Inside the Market’s roundup of some of today’s key analyst actions
Rogers Communications Inc.’s (RCI.B-T) medium-term forecast remains largely unchanged after Wednesday’s release of in-line second-quarter results, according to RBC Dominion Securities’ Drew McReynolds.
In a research report, the equity analyst touted the presence of an “attractive multi-year set-up at a reasonable price.”
“After two years of managing the transition to unlimited plans and COVID-19 and with a constructive CRTC wireless review decision, we believe Rogers is well positioned to benefit from re-opening tailwinds (wireless loading, roaming, Rogers Media), an improvement in wireless KPIs with the near completion of the migration to unlimited plans, and improved digital execution,” said Mr. McReynolds. “Over the medium-term, we expect Rogers to benefit from structural cost efficiencies on the back of improved operating leverage, with the acquisition of Shaw accelerating Rogers’ 5G deployment with additional fiber/fixed telecom infrastructure, enhancing bundling opportunities and strengthening the B2B capability. We also see attractive option value in the portfolio of non-telecom assets that could become a source of funds for strategic initiatives/debt repayment.”
Before the bell on Wednesday, Rogers reported consolidated revenues of $3.582-billion, up 13.5 per cent and narrowly lower than the analyst’s $3.617-billion estimate. EBITDA grew 6.2 per cent to $1.374-billion, falling in line with Mr. McReynolds’s $1.370-billion projection.
The analyst did tweak his near-term wireless recovery projections after the company’s average revenue per user and margin guidance fell below his forecast. However, he emphasized that “recalibration” resulted in minimal changes to his expectations for 2022 and 2023.
“Detailed Q3/21 guidance was provided with management ‘optimistic’ on the outlook given the vaccine, re-opening and economic backdrops,” he said. “Specifically for Q3/21, management expects: (i) modest sequential improvement in network revenues underpinned by continued wireless loading momentum and $50 ARPU (below our previous $51.89 estimate) with 63-per-cent network EBITDA margins (below our previous 65.0-per-cent estimate); (ii) a modest sequential deceleration in year-over-year cable revenue growth with 50-per-cent cable EBITDA margins (both in line with our forecast); and (iii) a sequential decline in media revenues(in part due to seasonality) with media EBITDA of $30-million.”
After making small adjustments to his revenue and earnings expectations for 2021 through 2023, Mr. McReynolds cut his target for Rogers shares to $76 from $77 with an “outperform” rating. The average on the Street is $74.43, according to Refinitiv data.
“We have made changes to our forecast mainly to reflect: (i) a lower near-term wireless ARPU trajectory with our medium-term assumptions largely unchanged; and (ii) slightly lower wireless EBITDA margins on incremental re-opening costs,” he said.
Elsewhere, JP Morgan’s Phil Cusick raised his target to $78 from $72 with an “overweight” recommendation.
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In a research report previewing second-quarter earnings season for the Canadian energy sector, Desjardins Securities Energy Research team raised its oil price forecasts, which it expects will provide “wind in the sails” for most companies.
“While we have been cautiously optimistic on crude prices for the better part of a year, we certainly did not expect OPEC+ to stay the course as well as it has — and, to be frank, this has led to a much higher crude price than we believe is fundamentally supportable, at least in the near term,” said analysts Justin Bouchard and Chris MacCulloch.
“That said, the new deal that OPEC+ hammered out was a positive development from our perspective, as it provides the market with visibility on the gradual return of barrels to the market. But in recent days, we have also seen the market’s reaction to the prospect of a Delta-variant-induced fourth wave of COVID-19 infections. In any event, we have moved up our WTI price forecast to US$75 per barrel for the balance of 2021 and to US$70 per barrel for 2022.”
The firm thinks the oil price recovery “remains on track, despite renewed headwinds from the rise of COVID-19 variants and noise surrounding the recent OPEC+ supply agreement.” The more constructive crude outlook led the analysts to raise their target prices for most stocks in their coverage universe.
They also upgraded both Enerplus Corp. (ERF-T) and MEG Energy Corp. (MEG-T) to “buy” recommendations from “hold” to reflect “the significant move in funds flow owing to both companies’ significant operating and financial leverage to strengthening commodity prices.”
Mr. MacCulloch raised his Enerplus target to $10 from $9. The current average on the Street is $11.08.
Mr. Bouchard hiked his target for MEG to $10 from $7.50, which is below the $10.98 average.
The analysts’ target changes for large-cap stocks were:
- ARC Resources Ltd. (ARX-T, “buy”) to $16 from $15. Average: $14.11.
- Canadian Natural Resources Ltd. (CNQ-T, “buy”) to $54 from $46. Average: $52.93.
- Cenovus Energy Inc. (CVE-T, “buy”) to $16 from $14. Average: $15.17.
- Imperial Oil Ltd. (IMO-T, “buy”) to $41 from $35. Average: $40.89.
- Suncor Energy Inc. (SU-T, “buy”) to $40 from $36. Average: $36.77.
- Tourmaline Oil Corp. (TOU-T, “buy”) to $46 from $44. Average: $44.35.
For dividend-paying stocks, their adjustments were:
- Crescent Point Energy Corp. (CPG-T, “buy”) to $7.50 from $7. Average: $7.36.
- Freehold Royalties Ltd. (FRU-T, “buy”) to $12.50 from $11. Average: $11.88.
- Peyto Exploration & Development Corp. (PEY-T, “buy”) to $10 from $8. Average: $9.27.
- Whitecap Resources Inc. (WCP-T, “buy”) to $9 from $8.25. Average: $8.72.
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BMO Nesbitt Burns analyst Tom MacKinnon sees Great-West LifeCo Inc.’s (GWO-T) $4.45-billion deal to buy the retirement business of Prudential Financial Inc “a scale/expense synergy play in what is a consolidating defined contribution record-keeping market.”
“Opportunities to increase size/scale in highly competitive/rapidly consolidating U.S. retirement services business don’t come along too often,” he said. “When you’re #2 with a scalable platform, and can fund without issuing equity, you can afford to pay more. Price is not cheap, at 21 times estimated 2023 earnings, but a more reasonable 11 times including cost saves. EPS accretion, per GWO is 8-9 per cent by 2023 (we’re 5 per cent in 2022 reflecting Q1/22 close) is attractive, but partially offset by increased leverage (now 38 per cent) and higher proportion of spread-based revenue.”
Mr. MacKinnon did warn that the acquisition does bring additional risks, pointing to a higher proportion of slower-growing spread revenue, a lower proportion of fee revenue and increased exposure to book value guarantee risk, which increases as interest rates rise.
However, he raised his target for Great-West shares to $39 from $37 with a “market perform” recommendation (unchanged). The average target is currently $38.89.
“While a sector-leading 5-per-cent dividend yield provides support, a sector high valuation gives us pause, especially given its consistently underperforming Putnam, and earnings visibility challenges in the often lumpy & opaque Europe/Capital & Risk Solutions segments (40 per cent of earnings). Deployment of excess capital to augment Empower should help, but leverage remains elevated with limited excess capital,” he said.
Others making target changes include:
* Credit Suisse’s Mike Rizvanovic to $40 from $37 with a “neutral” rating.
“A solid deal that further expands Empower’s scalable business as GWO continues to find accretive capital deployment opportunities. The price paid translates to a PE multiple of 18 times, but a much more reasonable 8.1 times on a fully synergized basis,” he said.
* Desjardins Securities analyst Doug Young to $39 from $38 with a “hold” rating.
“We like several items,” he said. “(1) The transaction is on strategy. Management has talked about increasing its presence in the US retirement space for some time and it hosted an investor day focused just on this business in June 2021. (2) This is a good strategic fit. Prudential’s business adds scale and enhances Empower’s position with large corporate customers. It also adds new capabilities. (3) The math makes sense. The transaction is expected to be immediately EPS-accretive and 8–9-per-cent accretive in 2023. It expects run-rate expense synergies of US$180-million (phased in over 24 months) and run-rate revenue synergies of US$20-million by the end of 2023 (expected to grow to US$50-million by the end of 2025). Integration costs are expected to be US$170-million (completed in 24 months) and deal expenses US$55-million. The acquisition is also expected to add 1 percentage point to GWO’s ROE over the medium term. (4) Pro forma, management expects Empower’s contribution to GWO earnings to grow to 30 per cent by the end of 2023. So, it becomes a more meaningful part of the story. And this is a more capital-light business vs other traditional insurance businesses.”
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CIBC World Markets analyst John Zamparo expects inflationary pressures to weigh on the second-quarter results for Premium Brands Holdings Corp. (PBH-T).
“Much has been written about inflation lately, and we expect its impacts will become apparent among consumer stocks in Q2,” he said. “PBH may face the scenario of rising commodity costs among proteins and freight, in addition to either or both of higher labour costs or reduced labour availability leading to production shortfalls. We consider PBH to have greater pricing power than most other food businesses, but past price increases (on a consolidated basis) have been modest, averaging just 0.7 per cent per year since 2017. Furthermore, price increases typically lag cost increases by one to two quarters.”
Ahead of the Aug. 5 earnings release, Mr. Zamparo reduced his EBITDA projection for the Vancouver-based company to $100-million from $116-million, point to a lower gross margin estimate (18.3 per cent from 19.5 per cent) stemming from its Specialty Foods business.
“We believe the current EBITDA consensus of $109-million (relatively unchanged even as commodity prices spiked in the quarter) looks somewhat optimistic and could moderate before quarterly results are reported,” he said. We expect the pandemic’s impact on operations moderated versus Q1/21 (approximately 5 per cent hit to sales and 12 per cent to EBITDA, per management). Consumer demand was very healthy in Q1, and inventory positions will help, but we expect some supply disruptions.”
Despite his lower expectations, Mr. Zamparo hiked his target to $127 from $120, reiterating a “neutral” rating. The current average is $129.
“Sales growth does significantly exceed most Canadian peers, and the PBH management team and business garner faith from investors,” he said. “We believe valuation reflects the company’s expected strength in 2022, and we also recognize investors’ preference for this name, and the likelihood of future accretive M&A.”
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Pulse Seismic Inc.’s (PSD-T) outlook remains “constructive” after the release of “very strong” second-quarter results, according to iA Capital Markets analyst Elias Foscolos.
“The Company noted in its commentary that a number of companies have increased prior budgets for drilling programs, and so far this year we are seeing the Canadian rig count trend higher than our prior forecast. The industry indicators point to an improving Traditional outlook for PSD, while further M&A activity has the potential to drive additional Transactional sales,” he said.
After the bell on Wednesday, the Calgary-based company reported results that largely fell in line with expectations, driven by “material Transactional sales resulting from M&A activity in the upstream sector.” Concurrently, it revealed its debt has shrunk to just $4-million.
“As previously telegraphed, PSD generated revenue of $19-million in the quarter,” said Mr. Foscolos. “Transactional sales, driven by M&A, asset sales, and joint ventures in PSD’s E&P customer base, accounted for 78 per cent of quarterly seismic revenue, or $15-million. The remaining 22 per cent, or $4-million, was derived from Traditional sales, which are typically related to drilling activity, although a portion of Traditional sales for the quarter was related to one of the large transactions. The strong Transactional sales in the quarter were driven by robust consolidation activity in the Canadian oil and gas sector, which led to two material transactions for PSD, one of which still includes $9.7-million of revenue that is expected to be recognized before April 15, 2022.”
Pointing to the debt reduction, Mr. Foscolos, currently the lone analyst covering the stock, raised his target for Pulse Seismic shares to $2.50 from $2.40, reaffirming a “speculative buy” recommendation.
“We remain constructive on the outlook for Canadian oilfield activity, and believe PSD is positioned to continue generating strong levels of FCF and repay its remaining debt in the near term, after which we believe the Company would seek to return cash directly to shareholders via an NCIB or dividend,” he said.
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In second-quarter earnings preview for precious metals companies, Desjardins’ John Sclodnick made a pair of ratings changes.
Expecting an earnings beat, he raised Lundin Gold Inc. (LUG-T) to “buy” from “hold” with a $14.50 target, up from $14 but below the $14.97 average.
“Some estimates do not appear to reflect the inventory build from 1Q which was sold in 2Q,” he said. “We also have conviction on an Equinox EQX production miss due to seasonal weakness in Brazil as a result of the rainy season, the low Mesquite stacking rate in 1Q and the impact of the blockade at Los Filos.”
“The stock is now trading at 0.77 times NAV and 12 per cent below its average P/NAV over the past two years on a consensus basis, and below the average premium vs peers over that time (currently 22 per cent vs the average at 26 per cent). It traded at a 70-per-cent premium to peers when we initiated coverage with a Hold rating.”
Conversely, Mr. Sclodnick downgraded Wesdome Gold Mines Ltd. (WDO-T) to “hold” from “buy” based on valuation concerns. His target slid by $1 to $13, sitting below the $14.41 average.
“We no longer see sufficient upside to our target with an implied return of 6 per cent and the stock trading at 1.16 times NAV vs junior peers at 0.68 times and intermediate peers at 0.66 times,” the analyst said.
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In other analyst actions:
* TD Securities analyst Brian Morrison dropped Martinrea International Inc. (MRE-T) to “buy” from “hold” with a $17 target, which is below the $18.69 average on the Street.
* TD’s Aaron MacNeil increased his Mullen Group Ltd. (MTL-T) target to $18.50 from $18, exceeding the $15.02 average, with a “buy” recommendation.
* In the wake of the announcement of the acquisition of Collision Works, which operates 35 collision repair centre locations in Kansas, Missouri, and Oklahoma, after the bell on Wednesday, BMO Nesbitt Burns analyst Jonathan Lamers hiked his target for Boyd Group Service Inc. (BYD-T) to $272 from $248 with an “outperform” rating. The average is $239.31.
“Year-to-date, the shop count has increased 13 per cent (or 93 shops), a faster pace than we had forecast (88 shops for full-year 2021) and ahead of the rate needed to achieve the company’s 2025 target to double revenue. This should address any recent market concerns regarding the feasibility of capital deployment goals. After increasing our estimates and rolling forward one quarter, our target price increases.”
* Raymond James analyst Brad Sturges raised his targets for a pair of Canadian office real estate investment trusts, seeing the sector’s fundamentals “showing signs of stabilization.
With an “outperform” rating, he increased his Allied Properties REIT (AP.UN-T) target to $52 from $50, exceeding the $47.98 average.
Mr. Sturges’s target for True North Commercial REIT (TNT.UN-T) rose to $7.50 from $7.25, topping the $7.20 average, with a “market perform” recommendation.
* Ahead of the Aug. 5 release of its quarterly results, Canaccord Genuity analyst Derek Dley raised his Maple Leaf Foods Inc. (MFI-T) by $1 to $38 with a “buy” rating. The average target is $35.79.
“While we recognize investors are unlikely to award Maple Leaf with the full value of its plant-based business given uncertainty surrounding its longer-term potential, the shares appear to be trading at a discount to even the book value of the plant-based segment, which we believe is unwarranted,” he said. “In our view, Maple Leaf continues to offer long-term investors an attractive growth profile at an inexpensive valuation, given the company’s leading market share, strong balance sheet, and high-quality brand portfolio.”
* After hosting investors meetings with reinforced his positive view on Haivision Systems Inc. (HAI-T), Canaccord’s Robert Young raised his target for the Montreal-based company by $1 to $14.50 with a “buy” recommendation. The average is $13.88.
“We came away with better insight on the near-term outlook and opportunities related to the recent acquisition of CineMassive,” he said. “As noted previously, we believe CineMassive is highly complementary and consistent with the expectations on timing and size set through the IPO; management is doing what it said it would do. CineMassive facilitates the creation of a more mature state/local and public safety vertical while shifting mix towards government/defense. Haivision sees opportunities to materially increase CineMassive’s sales reach and add an additional lever of organic growth through expansion beyond the current US focus. Haivision stated it is continuing to evaluate M&A targets that may yet fall in 2021. To augment liquidity or M&A, Haivision is in the process of amending and increasing its credit line. Given Haivision’s steady execution of communicated goals and our increased estimates to include CineMassive, we are increasing our price target.”
* Canaccord’s Doug Taylor increased his Avante Logixx Inc. (XX-X) target to $2.75, matching the consensus, from $2.50 with a “buy” rating.
“Following Avante’s March quarter results, we have made small increases to our EBITDA forecasts as the company continues to maintain cost discipline while targeting further double-digit organic growth in the years ahead. The improving cash flow profile, consistency, and declining leverage argue for further multiple re-rating, in our view,” he said.
* Susquehanna analyst John Coffey raised his target for Shopify Inc. (SHOP-N, SHOP-T) shares to US$1,800 from US$1,500. The average is currently US$1,549.65.
* National Bank Financial analyst Richard Tse increased his CGI Inc. (GIB.A-T) target to $135 from $120, exceeding the $118.73 average, with an “outperform” recommendation.
* JP Morgan analyst Jeremy Tonet raised his Enbridge Inc. (ENB-T) target to $54 from $53 with an “overweight” rating. The average is $52.94.
* JP Morgan’s Ryan Brinkman cut his Magna International Inc. (MGA-N, MG-T) target to US$110 from US$114 with an “overweight” recommendation. The average is US$110.17.
David Leeder