Inside the Market’s roundup of some of today’s key analyst actions
Brookfield Infrastructure Partners LP (BIP.UN-T, BIP-N) is “putting money where their mouth is” in launching a hostile takeover bid for Inter Pipeline Ltd. (IPL-T), according to Citi analyst Ryan Levine.
On Wednesday after the bell, Brookfield revealed it has offered $16.50 per share for the remaining stake in Inter Pipeline that it does not already own, a 23.13-per-cent premium Wednesday’s close and valuing the Calgary-based company’s equity at $7.08-billion.
“BIP began accumulating interests in IPL in March 2020 during the COVID-19 selloff,” he said. “By market close Wednesday, BIP owned 20 per centof IPL. On the earnings call last week, BIP indicated that it had the intention to acquire at least one of the companies that it made a direct investment in. IPL must have been the deal that BIP was alluding to during the earning call. BIP prefers control deals so may be willing to pay up to gain control (given cost basis in IPL). BIP and BIP-C have rallied recently which gives them an improved currency as well.
“Since 2016 BIP has been investing more in data, communications infrastructure and midstream energy. We have put together a list of material transactions over the last five years to help identify the trend. Midstream investments have started to take up larger market share in the last couple years which signals that BIP thinks these assets are the most attractive long term investments. The company has publicly signaled this as well in recent quarter which suggest that conviction has only been strengthened by recent changes to public and private market prices”
Citing an improved macro economic and business outlook, Mr. Levine raised his target for Brookfield’s U.S.-listed shares to US$54 from US$45, keeping a “neutral” recommendation. The average on the Street is US$57.69, according to Refinitiv data.
In response to Wednesday’s announcement, a pair of equity analysts raised their recommendations for Inter Pipeline.
Credit Suisse analyst Andrew Kuske raised its shares to “neutral” from “underperform” with a $16.50 target, up from $13.50. The average on the Street is $15.06.
“a hostile approach by Brookfield is unusual, however, the language was clear with a view the ‘Offer is in the best interests of all IPL shareholders and that shareholders should have the opportunity to determine what is best for their investment’,” said Mr. Kuske. “Brookfield holds 84.3 million IPL shares for a 19.65-per-cent economic interest directly by way of swaps. Given this situation, the IPL focus shifts from Heartland Petrochemical Complex (HPC) execution to some volumetric and commodity positives). As a result, we upgrade IPL.”
CIBC World Markets’ Robert Catellier moved the stock to “outperformer” from “neutral” with a $17 target, rising from $13.50.
“In our view, the $16.50 per share offer from BIP is credible and puts the company in play. We expect IPL will either engage in a fully marketed process or allow BIP access to confirmatory due diligence to allow for a higher offer, currently disclosed by BIP to be in the range of $17.00- $18.25 per share,” said Mr. Catellier.
Other analysts raising their targets for Inter shares included:
* Canaccord Genuity’s John Bereznicki to $16.50 from $14 with a “hold” rating.
“We believe the de-risking of the Heartland Petrochemical Complex (HPC) could support a higher offer from BIP, which suggests potential upside for current shareholders above the initial $16.50 offer. We nonetheless view the likelihood of a competing offer as low, which suggests the risk that no transaction materializes and IPL continues to progress HPC on its own,” he said.
* Raymond James’ Chris Cox to $18.25 from $15 with a “market perform” rating.
“We view Brookfield’s offer to acquire Inter Pipeline as an attractive exit to a story that has delivered consistently disappointing results for shareholders for years. In the context of a market characterized by no to low premium deals in the energy sector, we view the $16.50/sh offer and 23-per-cent premium as abundantly fair, though we suspect (and indeed, hope) the Board will eventually engage with Brookfield to settle on a modestly higher offer,” said Mr. Cox.
* RBC’s Robert Kwan to $17 from $15 with a “sector perform” rating.
After the late Wednesday announcement that it is buying Seven Generations Energy Ltd. (VII-T) for $2.7-billion in stock, Raymond James analyst Jeremy McCrea upgraded ARC Resources Ltd. (ARX-T) to “strong buy” from “outperform,” expecting the combined entity to “attract new capital from the likes of growth investors now, value investors, and index funds (especially given the limited choices for pure play Montney names of size).”
“As sentiment has improved for the energy sector, the first group of investors that have come back meaningfully have looked for balance sheet safety, profitability and size (i.e., liquidity),” he said. “These qualifiers have been limited to fewer and fewer producers every year and as such, a key reason why valuation multiples have deteriorated over time for the sector. The merger between ARC and Seven Generations, two premium Montney entities, gives the scale both companies likely required to be more institutionally relevant with global investors. In addition, the above average leverage (and credit rating) for VII is seemingly resolved and for ARX, it now has the adequate cashflow to commercially develop its Attachie land block (and thus get ‘value’ for this asset).”
His target for ARC shares rose to $12 from $10. The consensus on the Street is $9.06.
Elsewhere, Scotia Capital analyst Cameron Bean upgraded ARC to “sector outperform” from “sector perform” with an $11 target, up from $9.
Mr. Bean also raised his target for Seven Generation shares to $12 from $11, keeping a “sector outperform” recommendation. The current average is $8.48.
“We believe the ARX / VII combination is a clear win for ARX. The transaction answers the key questions we had about ARX’s strategy and is highly accretive to our preliminary pro forma 2021 estimated CFPS (19 per cent) and Net Asset Value (9 per cent) estimates,” said Mr. Bean. “We see fewer benefits from the deal for VII, given that the company was making solid progress as a standalone business; however, we believe that VII shareholders will gain more downside protection from the combined company due to lower relative debt and a lower production decline rate. Moreover, we do agree that increased scale and lower financing costs could provide additional market relevance and free cash flow benefits that VII lacks on its own. In our view, a competing offer is unlikely, but we are not ruling it out entirely as we see VII as a valuable asset and believe that ARX is getting a great deal. Our TP for ARX moves to $11/share and we are upgrading the stock to SO on the accretion and strategic benefits from the deal. Our VII TP moves to $12/share based on the share exchange ratio. We are also closing our Tourmaline Oil Corp. (TOU-T; ‘sector outperform’) over ARX pair trade . However TOU continues to be our top pick.”
Meanwhile, TD Securities’ Aaron Bilkoski cut Seven Generations to “tender” from “buy” with a $10.53 target from $8.
Those making changes to Arc targets included:
* TD Securities’ Menno Hulshof to $9.50 from $8.50 with a “buy” rating.
* BMO Nesbitt Burns’ Randy Ollenberger to $11 from $9 with an “outperform” rating.
Citing its “solid” writing results from both its Canadian and U.S. operations as well as growth south of the border, Raymond James analyst Stephen Boland raised his rating for Trisura Group Ltd. (TSU-T) following better-than-expected quarterly results.
On Wednesday, the Toronto-based specialty insurance provider reported diluted earnings per share of $1.05, rising from 47 cents a year ago and easily exceeding Mr. Boland’s 60-cent projection.
“Gross premium growth continues to exceed our estimates as new U.S. programs are added (8 in the quarter) and one of the Canadian divisions adds new programs,” he said. “Earnings were well above our estimates. As we have stated in the past, we do not believe quarterly results are the main driver of value for this stock. As we have seen with commentary from other insurers, the hard pricing environment is expected to remain through 2021 which should benefit the Canadian operations. With each passing quarter, we do get more comfortable with the U.S. operations as more programs become seasoned.
“We are raising our 2021 estimates to reflect the organic growth in the operations and the hard pricing environment. Additionally, we are introducing 2022 estimates that reflect higher income from the U.S. operations as it continues to gain scale”
Moving the stock to “outperform” from “market perform,” he hiked his target to $119 from $100. The average on the Street is $120.86.
Other analysts making target adjustments include:
* Scotia’s Phil Hardie to $126 from $110 with a “sector outperform” rating.
“We continue to view Trisura as an attractive opportunity for small-cap investors looking for a high-growth story,” said Mr. Hardie. “Despite the solid run, we continue to see a number of catalysts over the near-to-mid-term. The primary catalyst over the coming 12 months will likely be driven by increased U.S. earnings expectations. With continued top-line momentum, this could be accelerated through increased underwriting capacity of the platform through an equity raise, providing upside to our target. Potential Index inclusion in late 2021 or early 2022 assuming the investment float exceeds $1-billion is also a likely near-term catalyst.”
* CIBC World Markets’ Nik Priebe to $130 from $110 with an “outperformer” rating.
“Trisura reported a solid Q4 beat on several fronts. EPS and BVPS came in above our estimates and the high end of the consensus range. Premium growth in the U.S. business (the primary determinant of TSU’s share price performance) exceeded our estimate by over 10% and experienced the strongest quarter of sequential growth since inception. The Canadian business also experienced accelerating momentum with GPW and NPW more than doubling from the prior-year period,” said Mr. Priebe.
* BMO Nesbitt Burns’ Tom MacKinnon to $125 from $110 with an “outperform” rating.
* National Bank Financial’s Jaeme Gloyn to $177 from $161 with an “outperform” rating.
In the wake of a “strong but well anticipated” second quarter, Canaccord Genuity analyst Aravinda Galappatthige sees the outlook for Wildbrain Ltd. (WILD-T) improving.
On Wednesday, the Halifax-based media company reported revenue of $142.3-million, up 16 per cent year-over-year and ahead of the Street’s $134.5-million expectation. Adjusted EBITDA rose 14 per cent to $29.1-million, topping the consensus estimate of $25.4-million.
“We do note, however, that while the $34.3-million benefit to revenue from the licensing of the Peanuts Catalog was factored into our expectations, Q2 EBITDA was also boosted by a $4.4-million benefit from a litigation settlement,” Mr. Galappatthige said. “With that said, the upward revisions to F2022 are mainly intended to reflect the gradual improvement in consumer products, steady underlying growth in proprietary production (further supported by Sonic Prime), and a likely return to growth at WildBrain Spark as we lap the impact of the YouTube ‘Made for Kids’ rules.
“Alongside this, we have raised our target ... as we lift our target multiple for content from 9 times to 10 times and TV from 4 times to 5 times, given the broadly ebullient conditions in the market (especially for small caps) and in line with the steep upswing in comps, both in terms of content producers (e.g. TBRD, LGF) as well as broadcasters (e.g. Corus). The multiple increase is also driven by the recent increase in new premium projects including Peanuts with Apple TV+ and the Sonic the Hedgehog deal announced last week. Also note, in the case of WILD, even moderate changes in multiples drive steep swings in target price (both ways) due to the substantial net debt position, which represents nearly half of TEV.”
Calling the Sonic the Hedgehog deal “landmark” and seeing the development of other key brands, including legacy offerings, like Strawberry Shortcake, Inspector Gadget and Teletubbies, as a potential catalyst, Mr. Galappatthige raised his target for Wildbrain shares to $2.80 from $1.60, keeping a “hold” rating. The average on the Street is $2.36.
“With the broad market rally now manifesting sharply in the small cap space, we have seen both WILD and its comps start to participate quite meaningfully. Its closest Canadian comp – TBRD, is up 172 per cent over the last 12 months while the larger LGF.B is also up strongly of late (up 50 per centover 3 months). This together with the steep impact of even moderate changes to valuation multiples of WILD, drives our target price up sharply,” he said.
Other analysts making changes included:
* National Bank Financial’s Adam Shine to $3 from $1.80 with a “sector perform” rating.
* Scotia Capital’s Jeff Fan to $3.40 from $2 with a “sector perform” rating.
“We believe management has done a good job to stabilize the business in the short term, which has enabled the company to begin to invest for future growth. WILD has a strong pipeline of content production over the coming quarters which will continue to stabilize revenue and EBITDA. The investments position WILD for strategic opportunities that will benefit F22, F23, and beyond,” said Mr. Fan.
* BMO Nesbitt Burns’ Tim Casey raised his target to $3 from $2 with a “market perform” rating.
* Evercore ISI’s David Motemaden to $73 from $72 with an “outperform” rating. The average on the Street is $66.88.
* TD Securities’ Mario Mendonca to $75 from $73 with a “buy” rating.
* National Bank Financial’s Gabriel Dechaine to $69 from $67 with an “outperform” rating.
RBC Dominion Securities analyst Keith Mackey thinks Precision Drilling Corp.’s (PD-T) “focus on debt reduction and technology differentiation position the company to capture its share of incremental activity as the industry moves out of hibernation.”
He raised his financial expectations for the Calgary-based company through 2022 in response to Wednesday’s release of its fourth-quarter results, “preparing for an inflection.”
“Precision averaged 26 active rigs in the U.S. in 4Q20, with 33 currently operating as North American land drilling activity improves at a measured pace,” said Mr. Mackey. “On the call, Precision noted it expects to increase its U.S. rig count by 15-20 per cent to mid-year, which maps to 5-7 rigs. Larger improvement in industry activity may begin toward the second half of the year under stable commodity prices.”
Touting its “strong” liquidity and seeing potential gains in its renewed focus on enhanced ESG performance, Mr. Mackey raised his target for Precision Drilling shares to $42 from $32, keeping an “outperform” rating. The average is $33.42.
“PD continues to execute on its debt reduction targets and maintains a strong liquidity position. We also believe PD is favorably positioned for future deployment of land drilling software, algorithms, and automation technology,” he said.
Desjardins Securities analyst Gary Ho is expecting Goeasy Ltd. (GSY-T) to raise its dividend by 35 per cent and reintroduce a three-year outlook alongside the release of its fourth-quarter financial results on Feb. 17.
For the quarter, Mr. Ho is projecting adjusted earnings per share of $1.92, matching the consensus on the Street, and operating income of $55.1-million.
“The PayBright/Affirm investment has been a success — we now factor in the gain/proceeds on disposition of Affirm stock, increasing our BVPS [book value per share],” he said.
Mr. Ho also sees the Mississauga-based firm has a candidate for inclusion in the S&P/TSX Composite in its March 19 review, which he expects to create some near-term index demand.
Keeping a “buy” rating for its shares, he hiked his target to $119 from $99. The average on the Street is $112.83.
“Our investment thesis is predicated on: (1) GSY has been able to successfully weather the pandemic and remains well-insulated with its loan protection insurance program; (2) management has shifted its focus more toward offence, suggesting growth through organic initiatives as well as potential M&A; and (3) with scale, the business could consistently generate mid-20-per-cent ROE [return on equity],” he said.
After Wednesday’s fourth-quarter earnings release, a group of equity analysts adjusted their targets for shares of Finning International Inc. (FTT-T).
* Raymond James’ Bryan Fast to $34 from $31 with an “outperform” rating.
“Finning is committed to controlling the controllable and delivering the benefits of a higher velocity operating model, something we expect will be at the top of investors’ minds (and ours) as the year unfolds,” said Mr. Fast. “Although, the valuation model that we used to recommend the stock below $20 isn’t quite as compelling at these levels, at this point in the cycle investors historically tend to shift their focus on Finning from book value to earnings momentum. Thus, we think the stock still has room to run.”
* RBC Dominion Securities’ Sabahat Khan to $35 from $33 with an “outperform” rating. The average is $34.50.
* Scotia Capital’s Michael Doumet to $34.50 from $33 with a “sector outperform” rating
* National Bank’s Maxim Sytchev increased his target to $37 from $35 with an “outperform” rating.
* TD Securities’ Cherilyn Radbourne to $34 from $32 with a “buy” rating.
* BMO Nesbitt Burns’ Devin Dodge to $35 from $32 with an “outperform” rating.
LEAF Mobile Inc.’s (LEAF-T) recently completed $159-million acquisition of Vancouver’s East Side Games created an “enviable platform within the Canadian mobile game development landscape,” according to Haywood Securities analyst Neal Gilmer.
“Through the process of the acquisition, LEAF completed a private placement that raised approximately $23-million, with the bulk of the proceeds used to complete the acquisition. Going forward the Company has seven games in the development pipeline that should come to market in 2021, supplementing the strong base of the existing ten titles,” he said.
After commencing trading on the TSX on Wednesday, Mr. Gilmer initiated coverage with a “buy” rating and 75-cent target for its shares.
“We expect LEAF to generate strong revenue growth in 2021, particularly in H2/21 supported by the launch of games in the development pipeline. We expect the Company to invest in the business to drive revenue growth near-term resulting in modest EBITDA margins in 2021, expanding in 2022 based on that revenue growth,” the analyst said.
In other analyst actions:
* Scotia’s Phil Hardie raised his Intact Financial Corp. (IFC-T) target to $179 from $175 with a “sector outperform” rating, while Desjardins Securities’ Doug Young bumped up his target to $175 from $170 with a “buy” recommendation. The average is $177.18.
“Relative to our estimate, Canadian personal auto and Canadian personal property beat while the Canadian and US commercial divisions missed. Some of the beat was clearly driven by COVID-19 (reduced driving), although given current lockdowns this likely will benefit 1Q21 results as well,” said Mr. Young.
* Seeing its valuation “now more demanding,” BoA Global Research analyst Lawson Winder cut Cameco Corp. (CCO-T) to “neutral” from “buy” with a $22.75 target, up from $21. Scotia’s Orest Wowkodaw moved his target to $23 from $22 with a “sector outperform” rating, while TD Securities’ Greg Barnes bumped his target to $20 from $18 with a “hold” recommendation. The current average is $18.89.
“CCO released stronger-than-anticipated Q4/20 results,” Mr. Wowkodaw said. “Although limited 2021 guidance was somewhat mixed relative to our expectations, our 8% NAVPS increased by 5 per cent. Overall, we view the update as positive for the shares.
“CCO shares are rated [sector outperform] based on improving fundamentals. We anticipate growing global decarbonization initiatives to materially increase support for nuclear, which by extension, is positive for uranium. In our view, an inevitable resumption in long-term contracting is likely to serve as a significant catalyst for CCO shares ahead.”
* CIBC’s Dean Wilkinson raised his First Capital REIT (FCR.UN-T) target to $18.50 from $18 with an “outperformer” rating, while National Bank Financial’s Tal Woolley moved his target to $16.50 from $15 with a “sector perform” recommendation. Canaccord Genuity’s Mark Rothschild raised his target to $17.25, matching the cosnensus, from $16.75 with a “buy” rating.
“Continued shutdowns in most of First Capital REIT’s (FCR) key markets have put pressure on some of its tenants, and we expect some leases to ultimately require lower rental rates for these tenants to be profitable,” said Mr. Rothschild. “However, with an exceptionally well-located portfolio, there will be tenant demand for space in FCR’s portfolio. Currently, rent collections are in the low-to-mid 90-per-cent range, and the REIT continues to renew leases with positive leasing spreads. Operating performance should improve further as lockdowns are eased. While there are questions about the long-term profitability of some uses at current rental rates (gyms in particular), we expect FCR’s urban portfolio to largely perform well over the long term.”
* CIBC’s Mark Petrie increased his target for Canadian Tire Corporation Ltd. (CTC.A-T) to $198 from $173, maintaining an “outperformer” rating. The average is $178.09.
* CIBC’s John Zamparo moved his Canopy Rivers Inc. (RIV-T) target to $4 from $1.60 with an “outperformer” rating. The average is $1.80.
“Every cannabis stock has vaulted forward in recent weeks and months, but an increased appetite from retail investors has caused an acceleration. Rivers’ fortunes are temporarily tied to Canopy Growth (we estimate WEED shares represent nearly 65 per cent of RIV’s NAV), which has boosted the stock’s fortunes. With the spectre of material debt from PharmHouse now likely off the table, and the RIV-WEED deal approaching its close, we believe another clear catalyst emerges in the form of a materially accretive U.S. acquisition. This would allow RIV to benefit from multiple arbitrage, and would offer investors exposure to another U.S. operator,” said Mr. Zamparo.
* National Bank Financial analyst Michael Parkin trimmed his New Gold Inc. (NGD-T) target to $4 from $4.25 with an “outperform” rating, exceeding the $3.11 average.
* National Bank’s Patrick Kenny cut his Keyera Corp. (KEY-T) target to $28, which is the current consensus, from $29 with an “outperform” rating.
* Resuming coverage following a recent $42.5-million bought deal financing, Canaccord Genuity analyst Robert Young raised his target for Enthusiast Gaming Holdings Inc. (EGLX-T) to $8.75 from $7.50 with a “buy” rating. The average is $6.83.
“Enthusiast Gaming has recently closed multiple transactions, including a bought deal financing, which bolster the company’s balance sheet and provide funds to support continued growth,” he said. “We believe these are positive developments which underscore Enthusiast Gaming’s maturation as a public company alongside its uplisting to the TSX. EGLX is a unique asset with a spectrum of video gaming lifestyle channels spanning websites, influencers, owned and UGC internet video, esports and events. We believe that there is a flywheel at play whereby strong brands are attracted to the platform through a growing direct sales effort, which in turn attracts leading content creators, which attracts more brands.”
* TD’s Mario Mendonca lowered his Great-West Lifeco Inc. (GWO-T) target to $36 from $37 with a “buy” rating, while National Bank Financial’s Gabriel Dechaine increased his target to $33 from $32 with a “sector perform” recommendation. The average is $32.89.