Inside the Market’s roundup of some of today’s key analyst actions
Admitting he was “wrong to be so conservative” on methanol prices coming into 2018, Raymond James analyst Steve Hansen expressed “renewed conviction” for the medium term, leading him to upgrade his rating for Methanex Corp. (MEOH-Q, MX-T) based on the “robust commensurate impact” on its earnings and free cash flow profile.
“Global spot prices have proven incredibly resilient despite prior concerns over identifiable headwinds, including: (1) the planned start-up of two large-scale greenfield facilities (OCI Beaumont, Iran’s Marjan); (2) the passing of multiple facility outages through spring; and (3) the potential for a steep climb in Chinese coastal inventories through summer (up 75 per cent),” said Mr. Hansen. “While all of these variables ultimately transpired as expected, there has been little apparent impact on global prices, arguably due to additional unforeseen outages, and the increasingly attractive forward outlook.
“With the aforementioned supply risks now past, we believe the forward price outlook appears increasingly constructive. Specifically, we see several factors supporting recent pricing strength through the balance of 2018 and into 1H19, including: (1) a robust demand outlook, underpinned by the near-term start-up of three new MTO plants; (2) a dearth of new supply (relative to demand); (3) our Energy Team’s increasingly constructive view on crude; and (4) the pending arrival of winter, China’s seasonal crackdown on air pollution, and the potential for a flurry of related supply disruptions.”
With his renewed “stronger-for-longer” outlook, Mr. Hansen moved Methanex to “outperform” from “market perform” with a target price of US$90, jumping from US$72. The average target on the Street is currently US$73.30, according to Bloomberg data.
=====
RBC Dominion Securities analyst Sabahat Khan lowered his target price for Roots Corp. (ROOT-T) in reaction to Wednesday’s release of second-quarter financial results that fell short of expectations, causing its stock to fall 15.7 per cent to a record low.
The Toronto-based company reported sales for the quarter of $60.2-million, up 3.6 per cent year-over-year but below both the projections of both Mr. Khan ($65.8-million) and the Street ($64-million). Same-store sales growth of 1.1 per cent also missed the consensus (6.9 per cent).
“During H2 F2018, we expect investor focus to primarily be on SSS growth given the difficult prior year comparables and the SSS growth shortfall relative to Street forecasts during H1 2018,” the analyst said. “Although we do not yet believe that the 2019 guidance is at risk, we do foresee some risk to our forecasts over the course of H2 2018. Q2 results were impacted by weak traffic trends and management noted that this weakness has continued into Q3. Given the SSS shortfall year-to-date and the cautious management commentary for Q3, we have revised our SSS forecast meaningfully lower for H2 2018 and 2019. Our Q3 and Q4 F2018 SSS forecasts are now 3 per cent/4 per cent, versus our prior forecasts of 15 per cent/7.4 per cent (which were consistent with guidance provided at the time of IPO). Our 2019 SSS forecast is now 8 per cent (12 per cent previously).”
With that drop, Mr. Khan lowered his earnings per share projections for fiscal 2018 and 2019 to 68 cents and 87 cents, respectively, from 81 cents and 99 cents.
He kept a “sector perform” rating on Roots shares, but his target fell to $10 from $13. The average is $12.13.
Elsewhere, Canaccord Genuity analyst Camilo Lyon lowered his target to $12 from $16 with a “buy” rating (unchanged).
Mr. Lyon said: “Given the continued traffic declines into Q3, we are moderating our comp expectations for the 2H and F19 but increasing our gross margin estimates as benefits from the UBR initiative will continue well into F19. Given the growth levers in place (renovations/re-locations, e-commerce, US expansion, international growth, leather and footwear), we believe the company’s ability to achieve its F19 targets remains intact. That said, we are moderating our estimates to the lower of end of the sales/EBITDA range until we see a return to positive traffic. We maintain our BUY rating but acknowledge the company likely needs to show traffic gains before the stock can benefit from multiple expansion.”
Credit Suisse’s Michael Binetti dropped his target to $8.50 from $13, keeping a “neutral” rating.
Mr. Binetti said: “Valuation likely offers some downside protection (11 times next 12-month P/E vs specialty peers 14-16 times), but with a lack of visibility on re-accelerating top-line trends, it’s tougher to argue for multiple expansion from here.”
=====
CIBC World Markets analyst Kevin Chiang upgraded Linamar Corp. (LNR-T) to “outperformer” from “neutral” upon assuming coverage of the stock.
“Our positive view on the company is backstopped by its strong earnings growth platform; its more diverse revenue stream, which supports a higher valuation; and our view that it is trading at trough levels, providing good downside protection (its relative valuation spread versus its peer group and broader indices is generally below one standard deviation from its average over a five- and 10-year time horizon),” said Mr. Chiang.
His target for the stock is $82, up from the firm’s previous target of $70. The average is currently $79.06.
Believing it is “well positioned” for the future, Mr. Chiang also maintained an “outperformer” rating for Magna International Inc. (MGA-N, MG-T) with a US$72 target, rising from US$60 and above the average of US$67.80.
He said: “We regard MGA as well positioned for the rapid technology changes under way in the auto industry. It has a proven track record of financial discipline, with the company’s shareholder return program and its position as the bellwether amongst the Canadian auto suppliers providing downside protection. MGA trades at what we believe is an unwarranted discount to its peers.”
Mr. Chiang also assumed coverage of Martinrea International Inc. (MRE-T) with a “neutral” rating and $20 target (up from $17). The average is $19.95.
“While we see MRE, along with its Canadian auto supplier peers, trading at compelling valuations, given the headwinds facing the industry, we believe the company’s multiple has a lower glass ceiling relative to Canadian peers, with fewer near-term catalysts to drive a higher valuation,” he said.
=====
Secure Energy Services Inc. (SES-T) continues to produce growth through multiple projects, according Raymond James analyst Andrew Bradford, who said “this stock should be owned.”
“Secure’s investors could be forgiven for wondering if they keep waking up in Punxsutawney on Groundhog’s Day,” he said. “For the last six months Secure’s share price has remained range bound between $7.00 and $8.50 – hitting that $8.50 resistance in the end of August before trailing off again in the first two weeks of September. The market is, in our view, implicitly ascribing very little growth to SES in either 2019 or 2020. By contrast, we are observing consistently improving capital efficiency through new facilities and old. The 3.75-year payout on the Kerrobert Feeder Pipeline, is a prime example.”
Mr. Bradford said the company’s Midstream Infrastructure division, formerly Processing, Recovery, and Disposal) has benefitted from its recent expansion and growth capital and is now “performing well.”
“We’ve noted very encouraging volumes at the two new single well disposal facilities (Gold Creek and Tony Creek) and similarly high injection volumes from the expansion well at Big Mountain,” he said. “Taken together, these three wells are sufficient to drive a noticeable increase in SES’ overall 3Q injection volumes.
“Looking outside of Canada, the performance of SES’ 6 facilities (3 full service terminals, 2 water disposal facilities, and one landfill) in North Dakota continue to perform well. Strong volumes in North Dakota were cited as an important contributor to the higher-than-expected results in 2Q. Crude production in North Dakota is up 19 per cent year-over-year, reaching 1.2 mmbbl/d in June, while the rig count is up 20 per cent over the last 6 months.”
Mr. Bradford raised his EBITDA and earnings per share projections for fiscal 2019 to $234-million and 20 cents, respectively, from $228-million and 18 cents. He also introduced 2020 estimates of $270-million and 42 cents.
He maintained a “strong buy” rating and $14.50 target for Secure shares. The average is $12.25.
=====
Desjardins Securities analyst Benoit Poirier said he’s maintaining his bullish stance on Stantec Inc. (STN-T, STN-N) following recent meetings with its management, believing shares are poised to re-rate after the divestiture of its construction business.
“Management reiterated that the divestiture process is well underway and that it has received strong interest,” he said. “Given the synergies between the U.K. and U.S. operations, management’s preference is to divest of the entire business in one transaction. It currently sees few synergies between the construction and consulting business, and does not believe that selling the construction segment will materially impact its consulting business. It expects to receive some form of interest by the end of the month (for the U.S. only, U.K. only or for the entire business) and is confident it can complete the process by year-end. Management also reiterated that the future for the remaining core construction business (water-related) remains bright, suggesting that the price could be decent. The proceeds (after some tax gains) would be used to pay down debt.”
He added: “We remain impressed by management’s renewed focus on its core M&A strategy (small to mid-sized firms). Given that the integration of MWH is well underway, management believes the timing is right to pursue further M&A, which it views as an important driver of growth. It also confirmed that the M&A pipeline is at the highest level ever. In the year to date, STN has announced seven acquisitions, three of which were outside North America, and M&A remains an important part of STN’s strategy. Management continues to target 15-per-cent revenue growth per year over the long term, with two-thirds from M&A and one-third from organic growth.”
Mr. Poirier said Stantec’s core consulting business continues to perform well across all segments, and suggested it should be a focal point moving forward.
He kept a “buy” rating and $39 target, which exceeds the consensus of $37.36.
=====
In other analyst actions:
TD Securities analyst Timothy James downgraded Transat AT Inc. (TRZ-T) to “hold” from “buy” and dropped his target to $8.50 from $11.50. The average target is $12.
Goldman Sachs analyst Eugene King downgraded Lundin Mining Corp. (LUN-T) to “neutral” from “buy” with a target of $7.50, falling from $10 and below the average on the Street of $9.37.
David Leeder