Inside the Market’s roundup of some of today’s key analyst actions
Recent developments in legal issues swirling around SNC-Lavalin Group Inc.’s (SNC-T) present investors with an “attractive” buying opportunity, according to Desjardins Securities analyst Benoit Poirier, calling its current valuation “too compelling to ignore.”
On Wednesday, the Public Prosecution Service of Canada revealed it would not agree to negotiate a deal with the Montreal-based engineering and construction firm on fraud and corruption charges.
“This implies that SNC would have to go to court to resolve the legal issues with the Canadian government instead of reaching an agreement out of court through the recently implemented DPA,” said Mr. Poirier. “We estimate that it could take up to 5–7 years to resolve the issue in court. SNC indicated that it strongly disagrees with the DPPSC’s current position and remains committed to negotiating an agreement with the government instead. We would welcome such a decision as it would allow SNC to resolve its legal issues and avoid an extended period of uncertainty.
“Assuming that both parties go to court, SNC would continue to operate normally until an agreement/verdict is reached. As of now, SNC’s operations in Canada would continue to operate as they have since charges were laid in 2015. At the time, SNC had signed an administrative agreement with the Canadian government that allowed SNC to continue to contract and supply it despite the federal charges pending against it. Down the road, SNC may have to pay a fine and could be banned from doing work for the federal government for 5–10 years if found guilty. We estimate that SNC’s exposure to the Canadian government is less than 15 per cent of total revenue.”
In reaction to the announcement, SNC-Lavalin shares dropped as much as 15 per cent to $43.82, its biggest intraday decline since February of 2012. The stock closed down 13.48 per cent at $44.86.
Mr. Poirier called that fall “overstated” and emphasized the opportunity now presented to long-term investors, including a potential return of 60 per cent to his target price.
Keeping a “buy” rating for the stock, the analyst lowered his target to $72 from $75 after an adjustment to his valuation multiple for the company’s engineering and construction segment to “reflect the uncertainty related to the settlement of legal issues.” The average target on the Street is currently $66.83, according to Bloomberg data.
“Overall, while we are disappointed by the recent legal developments, we believe the current valuation disconnect (SNC is trading at 4.0x P/E FY2 while its peers are trading at 14.1x on average) is unwarranted in light of SNC’s robust E&C business and the numerous catalysts ahead (Highway 407 divestiture, potential share buybacks, etc),” he said.
Elsewhere, CIBC World Markets’ Jacob Bout downgraded his rating for the stock to “neutral” from “outperform” with a target of $52, falling from $68.
Mr. Bout said: “While we believe that ultimately cooler heads will prevail, it may take years for a resolution. If this drags on in the courts, headline risk will continue to weigh on SNC’s valuation and share price. We have made no changes to our 2018/2019 estimates, but have lowered our target multiple on the traditional E+C business from 9 times to 6.5 times EBITDA.”
=====
Despite possessing “above average” growth prospects, Canadian Western Bank (CWB-T) continues to trade at a discount to its peers, according to Canaccord Genuity analyst Scott Chan, leading him to upgrade his rating for its stock to “buy” from “hold.”
“With significant stock relative underperformance year-to-date (down 14 per cent) versus Big-6 banks at an increase of 2 per cent, we view shares as more attractive with a total RoR [return on revenue] of 19 per cent,” said Mr. Chan. “We see strong NII [net interest income] growth trends (e.g. double-digit loan growth, NIM expansion) and stable credit conditions that should help contribute to Canaccord Genuity’s highest EPS growth expectations among Canadian banks (average of 12 per cent for F18E/F19E). CWB shares are relatively attractive trading at a P/E (NTM) of 10.4 times, which is a 13-per-cent discount to its historical average and 5-per-cent discount to peers (vs. 9-per-cent historical premium). Further, CWB’s incoming transition to AIRB (F2020) will release significant excess capital further improving the EPS and ROE profile of the firm. We view CWB as a core mid-cap holding with significant relative stock outperformance over time.”
Mr. Chan maintained a target price for the bank’s shares of $38, which falls 45 cents below the consensus.
=====
CannTrust Holdings Inc. (TRST-T) is “one of a handful of producers positioned to excel” in the early days of the legal marijuana market, according to Beacon Securities analyst Russell Stanley.
“We believe that shelf space has become the new battleground in the Canadian market,” he said. “On a mid/long-term basis, winning this battle will require the capacity to produce on a large-scale basis in terms of both volume and product breadth. Moreover, as additional production capacity comes online, we expect price compression for standard dried flower products, which will make the development and commercialization of higher value products (e.g. oils/extracts, capsules and creams in today’s market, and vape pens, edibles and beverages for tomorrow’s) increasingly important.
“TRST already excels on both fronts, and we expect that to continue. The Company is already the market leader in terms of revenue mix, as 60 per cemt of last quarter’s cannabis revenue came from the sale of oils/extracts. This weighting is approximately 2 times the weighted average amongst major producers of 30 per cent, and puts CannTrust well ahead of its closest peers at the 45-per-cent level. We believe this demonstrates the Company’s ability to deliver and achieve market penetration for value-added products. Through partnerships with Apotex and Club Coffee L.P., TRST is well positioned to continue developing and commercializing higher value products that should help the Company further penetrate both the recreational and medical markets.”
In a research report released Thursday, Mr. Stanley initiated coverage of the stock with a “buy” rating.
“CannTrust is already one of the largest producers in the space, with a current annualized cultivation capacity of 50,000 kilograms, and a fully-funded Phase 3 expansion on track to take that to 100,000 kilograms plus,” he said. “This puts TRST in the upper tier of producers in terms of scale, which we believe will be important to provincial buying authorities as it helps ensure reliability of supply.
“Importantly, CannTrust has already secured supply agreements with eight provinces, the only notable exceptions to date being Quebec and Saskatchewan. The Company also recently announced entering a letter of intent with Canada’s largest beverage alcohol broker of premium spirits, wine and beer brands (Breakthru Beverage Group).”
Seeing multiple potential catalysts for the stock, Mr. Stanley set a target price of $21, exceeding the consensus of $16.11.
“We believe that a U.S. exchange listing is a likely initiative for the Company in the near-term,” he said. “With just three current U.S.-listed peers trading at an average of 99 times EV/calendar 2020 estimated EBITDA based on consensus estimates (ranging from 37 times to 163 times), the multiple lift could be significant. With an existing relationship with Apotex covering the pharmaceutical space, we expect CannTrust to develop similar partnerships for other verticals.
“Finally, we believe that CannTrust’s fully-funded large scale production platform, leadership in higher value products, and supply agreements in eight provinces make CannTrust an ideal acquisition target, particularly for companies from other industries looking for a platform transaction to enter the space.”
=====
Goeasy Ltd. (GSY-T) is “cashed up and ready to grow,” said Desjardins Securities analyst Gary Ho upon resuming coverage of Mississauga-based alternative financial company following its $46.5-million equity financing.
“While this offering is dilutive near-term until excess cash is put to use to fund loan book growth, we believe it provides added financial flexibility for GSY,” said Mr. Ho. “Not only does it increase GSY’s available capital by $45-million (assuming over-allotment), it also lowers its net debt/total capital to 64 per cent from 69 per cent. Put another way, this $45-million creates an added buffer for GSY to increase its debt by $105-million, assuming a 70/30 debt/equity mix. By our estimate, GSY now has financial capacity for growth well into 2020.”
“One of the criticisms from investors has been the lack of liquidity on GSY stock. According to Bloomberg stats, insiders control 25–30 per cent of the outstanding shares while Fiera/Natcan (through its funds) owns another 15 per cent. The balance of 55–60 per cent represents 7.5–8.5 million shares. We believe the offering of 0.92m shares (including over-allotment) helps to improve the stock’s trading liquidity."
Ahead of the early November release of its financial results from the third quarter, which he emphasized is a typically slow period, Mr. Ho raised his earnings per share projection for the full fiscal year to $3.40 from $3.30. His revenue estimates for both 2018 and 2019 also increased (to $504-million and $613-million, respectively, from $503-million and $611-million).
“In terms of forward-looking indications, CPI and unemployment readings as well as oil price estimates all edged slightly higher— we do not expect a material impact on allowances for loan losses. Our 2019 estimates are largely unchanged. The dilutive impact from the equity offering was offset by refinements to our model assumptions and financing costs.”
Keeping a “buy” rating for its shares, his target rose to $58 from $55. The average is currently $64.40.
Mr. Ho said: “Our investment thesis is predicated on: (1) management executing on targets given its track record in meeting/exceeding past targets; 2020 guidance sees the loan book doubling; (2) with the exit of two incumbents, the non-prime consumer lending market is underserved (particularly in Quebec); (3) with scale, the business could generate ROE [return on equity] of 26 per cent plus; and (4) we expect double-digit dividend growth in the next few years.”
Elsewhere, Raymond James’ Brenna Phelan lowered her target to $65 from $67.50 with an “outperform” rating (unchanged).
Ms. Phelan said: “We view goeasy as a uniquely high-growth story, catering to an underserved market with significant demand and fragmented competition and executing with effective and reliable credit adjudication and underwriting. Now armed with $46.5-million of new equity capital, our model suggests that goeasy has the flexibility to accelerate loan growth beyond its recently released targets, and we believe there may be potential upside to our numbers. On current estimates, a 38-per-cent loan growth CAGR [compound annual growth rate] coupled with strong operating leverage drive our forecast 31-per-cent 3-year EPS CAGR through 2020. Layering in some modest multiple expansion to reflect these attributes, we think goeasy’s next two years of share price performance will look a lot like its last two.”
=====
Desjardins Securities analyst Justin Bouchard moved BlackPearl Resources Inc. (PXX-T) to “tender” from “buy” after Wednesday’s announcement that it has been acquired by International Petroleum Corp., expecting the deal to close in December.
Under the agreement, Vancouver-based IPC will acquire each share of BlackPearl based in exchange for 0.22 shares of IPC.
“The combined entity will give PXX shareholders exposure to an international, geographically diversified asset base with a mix of long and short-cycle capital allocation options,” said Mr. Bouchard. “As part of a larger and better-capitalized business, PXX shareholders may also benefit from potential upside related to the target’s heavy oil growth opportunities, particularly Blackrod (under the right commodity and egress environment).”
To reflect the implied price of the deal, Mr. Bouchard raised his target for BlackPearl shares to $1.85 from $1.75. The average is $1.82.
=====
Calling it an “opportunistic upgrade,” Citi analyst Mark May moved GoDaddy Inc. (GDDY-N) to “buy” from “neutral”
“As the market corrects, we scour our coverage universe to see if companies we fundamentally like but that were Neutral rated due primarily to valuation have reached valuation levels that result in a change in our investment view – and GDDY meets that criteria,” he said.
“GDDY is a nicely profitable, high FCF generative business with highly recurring subscription-based revenue, a stable competitive landscape, and a strong management team with a track record of execution.”
Mr. May is projecting revenue growth for the Arizona-based internet domain registrar and web hosting company of 15 per cent for the third quarter, 14 per cent for the fourth quarter and 11 per cent for fiscal 2019. Those estimates largely fall in line with the expectations of the Street.
“GoDaddy will face slightly tougher comps as it anniversaries the Main Street Hub acquisition and strong Domain revenue growth (after-market sales), but we believe those are largely factored in,” he said. “We forecast operating income of $241-million and unlevered FCF of $788-million in 2019. While consensus operating income and EPS estimates may not fully incorporate growth- and efficiency-related investments such as the cloud/AWS migration, we believe investors will look through these if they result in near-term negative EPS revisions.”
Mr. May maintained a US$86 target for GoDaddy shares, which 43 US cents higher than the consensus.
=====
Parkland Fuel Corp.’s (PKI-T) $1.57-billion acquisition of a 75-per-cent interest in Barbados-based SOL Investments Ltd. is “strategically compelling,” said Desjardins Securities analyst David Newman.
“Beyond leveraging SOL’s assets, such as retail and commercial, we view the supply synergies as one of the key elements of the deal, which should serve to: (1) link significant Caribbean fuel demand with supply opportunities on the U.S. Gulf Coast; (2) leverage the overlap in refiner partners; (3) gain greater access to global product flows; and (4) exploit additional arbitrage opportunities across the combined footprint,” said Mr. Newman. “We believe the deal should provide earnings stability, serve to dilute the more volatile components of the business (Parkland Refinery, perhaps with a valuation rerating in time), support PKI’s U.S. dollar cash flows, and provide another platform for growth and strong potential synergies.”
With the deal for the Caribbean’s largest independent petroleum distributor, Mr. Newman increased his adjusted EBITDA projection for 2019 to $1.1-billion from $855-million, while his adjusted free cash flow per share estimate jumped to $4.38 from $3.90.
“SOL’s retail and commercial business have been somewhat stable, with consistent performance over the last three years,” he said. “While retail gas is relatively regulated in certain Caribbean countries, some aspects of the commercial business are also regulated, eg diesel and fuel oils. This lends itself to stability in the story, along with increased diversification from the North American market, but with upside based on expansion and expected growth in the region, especially in certain areas. In retail, the company expects to roll out its existing private-label loyalty plan and enhanced food offer across SOL’s retail footprint. It also anticipates strong LPG (propane) growth.
“Beyond leveraging SOL’s assets, such as retail and commercial, we view the supply synergies as one of the key elements of the deal. As noted, the deal allows the company to leverage its ’fortress’ assets in stable markets across the Caribbean region.”
Maintaining a “buy” rating for Parkland shares, Mr. Newman hiked his target to $50 from $47, which sits above the average of $48.86.
“PKI offers a potential total return of 15.5 per cent, with a mix of strong growth and stable yield, as well as catalysts given the integration of the CST, CCL and SOL acquisitions (including synergies),” the analyst said.
Elsewhere, Canaccord Genuity's Derek Dley raised his target to $57 from $50 with a "buy" recommendation (unchanged).
Mr. Dley said: “In our view, SOL represents another home run acquisition for Parkland. There is material overlap between refinery partners within Parkland’s existing Canada/U.S. business and SOL, which should further enhance Parkland’s supply advantage. Importantly, adding Gulf Coast and European supply exposure should further enhance Parkland’s procurement abilities, along with its supply and arbitrage ability, as the Gulf Coast remains a market where fuel supply is long (i.e., cheap). In our view, this should lead to better than expected supply and wholesale performance going forward and will be instrumental in Parkland meeting, or exceeding, its synergy targets.”
=====
In other analyst actions:
Citing a 35-per-cent implied return to his revised target for its stock, Canaccord Genuity analyst Dalton Baretto upgraded First Quantum Minerals Ltd. (FM-T) to “buy” from “hold” with a target of $19.50, up from $18. The average is $21.58.
Mr. Baretto downgraded Nevsun Resources Ltd. (NSU-T) to “hold” from “buy” with a $6 target, which is 7 cents higher than the consensus.
Tudor Pickering & Co analyst Matthew Murphy upgraded Imperial Oil Ltd. (IMO-T) to “buy” from “hold” and raised his target to $56 from $48. The average is $45.05.
Eight Capital analyst Ralph Profiti downgraded Goldcorp Inc. (G-T, GG-N) to “neutral” from “buy” with a target of $18, down from $23 and below the average of $20.54.
Mr. Profiti upgraded Agnico Eagle Mines Ltd. (AEM-T, AEM-N) to “buy” from “neutral” with a $60 target, which sits below the average of $62.47.
He also upgraded Franco-Nevada Corp. (FNV-T, FNV-N) to “buy” from “neutral” with a $105 target. The average is $106.19.
Eight Capital’s Graeme Kreindler downgraded Tilray Inc. (TLRY-Q) to “neutral” from “buy.” He raised his target to US$70 from US$32. The average is US$98.67.
Accountability Research Corp analyst Harriet Li downgraded AutoCanada Inc. (ACQ-T) to “hold” from “buy” and dropped her target to $12 from $25. The average is $14.22.
Vertical Research Partners analyst Chip Dillon upgraded Norbord Inc. (OSB-T, OSB-N) to “buy” from “hold.”
Scotia Capital analyst Paul Steep upgraded Celestica Inc. (CLS-T, CLS-N) to “sector outperform” from “sector perform.”
David Leeder