, marking another potential catalyst for the story.”
Though its second-quarter results “delivered a comprehensive beat on all metrics,” Laurentian Bank Securities analyst Nauman Satti lowered his rating for Stella-Jones Inc. (SJ-T) to “hold” from “buy.”
"Net/net we continue to like Stella-Jones for its resilience in light of an extremely challenging COVID environment," he said. "While M&A ultimately could provide upside to estimates, [Wednesday's] guidance and some cautiousness surrounding near term performance causes us to shift to a Hold on the back of strong stock price appreciation, up 87 per cent from a 52 week low and ahead of pre-Covid levels ($38). SJ is trading at 15 times versus Koppers 7 times forward P/E multiple."
Though he thinks M&A opportunties remain “top-of-mind” for its management, Mr. Satti is concerned that the environment stemming from the COVID-19 pandemic “may impact the due diligence process and with the guidance revision, near term results are expected to be relatively flat year-over-year.
“Pull forward in demand may have negative impact on sales in back half of the year,” he said. “Following 13-per-cent organic growth in the first half of the year, guidance takes into account a potential softening of demand in the back half of the year, on the tie side. While it remains too early to predict demand patterns in 2021, should WFH remain in place for a number of companies, residential demand may remain heightened, albeit the division faces challenging year-over-year comps. In regard to tie sales in 2021 SJ is starting to have discussions with short line and Class 1 customers surrounding future year orders and at this point expectations are for GDP-like growth.”
Seeing increased probability that the company will reach the upper end of its guidance, Mr. Satti increased his target to $44 from $40. The average on the Street is $45.63.
Though Raymond James analyst Stephen Boland viewed Trisura Group Ltd.‘s (TSU-T) second-quarter results as “solid” and responded by raising his earnings expectations, his concern over the Toronto-based specialty insurance provider’s current valuation led him to lower his rating for its stock.
On Wednesday after market, Trisura reported diluted earnings per share of 68 cents, up from a loss of 63 cents during the same period a year ago and exceeding Mr. Boland's 56-cent projection.
“Overall, this was a solid quarter with strong underwriting results from the Canada operation and high growth in gross premiums written driven by the U.S. operations,” he said. “The U.S. operations are now contributing similar underwriting income to the Canadian operations. However, we believe the results are less relevant than focusing on the performance of the stock. In 2Q20, the stock increased 49 per cent (versus 16 per cent for the S&P TSX) followed by another increase of 37 per cent so far in 3Q20 (versus 6 per cent for the S&P TSX). This is a total of 104 per cent since the end of March (23 per cent for the S&P TSX) and we believe this is well above most price movements we have seen in financial services stocks in years. We believe this is due to several factors including the strong underwriting results, the rapid growth in the U.S. business and a small float. We believe for many portfolio mangers with a long investing horizon it can take many trading sessions to establish a meaningful ownership position that may have contributed to the rapid increase in the stock price.
“Our concern regarding the stock price is valuation. TSU is now one of the most expensive stocks in the comparable group and is trading at 3.2 times 2Q20 BVPS [book value per share]. We believe a material portion of the value is being assigned to the U.S. operations and comparing it to similar fronting fee insurers that can trade in a higher range than traditional balance sheet P&C insurers. However, it cannot be overlooked that many of the U.S. programs are new to TSU and still not seasoned in our opinion. New programs with new MGAs can take time to adjust which we do not believe is being considered.”
With the results, Mr. Boland increased his 2020 and 2021 EPS estimates to $3 and $3.75, respectively, from $2.75 and $3.44.
Moving the stock to "market perform" from "outperform," he hiked his target to $93 from $57. The average on the Street is $90.86.
“We have been patient in raising our target price as the stock appreciated possibly because of the low trading volumes. However, at this time we are downgrading the stock to Market Perform from Outperform. We continue to expect strong results but with a low teen ROE expected over the next year, we believe the valuation is full,” he said.
“Following a quarter of the stock being largely range bound, we view current levels as an attractive buying opportunity for investors looking for a degree of capital protection in the event of a prolonged 2008–09 style recession and recovery, yet also seeking capital appreciation should this recession be deep but relatively short-lived with a ‘V-like’ recovery beginning in H2/20,” he said in a research note. “Prior economic cycles for Thomson Reuters have shown: (i) a defensive revenue mix; (ii) management’s ability to realize additional cost efficiencies to mitigate incremental revenue pressure; and (iii) the stock typically experiences a reasonably sharp but short-lived period of multiple compression before recovering along with an improvement in market sentiment.”
On Wednesday before the bell, the news and information provider reported underlying second-quarter results and third-quarter guidance that exceeded Mr. McReynolds’s expectations. He now sees the company at an " inflection point on a multi-year period of margin expansion.”
“We believe this quarter represents an inflection point that should kick off a multi-year period of notable adjusted EBITDA margin expansion for the company,” he said. “Our view represents the culmination of multiple factors, including: (i) management’s high degree of confidence in the organic revenue growth outlook for the Big 3 segments despite indirect COVID-19 impacts, which should lock in meaningful positive operating leverage effects re-commencing in Q3/20; (ii) the realization as of Q2/20 of two-thirds of the targeted US$100-million in annualized cost savings exiting 2020 with management reiterating that such savings (and likely additional cost savings) will be recurring post-2020; and (iii) our expectations of meaningful progress under the new management team and new asset mix excluding F&R (and potentially excluding Reuters News) in transitioning the company to more of an operating company structure, complemented by increasingly shared infrastructure leveraging cloud-based platforms, as well as a costsynergistic tuck-in M&A strategy.”
Mr. McReynolds thinks Thomson Reuters’ new third-quarter guidance, reiteration of its 2020 full-year guidance and new management commentary point to “significantly” improved earnings visibility. That led him to raise his 2021 and 2022 earnings per share projections to US$2.10 and US$2.42, respectively, from US$2.05 and US$2.38.
Keeping an “outperform” rating for its shares, he raised his target to US$79 from US$77, citing a higher adjusted EBITDA margin trajectory. The average target on the Street is US$74.88.
“Given the ongoing revenue resilience of the Big 3 segments and only a few COVID-19-driven ‘known unknowns’ remaining, we believe Thomson Reuters has the best earnings visibility in our coverage almost irrespective of the indirect COVID-19 scenario (i.e., economic recession/recovery) that we believe is far from fully playing out,” said Mr. McReynolds. “We believe such earnings visibility significantly enhances the relative risk profile of the stock, particularly at the current juncture where H2/20 and 2021 earnings visibility across many segments of the global economy remains unusually limited. At a FTM EV/EBITDA [forward 12-month enterprise value to earnings before interest, taxes, depreciation and amortization] multiple of 14.6 times, we believe this relative risk profile combined with a forecast 10-per-cent NAV CAGR [net asset value compound annual growth rate] through 2023 is not adequately reflected in the stock.”
Elsewhere, Canaccord Genuity analyst Aravinda Galappatthige increased his target to US$71 from US$66 with a "hold" rating.
Mr. Galappatthige said: “We expect the stock to be fairly range bound in the near to medium term: While we very much appreciate the improving underlying growth (through 2018-2020) and the defensive strengths of TRI, the current valuation of the stock continues to hold us back. TRI now trades at 15.6 times fiscal 2020 and 14.0 times 2021 estimated EV/EBITDA. The stock is only down 5 per cent off the beginning of March, which compares to a 11-per-cent decline for RELX and a 6-per-cent increase for Wolters, largely reflecting of the respective earnings revisions for the two stocks post the outbreak of the pandemic. Wolters and RELX are now at 14.7 times and 13.2 times EV/F21 EBITDA respectively. At the current juncture we do not see material further upside to valuation multiples against the backdrop of underlying (normalized) mid-single digit growth rates in revenue and EBITDA which is good but not necessarily deserving of mid-teens EBITDA multiples.”
“Things are looking up” for Dream Industrial Real Estate Investment Trust (DIR.UN-T), said Desjardins Securities analyst Michael Markidis.
"COVID-19-related items did not significantly impact 2Q earnings, collections are improving, leasing demand remains strong and, following a brief pause, balance sheet deployment has resumed," he said. "The FFO payout has been elevated over the past several quarters (100 per cent); however, we see meaningful improvement through 2021 (90 per cent)."
On Tuesday, the Toronto-based REIT reported funds from operations per unit of 17 cents for the quarter, a penny below the projections of both Mr. Markidis and the Street.
Though Dream did not execute any property transactions in the quarter, it has lined up six assets worth $136-million with an average cap rate of 5.8 per cent, which Mr. Markidis expects to close in the second half of the year. Those include a pair of properties in Germany (Greater Frankfurt Area and Dresden) as well as assets in the Netherlands, Great Toronto Area and Greater Montreal Area.
"Acquisition economics are very attractive given the physical attributes and locations, in our view," he said.
After raising his FFO for 2020 and 2021 estimates, Mr. Markidis increased his target to $12.50 per unit from $12, keeping a “buy” rating. The average target is $12.11.
Goodfood Market Corp.‘s (FOOD-T) equity offering adds flexibility for customers and supports its next growth phase, said Desjardins Securities analyst Frederic Tremblay upon resuming coverage.
He said he’s “pleased” that a significant portion of the deal, which resulted in gross proceeds of $28.8-million for the Montreal-based home meal and meal kit company, will be allocated to growth of its same-day delivery capabilities.
“We already thought Goodfood was a very solid player amid an acceleration of food e-commerce, thanks to its broad reach, sales capacity of more than $1-billion and expanding product offering,” said Mr. Tremblay. “Now, our positive stance is reinforced by its upcoming investments in fulfilment technology and automation to build out same-day delivery capabilities which: (1) is consistent with the quick turnarounds consumers expect for grocery shopping, and (2) is a differentiator vs meal kit–focused competitors. In addition, we expect the upcoming investments in technology and automation to lower fulfilment costs.”
“Regular enhancements to the product offering and customer experience have been key ingredients of Goodfood’s success and we are pleased to see the company take additional steps to further improve its winning recipe. Goodfood recently launched Flex, a new ordering interface which significantly increases subscribers’ flexibility when they assemble their baskets. This includes more flexibility in terms of the quantity of items placed in the basket and the product categories (ie grocery products only, meal solutions only, or a mix of the two). We believe that this could contribute to increases in order size and frequency. More than 75 per cent of subscribers now have access to Flex, with the remaining clients to be transitioned in the coming weeks.”
Keeping a “buy” rating for Goodfood shares, the analyst hiked his target to $10 from $7.50. The average on the Street is $9.11.
“We now value FOOD using an EV/revenue multiple of 1.75 times on our FY21 estimates (up from 1.25 times previously), which remains at a discount to HelloFresh,” he said. “This revised valuation multiple reflects our view that Goodfood should continue to benefit from the accelerating penetration of online food purchases in Canada and that recent/future initiatives (ie Flex ordering interface and investments in fulfilment technology and automation) should act as strong foundations for the company’s next leg of growth.”
Gibson Energy Inc.‘s (GEI-T) “massive” second-quarter earnings beat exhibited the resilience of its business model and provided added confidence in its growth prospects, according to Desjardins Securities analyst Justin Bouchard.
Before the bell on Wednesday, Gibson reported adjusted EBITDA of $143-million, exceeding Mr. Bouchard's $96-million estimate and the consensus forecast of $98-million.
“On the call, management noted that negotiations for new tanks and DRU capacity are again progressing (after being put on ice earlier this year),” the analyst said. “Looking to 2021, the company expects to spend $200–300-million on growth and believes that there is potential for another 50 mbbl/d DRU phase and support for 2–4 tank sanctions at Hardisty and Edmonton (where progress on TMX could spur a buildout in storage and where GEI has room for 2.0 mmbbl of incremental capacity). For the next 2–3 years, GEI has clear line of sight toward organic growth; longer-term, its growth prospects are tied to the fortunes of the oil industry and there are many unknowns with respect to the trajectory of oil demand, the glut in inventories, shut-in barrels and mounting ESG pressures. In short, the longer-term growth outlook is opaque.”
After raising his earnings expectation for 2020 and 2021, Mr. Bouchard increased his target to $26 from $24 with a “buy” rating (unchanged). The average on the Street is $25.29.
Citing near-term headwinds and valuation concerns, CIBC World Markets analyst Stephanie Price lowered Ceridian HCM Holding Inc. (CDAY-N, CDAY-T) to “neutral” from “outperformer” following the release of in-line second-quarter results.
“With a difficult employment environment impacting recurring revenue, and lower interest rates impacting float revenue, we see the stock as relatively fairly valued at these levels,” she said. “While we see longer-term upside from Ceridian’s geographic and product expansion plans, we expect near-term headwinds to weigh on revenue growth, and look to a better entry point for the name.”
Ms. Price kept an $83 price target, which falls below the consensus of US$84.29.
In other analyst actions:
* Raymond James analyst Craig Stanley initiated coverage of INV Metals Inc. (INV-T) with an “outperform” rating and $1.75 target. The average on the Street is $2.13.
“Our Outperform rating is a function of Norbord’s demonstrated superlative operating and cost performance, margin growth and stabilization strategy, strong ESG credentials and leverage to strong U.S. housing fundamentals,” he said. “With demand outstripping available supply, North American OSB panel pricing is in the midst of a record run which we expect will drive outsized near-term earnings. We highlight that under its variable dividend policy, Norbord increased the quarterly dividend to 30 cents per share (3-per-cent yield) from 5 cents per share and our estimates support additional increases in coming quarters. In the context of pandemic related uncertainty, share prices continue to lag valuations achieved during the 2018 building materials rally, however, we point to historically low mortgage rates, changing homebuyer preferences and increased R&R spending as durable demand tailwinds and expect building materials share prices to price this in over time. We expect this, along with impressive cost reductions associated with a COVID-19 inspired maintenance program changes and flexible operating regime and investor returns under its variable dividend policy, to backstop share price growth and recommend investors add to positions.”