Inside the Market’s roundup of some of today’s key analyst actions
Brookfield Business Partners LP (BBU-N, BBU.UN-T) is “a value creator with plenty of runway to grow,” according to Desjardins Securities analyst Gary Ho.
In a research report released Thursday, he initiated coverage with a “buy” rating, touting its “tremendous organic and capital recycling runway over the near to medium term.”
“We are positive on the BBU story for several reasons: (1) Growth in private alt investing combined with a proven track record of delivering attractive returns (26-per-cent gross IRR for BCP Funds II through V) are key ingredients in the formula for success. (2) Proven capital recycling efforts to fuel FFO/unit and EBITDA/unit growth. (3) Opportune time to invest in PE given historically strong returns post recessionary periods; robust pipeline to drive new acquisitions. (4) Leveraging BAM’s extensive platform serves as a competitive advantage. (5) With US$2.3-billion in cash, marketable securities and available credit facilities, BBU has plenty of liquidity to weather the COVID-19 storm and take advantage of opportunities,” Mr. Ho said.
He sees a number of potential near-term catalysts for the stock, including its Sept. 24 Investor Day, at which he expects discussions of its key investments as well as its M&A strategy and outlook and an update to the value of its assets. Mr. Ho is also looking to increased valuation recognition by the Street as it executes its value-enhancement strategy, particularly with Westinghouse and Clarios.
Though he expressed concern over the impact of the COVID-19 ppandemic on its investment and operations, Mr. Ho expects business activity and earnings to pick up as the “the current environment normalizes” and emphasized “the defensive and resilient attributes of the portfolio companies as some are considered essential businesses and services.”
“For investment managers, delivering sustainable returns is critical,” he said. “In the case of BBU, not only does this enable future capital recycling into new opportunities but it also attracts larger pools of capital through future private funds (BCP) fundraised by BAM. On top of this, we believe the private alt asset class will continue to appeal to a growing investor base over the long term. Alternative assets and strategies (alts) encompass a broad range of investments that generate stable uncorrelated returns, offer a balanced risk/reward profile and serve as an inflation hedge while enhancing portfolio diversification from public equities/fixed income. Over time, we believe these two drivers (fund performance and increased allocation to private equity), compounded by capital recycling, will translate into EBITDA/share and FFO/share growth, fuelling a higher BBU unit price.”
Mr. Ho set a target price of US$40. The average target on the Street is US$39.20, according to Refinitiv.
“Our investment thesis is predicated on the following: (1) secular shift in investor appetite for private alts to drive capital flows into the asset class — BBU offers investors a unique way to gain PE exposure without liquidity constraints; (2) BBU’s investment team has delivered a solid investment return track record; (3) historically strong PE returns post recessionary periods; and (4) BBU’s ability to leverage BAM’s extensive platform,” the analyst said.
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Following a “meaningful” new vein discovery at its Clarence Stream gold exploration project in New Brunswick, Paradigm Capital analyst Don MacLean reiterated Galway Metals Inc. (GWM-X) as one of his favourite explorers, saying it has delivered beyond his expectations.
On July 29, the Toronto-based company announced the presence of a “massive” quartz vein that is 14.4 metres in core lengths and contains visible gold.
“We believe that H65 is more than just the discovery of a new vein,” said Mr. MacLean. “Granted, with a strong intersection like this, it is logical to expect the vein to expand with additional drilling, which is about to start. The implication could be much more important.”
“Clarence Stream is emerging as an exciting new gold district. Time and patience will tell. The project is in experienced, knowledgeable hands, the company is well funded, it has six rigs undertaking an extensive 75-km drill program through 2021 and we seem to be in a market that cares about exploration. The winds are certainly blowing in Galway’s favour.”
Maintaining a “speculative buy” rating for Galway shares, Mr. MacLean raised his target to $2.50 from $1. The average on the Street is $2.38.
“We are not fans of the requirement to set target prices, especially for exploration companies outlining promising new projects like Galway’s Clarence Stream and particularly when there is a buoyant market (targets are even harder to divine in a declining market),” he said. “We set a $1.00 target price in initiation report, when the stock was trading at $0.42. It exceeded that within a few weeks. The current share price is $1.72 and we are setting a new target price of $2.50. How do we know the share price will reach that level? We don’t. What we do know is that Clarence Stream continues to deliver strong results in what we have called Stage 1, the expansion and confirmation of the three new zones Jubilee, Richard and GMZ. Now there are indications that mineralization will be found outside that trend, in what we are calling Stage 2. We can only watch and see how matters progress, knowing the project is in good, knowledgeable hands, well funded and in a market that is supportive (finally) of exploration companies.”
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CT Real Estate Investment Trust (CRT.UN-T) emerged “virtually unscathed” from the second quarter, said Desjardins Securities analyst Michael Markidis, pointing to its strategic relationship with Canadian Tire Corporation Ltd. that accounts for more than 90 per cent of its annual minimum rent.
Yet, in a research note released Thursday, the analyst expressed concern over the temporarily halt on expansion of its investment pipeline.
“For the first time we can remember, no new investments were disclosed alongside the quarterly results release,” said Mr. Markidis. “We believe this momentary pause reflects (1) CTC’s enhanced focus on its existing business, (2) the REIT’s desire to preserve liquidity, and (3) a lack of available product in the market. Four previously announced projects (288,000 square feet) with an aggregate carrying value of $41-million ($36-million cost) came onstream during 2Q. The remaining 15 projects (780,000 sf) in the active pipeline are expected to consume another $54-million of capital over the next 12 months.”
However, Mr. Markidis said a “surprise” 2-per-cent distribution increase “signals both management’s and the board’s confidence in the REIT’s cash flows.”
“Although management described it as a coincidence, the timing (annual increases have historically been announced alongside 3Q results) should leave the door open for another increase in 2H20, provided the operating environment does not meaningfully deteriorate,” he said.
Keeping a “hold” rating for CT units, he increased his target to $14.50 from $14, falling short of the $15.21 consensus.
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Calling it “a catalyst play” and seeing the potential “unique” drug repurposing strategy generating “decent shareholder value going forward,” Mackie Research analyst Andre Uddin initiated coverage of Algernon Pharmaceuticals Inc. (AGN-CN) with a “speculative buy” rating.
“Algernon is focused on developing repurposed small molecules for new disease indications – these drug candidates have been already approved in ROW markets (but not approved in the U.S. or Europe). This strategy should give the company two key advantages: (i) those repurposed candidates can avoid near-term generic competition as they have never been approved in the U.S. and they are considered new chemical entities that are eligible for market exclusivity, and (ii) they can directly enter into Phase 2 trials as they have well established safety profiles.
“Algernon’s drug repurposing strategy was historically used by Biogen, Medivation and Celgene – those examples suggest this strategy can work.”
Currently the lone analyst on the Street covering the Vancouver-based company. Mr. Uddin set an 80-cent target for its shares.
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Shares of Inca One Gold Corp. (IO-X) “look undervalued,” according to Fundamental Research analyst Sid Rajeev.
He initiated coverage of the Vancouver-based miner, which is currently the largest gold ore processor in Peru, with a "buy" rating, noting management, board members and key investors currently hold 48 per cent of outstanding shares.
He set a fair value for its shares of $1.44.
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In a research note titled “In for the Comeback: 5 Reasons to Buy,” Raymond James analyst Jeremy McCrea hiked his target price for shares of Arc Resources Ltd. (ARX-T).
"As sentiment begins to improve for the energy sector, we think the first group of investors to come back will be looking for balance sheet safety and profitability," he said. "Given commodity prices today, these first two qualifiers are being met with a few producers now, and as such, have been rewarded with their share price. As new investors look to come back in, we believe ARC will begin to grab more investor attention."
Mr. McCrea pointed to the following factors: “positive momentum in CFPS revisions, more balance sheet safety than headline numbers suggest, profitability with updated well economics, shareholder base stable with recent 13Fs and an emerging constructive gas macro environment.”
Keeping an “outperform” rating, he increased his target to $8 from $7.60. The average is $8.20.
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After enjoying a surge in key customers in the second quarter, Target Corp. (TGT-N) is now faced with the challenge of keeping them, said Citi analyst Paul Lejuez, who sees that task as a “key to future success.”
“The large acceleration in TGT’s top-line results (from up 11 per cent in 1Q to up 24 per cent in 2Q) highlights the many ways the retailer is relevant to consumers,” he said in the wake of better-than-anticipated results on Wednesday.
“It has a broad category mix, is top-of-mind for value, and offers customers convenient ways to get their product (in-store, curbside, same day delivery). TGT gained a significant number of new customers during the pandemic (10 million new custs in 1H20) that we believe it can retain for the same reasons it is already a favored shopping destination for existing consumers (value, mix, convenience). Long term, we believe TGT is positioned to capture significant share that gets put up for grabs in the retail landscape.”
In response to the quarterly beat and an increase to his sales forecast, Mr. Lejuez hiked his 2020 and 2021 earnings per share projections to US$7.35 and US$7.96, respectively, from US$5.23 and US$7.06.
“We believe TGT is a winner in this retail landscape and will be a beneficiary of other retailers closing stores in years to come,” he said. “We had been concerned in the past about never-ending investments to drive sales growth, but there is an end in sight to these investments as capex is expected to moderate in F21 and beyond.”
Keeping a “buy” rating, Mr. Lejuez raised his target for Target shares to US$176 from US$140. The average on the Street is US$156.25.
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After its second-quarter results exceeded a “high bar,” RBC Dominion Securities analyst Scot Ciccarelli expects Lowe’s Companies Inc.‘s (LOW-N) momentum to continue, though he also anticipates “sticky” near-term consumer behaviour.
“While we clearly don’t expect the company to generate 20-per-cent-plus comps indefinitely, we do think that trends will remain strong for the foreseeable future as people continue to spend more time at home, giving them both the opportunity to notice potential repair/remodel projects and the time to complete such projects,” he said. “We also believe that today’s consumer behaviours are unlikely to change dramatically and big discretionary categories like Travel, Entertainment, Bar/Restaurant spending etc. will likely remain depressed for the foreseeable future. As a result, we believe that investing in one’s home will be one of the best/easiest ways to improve a consumer’s ‘standard of living’ and fully expect very strong stacked comp results as we shift into next year.”
Emphasizing the company’s claim that August sales momentum is “materially consistent” with the results seen in July, Mr. Ciccarelli hiked his 2020 and 2021 earnings per share estimates to US$8.70 and US$9.25, respectively, from US$7 and US$7.65. He also introduced a 2022 projection of US$10.30.
Keeping an “outperform” rating, he also increased his target for Lowe’s shares to US$188 from US$165. The average is currently US$177.62.
“While expectations were high, we think investors may not be fully appreciating the magnitude of their sales gain (35 per cent in U.S,) and all of the ancillary benefits that occur with it,” said Mr. Ciccarelli. “Further, we expect trends to remain strong given the massive wallet share shifts that have/are occurring with U..S consumers and believe home improvement will remain a key beneficiary, resulting in a ‘stronger for longer’ scenario.”
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In other analyst actions:
* National Bank Financial analyst Rupert Merer raised Ballard Power Systems Inc. (BLDP-Q, BLDP-T) to “outperform” from “sector perform” with a US$20 target, up from US$18. The average on the Street is US$21.22.
* Citing its valuation, BMO Nesbitt Burns analyst Jackie Przybylowski lowered Wheaton Precious Metals Corp. (WPM-N, WPM-T) to “market perform” from “outperform” with an unchanged US$50 target, falling short of the US$54.20 consensus.
* Ms. Przybylowski upgraded Ero Copper Corp. (ERO-T) to “outperform” from “market perform” with a $23 target (unchanged). The average is $20.95.
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David Leeder