Inside the Market’s roundup of some of today’s key analyst actions
Valuations for Canadian power and energy infrastructure stocks are currently in a “no brainer territory,” according to Raymond James analyst David Quezada, who believes several companies have been “unduly punished” as of late.
“We maintain a high degree of conviction that IPPs including Boralex, Northland Power, and Innergex each represent exceptional value at current levels and stress that valuations in these cases represent material discounts to both historical trading levels and relevant precedent M&A transactions,” he said. “Thus, while timing for normalization in these multiples is admittedly uncertain, we believe that downside is minimal. As for the regulated utilities in our coverage universe, with valuations also under pressure year-to-date, we emphasize our view of these stable, regulated businesses as an excellent place to take shelter from market volatility – something that has likely lifted these stocks over the past week. We highlight Strong Buy rated Algonquin as our top pick and maintain a constructive stance on the sector overall.”
Despite this bullish stance, Mr. Quezada downgraded his rating for Capital Power Corp. (CPX-T) to “market perform” from “outperform” with a target price of $31 (unchanged). The average target on the Street is currently $29.50, according to Bloomberg data.
“With the stock up 21 per cent year-to-date, shares of CPX have outperformed the peer group average by an impressive 35 per cent,” he said. “While we expect the stock’s valuation maintains some upside potential, we no longer expect it to outperform the broader peer group which we believe currently contains some unsustainably low valuations. Accordingly, while we continue to believe there is much to like in shares of CPX (a strong wind development portfolio, 6-per-cent dividend yield, and improved Alberta power markets) the more modest return to target relative to peers prompts our neutral stance.”
Mr. Quezada lowered his target price for shares of Polaris Infrastructure Inc. (PIF-T, “outperform”) to $22 from $28 in order to reflect ongoing civil unrest in Nicaragua. The average is $23.50.
He also lowered his target for TransAlta Renewables Inc. (RNW-T, “market perform”) by a loonie to $12.50, which is 48 cents lower than the consensus.
iAnthus Capital Holdings Inc. (IAN-CN) is currently being overlooked by investors, said Beacon Securities analyst Russell Stanley, who believes U.S. cannabis companies offer “compelling” valuations relative to their Canadian peers.
On Oct. 18, New York-based iAnthus announced a $835-million merger with MPX Bioceutical Corp. The agreement is the first public-to-public merger transaction in U.S. cannabis history.
“Despite its longer history as a public company, we believe IAN has been overshadowed of late by other multistate operators (both public and private), and more generally by market volatility that took hold just as the acquisition of MPX was announced,” said Mr. Stanley upon resuming coverage of the stock. “We firmly believe that the MSO theme is one that investors must play, and that IAN’s existing assets in New York and Florida, combined with MPX’s $50-million-plus revenue business in Arizona, and growth assets in Nevada and Maryland, create a very attractive portfolio. Despite having comparable pro forma scale (in terms of state coverage and addressable market sizes), IAN’s market capitalization is just over half of that of its closest peers.
“We believe closing of the MPX transaction (expected in January 2019) is the most significant near-term catalyst for this stock. Moreover, the imminent public listing of a number of other MSOs should attract additional attention to this sub-category of the cannabis space, which should support a re-rating for IAN.”
Mr. Stanley maintained a “buy” rating and $12.50 target for iAnthus shares. The average is $10.08.
“Cannabis companies with operations in the United States now trade an average multiple discount of 72 per cent relative to Canadian operators (9.9 times versus 35.1 times enterprise value-to-calendar 2020 estimated EBITDA, based on consensus expectations),” he said. “We view this discount as unsustainably high, and expect multiples to converge as investors will eventually realize that U.S. operating companies generally offer investors more established business models with far broader product suites and greater participation throughout the value chain (cultivation, manufacturing/production and retail).
“The only rational reason we see for any discount is cannabis’ current federal status in the United States. However, given the increasing voter support for legalization in the U.S., and President Trump’s commitment to back congressional efforts to protect states that have legalized cannabis, we believe the real risk of federal interference has declined materially since last April. Despite these developments, the discount at which U.S. operating companies trade has actually increased. This disconnect creates a significant opportunity for investors.”
Minto Apartment Real Estate Investment Trust (MI.UN-T) presents investors with an “attractive” opportunity to invest in an “institutional quality“ Canadian multi-family REIT, said Canaccord Genuity analyst Brendon Abrams, who initiated coverage of the equity with a “buy” rating.
“We attribute this to its portfolio, operating platform, executive team, and governance,” said Mr. Abrams. “With the support and by leveraging the relationships of the Minto Group, we expect Minto to successfully execute its growth strategy and become a household name among Canadian REIT investors.”
In justifying his rating, the analyst pointed to Minto’s “high-quality” portfolio in “high-barrier-to-entry” urban markets, pointing to “red hot” investor demand for apartments, particularly in Ottawa and Toronto.
He also pointed to multiple levers for growth, noting: “We expect meaningful organic NOI [net operating income] growth (5 per cent per annum) as Minto captures market rents on tenant turnover which significantly exceed its in-place rents. The REIT estimates this opportunity can add $5-million to annualized NOI. We also expect attractive acquisition opportunities for the REIT as it leverages its relationship with Minto and has favourable access to many of Minto's existing multi-family investments. We estimate the REIT has the capacity to acquire approximately $200-million of assets without raising additional equity.”
Mr. Abrams set a price target of $19.25 per Minto unit. The average is $18.96.
“We believe Minto’s units should trade at a premium to NAV based on the institutional quality of the REIT, expected cash flow per unit growth (7 per cent per annum), and the value we expect will be created as it executes its growth strategy,” he said. “Combined with a 2.3-per-cent distribution yield, our target price implies a one-year total return of 12.6 per cent.”
Sentiment toward the Canadian asset management sector is currently “weak,” according to Desjardins Securities analyst Gary Ho, who emphasized valuations sit in “near-trough” multiples.
“In 3Q18, share prices for the group dropped 6.1 per cent (down 8.3 per cent so far in October), underperforming the S&P/ TSX Capped Financials Index, which gained 3.0 per cent (down 5.6 per cent),” said Mr. Ho in a research note previewing third-quarter earnings season.
“Gluskin Sheff, AGF and CI Financial lagged the group, declining 31.8 per cent, 20.5 per cent and 20.1 per cent, respectively, since the end of June. For 3Q18, we believe investors will focus on themes related to the recent market volatility: (1) positioning of portfolios, (2) net flows outlook (September industry net outflows of $1.4-billion were the worst in the past decade), and (3) ability to control discretionary expenses given top-line pressure. Sector valuations have contracted recently and are now at or near all-time lows due to market uncertainty.”
Mr. Ho decreased his target price for five of the six stocks in his coverage universe to reflect lower multiples.
His changes were:
AGF Management Ltd. (AGF.B-T, “buy”) to $8 from $8.50. Average: $7.46.
IGM Financial Inc. (IGM-T, “buy”) to $42 from $46. Average: $43.13.
Fiera Capital Corp. (FSZ-T, “buy”) to $14 from $15. Average: $14.64.
Gluskin Sheff Associates Inc. (GS-T, “hold”) to $14 from $17.50. Average: $14.
CI Financial Corp. (CIX-T, “hold”) to $21 from $24. Average: $24.13.
He maintained a target of $2.75 for Sprott Inc. (SII-T, “hold”), matching the current consensus.
The Toronto-based real estate services company reported adjusted EBITDA for the period of $59-million, missing the projections of both Mr. Bastien ($61-million) and the Streret ($60-million) despite representing an increase of 13 per cent. Adjusted earnings per share of 89 cents also fell short of expectations (94 cents and 90 cents, respectively).
“There were no major disappointments in the quarter, to be clear, but the organic growth, M&A lift and margin gain each fell shy of our respective targets, amplifying the negative variance to our EBITDA forecast,” he said. “We note that 3Q18 marked the first quarter of single-digit top-line growth since FirstService’s split from Colliers, further underscoring just how high the bar had been raised for the firm.”
He added: “[FirstService Brands] continues to profit from a strong home improvement market in the U.S., with high single-digit growth very much in the cards for 2019. It is true multiples for standalone franchises have been creeping up, likely deterring FSV from pulling the trigger on a sizeable deal anytime soon. Keep in mind, however, that the company-owned strategy has a few years left before it runs its course. For proof consider the three tuck-in acquisitions completed during the quarter, including two Paul Davis Restoration outlets in Kentucky and Seattle and a California Closets in Houston (the brand’s 5th largest U.S. market). Meanwhile, few property managers can compete head on against [FirstService Residential] when it comes to full-blown service offerings for high-rise buildings and master planned adult communities. This defendable market share gives us confidence the division can sustain much improved margins down the road.”
Keeping a “market perform” rating, Mr. Bastien lowered his target for FirstService shares to US$76 from US$83. The average is US$80.75.
“Over the past three years we have witnessed FirstService’s tried-and-tested business model gain a broader investor following and its valuation expand materially (both deservedly so),” he said. “But with earnings growth decelerating and the market less willing to pay up for stocks amid mounting macro risks, we continue to wait for a greater margin of safety or an improved relative valuation before recommending the stock.”
Following the release of “mixed” third-quarter results on Wednesday, Canaccord Genuity analyst Carey MacRury thinks 2018 is “coming up short” for Goldcorp Inc. (G-T, GG-N), but he thinks 2019 is “still looking much better.”
“While 2018 has been disappointing, Goldcorp has provided more detailed mine-by-mine guidance than usual for Q4/18 that indicates significant improvements are expected,” the analyst said. “Overall, Goldcorp is forecasting 620,000 ounces in Q4, a 23-per-cent improvement versus Q3. The improvement is expected to be largely driven by Cerro Negro (up 50,000 ounces quarter-over-quarter on 25-per-cent higher throughput and 30-per-cent higher gold grade), Penasquito (up 32,000 ounces on 15-per-cent higher throughput and 45-per-cent higher gold grade), and Eleonore (up 24,000 ounces on 15-per-cent higher throughput and 10-per-cent higher grade).”
“We continue to forecast a significant improvement in 2019 with production rising 16 per cent year-over-year, operating cash flow increasing 29 per cent and capex decreasing 26 per cent resulting in FCF swinging to $591-million from -$39-million in 2018.”
Despite this optimism, Mr. MacRury lowered his target price for Goldcorp shares to $19.50 from $21 after dropping his net asset value estimate. The analyst consensus target is $19.36.
Elsewhere, Cormark Securities analyst Richard Gray downgraded the stock to “market perform” from “buy” with a target of $16.50, falling from $23.
In other analyst actions:
TD Securities analyst Timothy James upgraded Bombardier Inc. (BBD.B-T) to “speculative buy” from “hold” with a $5 target. The average on the Street is $5.83.
Wolfe Research analyst Daniel Galves upgraded Tesla Inc. (TSLA-Q) to “outperform” from “peer perform.”