Inside the Market’s roundup of some of today’s key analyst actions
Desjardins Securities analyst Maher Yaghi thinks the attempts by Corus Entertainment Inc.’s (CJR.B-T) management to improve its financial position will prove unsuccessful.
In the wake of Wednesday’s third-quarter financial results, which were overshadowed by a 79-per-cent cut to its annual dividend (to 24 cents from $1.14) and sent the stock plunging 17.9 per cent to a record low, Mr. Yaghi said he expects Corus’ top line to continue to decline over “many” years.
“While the [dividend] cut was anticipated, it was at the high end of our 50–75-per-cent expectation,” he said. “The stock now yields 4.7 per cent annually, which is still higher than the peer average. We believe that reducing the dividend is the right way forward given CJR’s elevated debt, but the high dividend was without a doubt a reason to own the stock. In addition, the company took a $1.0-billion asset writedown as the challenging environment reduces the value of goodwill and licences. To value these assets, management is now using a TV earnings growth rate of a decline 7.4 per cent to an increase of 0.3 per cent and a terminal growth rate of 0–1 per cent. Management also provided additional details on its strategy.
“While CJR is working to increase monetization of its assets, we believe the lack of significant control over content and delivery methods is likely to steadily erode revenue.”
In reaction to the results, Mr. Yaghi lowered his revenue forecast for Corus in order to “reflect the current advertising environment as well as the company’s assumptions included in the goodwill review.”
He added: “We have also reduced the medium-term growth rate in our DCF [discounted cash flow] to a decline of 4 per cent (from a 2-per-cent drop) for the same reasons. Even though the company exceeded our margin expectations in the quarter, we have made little change to our margin forecast as continued cost-control efforts should be offset by the declining top line, which reduces potential economies of scale. Following these adjustments, we now forecast EBITDA will decline by 2.5 per cent in FY18 and 4.9 per cent in FY19.”
Maintaining a “hold” rating for Corus shares, Mr. Yaghi dropped his target price to $6.50 from $9.50. The average target on the Street is currently $6.28, according to Bloomberg data.
“We believe there is elevated risk related to owning CJR shares,” he said. “While the company still generates healthy cash flows, we believe the TV environment will be challenging for the foreseeable future. We believe that a sustainable stabilization of advertising revenue is key for investors to gain confidence in future outperformance from CJR.”
Elsewhere, National Bank Financial analyst Adam Shine upgraded Corus to “sector perform” from “underperform” with a target of $5.50 (unchanged).
A pair of equity analysts upgraded Detour Gold Corp. (DGC-T) on Thursday in response to Wednesday’s release of an updated life of mine plan for its Detour Lake operation located in northeastern Ontario.
Eight Capital analyst Craig Stanley moved Detour shares to “buy” from “neutral” after the results fell in line with his expectation following preliminary results in late April.
Citing lower-than-anticipated capex expectations, Mr. Stanley said his free cash flow forecast at spot prices in 2018-2020 increased to $100-million from $72-million.
He did lower his target for Detour shares to $14.80 from $15.20, noting marginally higher operating costs have reduced cash flow per share estimate over the next two years.
Scotia Capital analyst Trevor Turnbull raised his rating to “sector outperform” from “sector perform” despite calling the LOM plan is non-event as guidance was largely unchanged.
“Many, including potential acquirers of the company, could not care less,” said Mr. Turnbull, who believes the company is a desirable asset for buyers.
Seeing the stock trading at a significant discount to its valuation due to uncertainty and erosion in confidence, he hiked his target to $18 from $15. The average target on the Street is $16.29.
After its fourth-quarter earnings fell “well below” the Street’s expectations, AltaCorp Capital analyst Keith Carpenter downgraded Canopy Growth Corp. (WEED-T) to “sector perform” from “speculative buy,” citing its current valuation.
“The Company is well positioned to benefit from the opening of the Canadian recreational market and the advancement of the international medicinal market,” he said. “Their size, capacity, inventory levels, and platform all provide the basis in which to grow their business and strengthen their market share. However, one of the issues the Company will have to prove out to investors post the launch of the recreational market is whether they will be efficient with regards to their costs. We accept that management needs to build out its platform and there is a ramp in costs associated with that. However, having never gone through this process in this sector at this level, it’s also difficult for management to pinpoint that the substantial ramp that is occurring in SG&A costs will not overshoot and impact those expanded sales later this year and going forward. As a result, we remain cautious of the Company’s cost efficiency potential over the next few years.”
Mr. Carpenter lowered his target by a loonie to $40. The average target on the Street is $36.06.
Russel Metals Inc. (RUS-T) presents a “balanced risk-reward investment opportunity,” according to RBC Dominion Securities analyst Derek Spronck, believing it is benefitting from both higher steel prices and steady end-market demand.
Though he cautions that the potential indirect impact of steel tariffs creates “some near-term uncertainty” and he sees better upside opportunities elsewhere in his coverage universe over the next 12 months, Mr. Spronck initiated coverage of the Mississauga-based company with a “sector perform” rating.
“Russel Metals is a top-ten steel and steel product distributor in North America by way of revenue,” he said. “The key is that as steel prices move directionally, so has the opportunity in the shares of RUS - with revenue, EPS, and share price performance exhibiting high correlations (60 per cent or more) to steel prices. However, with steel prices up more than 50 per cent year over year, and with steel price futures pointing to softer prices in 2019, we see less earnings and valuation upside in shares of RUS in the near-term.”
“Russel primarily sources U.S. steel for its U.S. operations (and vice-versa in Canada). Tariffs add to the price of steel and higher prices are generally a positive for Russel. Where there is some uncertainty is whether Russel will be able to pass on the full tariff increase to customers (where impacted). There could also be indirect consequences of tariffs (and increasing trade protectionism) that could result in lower economic growth – which would be a negative. We do think tariffs will be a net neutral impact for Russel, consistent with management’s views. However, it does create some uncertainty, with potential countermeasures that could still further influence the market.”
Mr. Spronck set a target price for Russel Metals shares of $30. The average target is $34.75.
“Russel Metals offers investors: 1) cyclical exposure by way of end-market demand for steel products; 2) strong anticipated ROE [return on equity] generation of 16 per cent; and 3) a dividend yielding 5 per cent that is partial protected due to the counter-cyclicality of cash flows,” the analyst said. “We do see valuations as fair given the context of the current and anticipated operating environment. However, for investors looking for dividend yield and/or with a more positive view around GDP/steel pricing, we think shares of RUS would be an appropriate investment in that context.”
“We believe valuations have become more attractive as these stocks and the broader sector have come under pressure due to rising rates and a rotation out of defensive, interest rate-sensitive stocks,” said Mr. Jarvi. “While we do foresee potential upside (through higher earnings), we have a cautious stance on these stocks given our views on near-term earnings contraction, slowing growth, geographic/regulatory concentration and a more complicated structure with insider voting control.”
Mr. Jarvi gave Canadian Utilities a $34 target, which sits below the consensus of $37.61.
“Canadian Utilities has delivered very strong results over the last several years, but we now expect growth on all fronts to slow for a few reasons: rate base growth in its core Alberta market has moderated, utility ROEs are expected to decline albeit we still expect over-earnings vs. the deemed ROE, and the outlook for the unregulated businesses is generally more muted,” he said. “With slowing earnings and cash flow growth, and little room to raise the payout ratio, we believe dividend growth will moderate. However, we believe the company will continue to with its impressive track record of 46 years of consecutive dividend increases. The balance sheet remains in good shape and potential acquisitions or new unregulated investments could provide upside to our forecast and could improve the company’s diversification.”
His target for Atco is $42, which is 42 cents below the consensus.
“ATCO Ltd. provides investors with exposure to predominately stable regulated earnings through its 52.5-per-cent ownership of Canadian Utilities and also has potential upside from unregulated assets including the Structure & Logistics business,” said the analyst. “The unregulated businesses have seen earnings declines over the past few years — we believe operations have stabilized, thanks to improved cost savings and efficiencies, and acknowledge that potential increased economic activity in Alberta and/or the resource sector could drive a material uplift in earnings. In terms of the regulated utility operations, we believe earnings growth is slowing due an expected reduction in earned ROEs and lower rate base growth. The lower earnings growth should likely translate to lower dividend growth—while the trailing five-year CAGR for dividends is 15 per cent, we believe the growth will drop below 10 per cent. While relative valuation is cheaper than utility peers, a discount is warranted given its structure (i.e. holdco discount) and the volatility of the unregulated operations.”
In the wake of Wednesday’s release of “mixed” second-quarter financial results, Desjardins Securities analyst Gary Ho called AGF Management Ltd. (AGF.B-T) a “value play.”
“It remains our preferred name in the sector given its attractive valuation (4.0 times our estimated 2019 wealth management EBITDA; we value the S&W [Smith & Williamson] stake at a conservative $267-million), net sales turnaround (in both retail and institutional), improving management credibility and the S&W jewel which potentially provides upside to our $8.50 target price,” he said.
The Toronto-based asset management firm reported adjusted earnings per share of 14 cents, excluding a 12-cent gain from a transfer pricing provision release and 5-cent loss stemming from restructuring. Both Mr. Ho and the Street had projected a 15-cent profit. Adjusted wealth management EBITDA of $16.8-million also missed the analyst’s expectation ($18.4-million), which he attributed to higher-than-anticipated expenses from a marketing push.
With the results, Mr. Ho lowered his fiscal 2018 EBITDA estimate to $66.2-million from $73.4-million, but he increased his earnings per share projection by 5 cents to 77 cents.
He kept a “buy” rating and $8.50 target for the stock, which is slightly above the consensus of $8.36.
“We foresee a few near- or medium-term positive catalysts: (1) improving fund performance leading to 60 per cent of AUM [assets under management] above median over three years; (2) net retail flows improving relative to industry; (3) investors recognizing a proper valuation of S&W; (4) restoring management’s credibility; and (5) all of these factors leading to better sentiment and valuation,” said Mr. Ho.
Stuart Olson Inc. (SOX-T) now sits on “solid footing,” according to Raymond James analyst Frederic Bastien, who believes Calgary-based construction services company is finally making in-roads into Ontario.
“It’s taken some time for CEO David LeMay and his team to tap Canada’s largest construction market, but his persistence is paying off,” said Mr. Bastien in a research note following recent sessions with management in Vancouver.
“Today, all three Stuart Olson divisions have something going for them in the province. The Industrial Group just wrapped up a new wet gas cleaning plant for Vale in Sudbury while the Buildings Group has been successful executing various jobs for large post-secondary institutions (which buy into the construction management approach SOX embraces). The Commercial Group is arguably having even better traction, with the who’s who in Canadian general construction and the budding marijuana grow-op segment increasingly turning to Canem for its unparalleled control systems expertise. Based on this broad momentum, it isn’t far-fetched to think Ontario can become Stuart Olson’s largest market at some point in time.”
Also citing “improving prospects for industrial work and prudent capital allocation yielding solid returns for its shareholders over the foreseeable future,” Mr. Bastien raised his target price for Stuart Olson shares to $9 from $8 with an “outperform” rating (unchanged). The average is $8.42.
Square Inc. (SQ-NQ) remains a “marquee ‘risk-on’ momentum stock,” according to Citi analyst Peter Christiansen, who expects its performance to remain volatile.
“SQ’s recent momentum has been impressive, and we recognize the long-term opportunity has likely been validated with PayPal’s acquisition of iZettle and First Data’s bullish emphasis on Clover,” the analyst said. “We do believe the opportunity for micro/SMB Cloud-based POS remains large, though we sense Square’s competition will begin to intensify, particularly as it continues to push upmarket. Distribution will be key, and Square does not have the luxury of bank/issuer partnerships or an untapped base of merchants to leverage. Still, we view Square’s offering to be compelling and consider the firm as a category leader in a segment undergoing significant innovation and strong secular growth. For now we remain Neutral, as we look to gain better comfort/evidence of Square’s upmarket competitiveness and/or see the stock at a more attractive level — SQ’s multiples rank greater-than 95 percentile of more than 2,000 stocks, indicating less than attractive risk/reward.”
Expecting the company’s subscriptions and services segment to achieve a compound annual growth rate of 60 per cent over the next 2 years and “outsized” growth from Instant Deposit option and Caviar food delivery service, Mr. Christiansen raised his target to US$67 from US$47. The average is US$56.89.
“We think continued execution and expectations beating for the next 2–3 quarters presents support for at least modest appreciation from current levels,” he said.
“We await a more attractive Risk/Reward setup before getting more aggressive on the name.”
In other analyst actions:
TD Securities analyst Damir Gunja downgraded Great Canadian Gaming Corp. (GC-T) to “hold” from “buy” with a target of $51, falling from $54 and lower than the consensus of $53.70.
Canaccord Genuity analyst Raveel Afzaal downgraded Crius Energy Trust (KWH.UN-T) to “hold” from “buy” with a target of $7.50, down from $9 and under the consensus of $9.90.
Cormark Securities analyst Jason Zhang reinstated coverage of Horizon North Logistics Inc. (HNL-T) with a “buy” rating and $3.25 target (from $2.80). The average is $3.40.