Inside the Market’s roundup of some of today’s key analyst actions
Believing recent market volatility has created an opportunity for investors, equity analysts at Acumen Capital revealed their “2019 Top Ideas” on Thursday.
The list consists of five stocks culled from the firm’s special situations coverage list.
“For this year’s picks, we are choosing to be more defensive and leaning towards names with proven businesses that have historically shown solid execution against a well-articulated business plan,” said analyst Brian Pow, Trevor Reynolds, Nick Corcoran and Jim Byrne. “We are also sensitive to valuations. In choosing our candidates, we used the following criteria: reasonable valuations in the context of historical trading ranges; strong cash flow generation supported by recurring revenue sources; and, strong balance sheets with below normal debt levels to fund growth strategy internally.”
The selections include three stocks with a market cap between $250-million and $750-million. They are:
Park Lawn Corp. (PLC-T) with a “buy” rating and $28 target. The average target on the Street is currently $29.44, according to Bloomberg data.
Mr. Pow: “PLC had another active year of acquisitions in 2018, with additional tuck-in transactions in Canada and major geographic expansion in the U.S.. The company now derives north of 75 per cent of its revenue from the U.S., with the combined businesses delivering a run rate EBITDA of $45.0-million– $48.0-million (trailing 12 months). In 2019, we expect Management to focus on operation projects that drive margin expansion, firm up plans for the deployment of growth capital, as well as introduce new products and services to help drive organic growth. We expect the company to continue being disciplined in its approach to acquisitions, with tuck-ins likely to be highly accretive on integration. The Company has a constructive plan, with a goal of achieving $100-million of EBITDA by 2022.”
People Corp. (PEO-X) with a “buy” rating and $8.75 target. Average: $9.46.
Mr. Pow: “PEO is once again a top pick based on a reasonable fundamental outlook and quality management team that continues to show solid execution. PEO had good success in 2018 increasing its market share through acquisitions and organic growth and carries strong momentum into 2019. We believe that the Company will have another active year of acquisitions, providing numerous catalysts for the shares.”
Pollard Banknote Ltd. (PLB-T) with a “buy” rating and $27.50 target. Average: $27.50.
Mr. Pow: “PBL returns to our top pick list in 2019 after a busy year in 2018. PBL’s performance in 2019 will continue to benefit from industry momentum (North American instant ticket retail sales grew at a CAGR [compound annual growth rate] of 6.0 per cent from 1995 to 2016) and contributions from two acquisitions completed in 2018. PBL offers a compelling valuation and attractive return to our target price. Assessing the broader macro risks, Instant tickets drive north of 80 per cent of PBL’s revenue and we note that demand for instant tickets have historically not been impacted by slower economic periods. We also like the fact that PBL earns a significant portion of its revenue from its U.S. operations with PBL’s share of the U.S. instant ticket market approaching 22 per cent. In assessing business performance, PBL’s operations provide a high return on invested capital approaching 19 per cent which stands out in our coverage universe.”
The firm also included two stocks sitting with a market cap under $250-million. They are:
Sangoma Technology Corp. (STC-X) with a “buy” rating and $2.30 target. Average: $2.37.
Mr. Corcoran: “STC was the strongest performer in our coverage universe in 2018 with a return of 77.1 per cent. We initiated on the company in May 2018, partway through an active year of acquisitions. STC acquired the Converged Communication Division of Dialogic Corporation in January 2018 and Digium, Inc. in August 2018. STC has completed six acquisitions since 2011 (and three acquisitions in the last 18 months). The company’s active acquisition strategy helps support strong organic growth. We highlight STC as a top pick in 2019 for margin expansion as Digium is fully integrated and cost synergies are realized, strong underlying organic growth, and potential acquisitions.”
Questor Technology Inc. (QST-X) with a “buy” rating and $5.35 target.
Mr. Reynolds, currently the lone analyst on the Street covering the stock: “We initiated coverage on QST in early-2018 when the stock was trading at $2.91 per share. QST had already seen a material increase in their stock price from 75 cents per share at the beginning of 2017 on the back of legislation in Colorado which banned open flares, in turn creating significant demand for QST’s best-in-class incinerator units. The company initiated a rental model and went from EBITDA of less than $0.5-million in 2016 to over $8.0-million in 2017. 2018 turned out to be a volatile year as the stock reached a high of $4.55 per share midway through the year before falling back to a low of $1.98 per share. The volatility is explained by a ballot measure in the state of Colorado which threatened to grind activity levels to a halt in what was QST’s sole rental market at the time. The ballot measure was ultimately rejected by voters in November which saw the stock begin to rebound. More recently, QST announced a significant reduction in location and key customer risk via entrance into three new markets (North Dakota, Texas, and Mexico) which all appear to offer significant upside potential. On the back of entrance into these key new markets and a continued push worldwide to address flaring and fugitive emissions, we see strong positive momentum for QST moving into 2019.”
Canaccord Genuity analysts lowered their ratings for six Canadian energy companies on Thursday in conjunction with upgrades to the firm’s commodity price deck.
“World oil prices fell dramatically in Q4/18, with WTI oil price plummeting from US$75 per barrel to US$45 per barrel in just two months, as oversupply concerns and worries of weakening demand weighed on pricing,” said analysts Anthony Petrucci, John Bereznicki, Dennis Fong and Jenny Xenos.
“Compounding the issue for Canadian producers was the widening of differentials in our country, due to increasing supply, refinery turnarounds, and lack of egress. The combined result was a significant drop in share prices for most of our companies under coverage. Although we do not believe we are completely out of the woods yet, the start of 2019 has provided some cause for optimism. OPEC cuts in late 2018 appear to have stabilized the broader market, while differentials in Canada have narrowed considerably following the government-imposed curtailment of production in Alberta.”
In reaction to the swift drop, the firm lowered its 2019 WTI forecast to US$50.00 per barrel (from US$70.00) and its Brent projection to US$60.00 (from US$75). Its long-term WTI price declined to US$55 (from US$70) and Brent to US$65 (from US$70). Its Edmonton Par-WTI differential estimates for 2019 and 2020 moved to US$10.00 per barrel and US$7, respectively, from US$13.00 and US$9.94.
The firm also dropped its AECO forecast to $1.25 per thousand cubic feet from $2 for 2019 and $1.50 from $2.50 for 2020.
“Given the significant drop in our price deck assumptions, our cashflow estimates decrease significantly (more than 20 per cent) for almost all of our companies under coverage,” the analyst said.
With those changes, the following stocks were downgraded;
Crescent Point Energy Corp. (CPG-T) to “speculative buy” from “buy” with a $7 target (from $13). Average: $8.79.
Imperial Oil Ltd. (IMO-T) to “hold” from “buy” with a $40 target (from $54). Average: $42.32.
Nuvista Energy Ltd. (NVA-T) to “hold” from “buy” with a $5 target (from $7.50). Average: $8.34.
Chinook Energy Inc. (CKE-T) to “hold” from “buy” with a 20-cent target, down from $3.50. Average: 22 cents.
Pengrowth Energy Corp. (PGF-T) to “sell” from “hold” with a 60-cent target (from $1). Average: 80 cents.
Pine Cliff Energy Ltd. (PNE-T) to “speculative buy” from “buy” with a 50-cent target (from 60 cents). Average: 39 cents.
Citing the impact of increased use by younger people and rising engagement among current users, Bank of America Merrill Lynch analyst Justin Post handed Twitter Inc. (TWTR-N) a double upgrade on Thursday, moving its stock to “buy” from “underperform.”
“Churn remains elevated, but improving metrics in the 18-29 demographic suggest more younger users are turning to Twitter,” said Mr. Post, pointing to findings from a recent social media survey. “Nine per cent of users indicated they planned to user Twitter more next year, up from 6 per cent in our 2Q survey.”
He added: “While Twitter has significantly less time spent per user than Facebook, monetization is also significantly lower than the $25 ARPU [average revenue per user] Facebook will generate globally in 2018, and $108 in the U.S. If Twitter can continue to improve engagement and targeting and build out its direct response advertiser base, comps suggest opportunities for significant ARPU increases.”
His target rose to US$39 from US$31, exceeding the consensus of US$33.11.
Expecting “robust sales growth and margin expansion” to continue, Needham analyst Rick Patel raised his rating for Nike Inc. (NKE-N) to “buy” from “hold.”
His target is set at US$85, which falls short of the consensus of US$86.41.
In a research note previewing what he expects a “volatile” year for the chemicals sector, CIBC World Markets analyst Jacob Bout raised his rating for Superior Plus Corp. (SPB-T), calling it a “very good defensive play” and feeling it would see the least downside to EBITDA in a downturn.
“We believe SPB has a good defensive model (propane is tied more to weather than to economic cycles, more residential propane with NGL acquisition, and less than 30 per cent of SPB’s EBITDA is generated from pulp chemicals),” said Mr. Bout, moving the stock to “outperformer” from “neutral.”
“SPB’s leverage is elevated, but our stress tests indicate that SPB remains well within financial covenants in a downside scenario (and a potential ERCO sale reduces net debt/EBITDA close to 2 times).”
He maintained a target of $14.50, which sits 30 cents lower than the consensus.
Conversely, Mr. Bout lowered his rating for Chemtrade Logistics Income Fund (CHE-UN-T) to “outperformer" from “neutral” with a $14 target, falling from $20 and below the $16.44 consensus.
“Our EBITDA forecasts are lowered and, similar to the rest of our Chemicals coverage, we are dropping our target multiple to reflect ongoing concerns of a global slowdown (target multiple moves from 8.5 times to 7.0 times) and the uncertain economic environment/cyclicality of chlor-alkali,” he said. “Leverage also remains a concern, with net debt/EBITDA of 4.1 times as at Q3/18. We believe that CHE.UN will continue to be a ‘show-me’ story given the number of operational/WSSC legal reserve issues in 2018.”
Though he expects both wine and beer sales in Canada to continue to show growth in 2019, Laurentian Bank Securities analyst John Chu said the industry may be “cannabis-alized” by the impact of legalized marijuana moving forward.
“Unfortunately, industry sales data is not as readily available,” said Mr. Chu in a research note released Thursday. “However, based on the LCBO’s 2019 forecast of 3-per-cent-plus sales volume growth from over a year ago we expect wine sales volumes to be growing well above beer rates. In fact, Ontario wine and Ontario VQA sales are estimated to grow at 5 per cent plus.
“Sales volume data from Beer Canada for the period ending Oct/18 shows Ontario sales volumes maintain a very modest positive last 12-month (LTM) year-over-year growth rate (0.1 to 0.7 per cent) for the past 4 months, after seeing 13 consecutive months of LTM sales volume y/y declines (from Jun/17 to Jun/18). In addition, domestic monthly sales volumes growth has outperformed imported sales for the past 11 months (since Dec/1sts for both unchanged).”
However, the analyst said he expects the legalization of marijuana will have a “negative impact” on sales, adding: “We suspect the impact will be greater on beer than wine (although, some U.S. data suggests otherwise). The impact should be modest early on given the limited number of retail options available to consumers and should pick up once edibles and beverages are introduced into the market place. We believe this risk is real and, given the deep pockets of the Canadian players as well as the major partners (Constellation Brands, Molsons), that a better tasting beverage (and edibles) will be available, which in turn should drive faster consumer uptake than what we have seen in the U.S. For that reason, we have lowered our valuation multiples for both Andrew Peller and Brick Brewing to reflect this risk (while leaving our forecast).
Mr. Chu now has a $19.75 target for shares of Andrew Peller, falling by a loonie but slightly above the $19.25 consensus.
“We are of the view that wine will be less impacted by cannabis than beer given a tendency to consume wine with food; as such, we lowered our valuation multiple to 14 times, from 14.5 times, to reflect our view of a more modest impact on the wine sector,” he said. “ADW’s move to ‘premiumize’ its product portfolio should help offset the impact. In addition, the recent sharp decline in its stock price makes the stock look very attractive at current levels.”
His target for Brick is now $4.50, which is 4 cents less than the consensus and a drop from $4.75.
“We have lowered our valuation multiple to 13 times, from 13.5 times, to reflect the impact cannabis could have on beer sales,” he said. “If not for Brick planning to produce cannabis-infused beverages, we would have reduced the multiple by a full turn. We should note that BRB’s stock is looking very cheap.”
On the heels of a 12.5-per-cent drop in share price on Wedneday, Ms. Hong raised her rating for its stock to “buy” from “neutral,” seeing a compelling risk/reward proposition stemming from the decline.
Though she thinks the company may tread water in the short term as investors grapple with recent disappointing results, Ms. Hong sees a path to outperformance, projecting beer sales growth to remain strong and a stabilization in margins.
She lowered her target to US$211 from US$243. The average is US$226.64.
CIBC World Markets analyst Cosmos Chiu upgraded Dundee Precious Metals Inc. (DPM-T) to “outperform” from “neutral” and raised his target to $6 from $4. The average is now $5.22.
Mr. Chiu said: “We see DPM shares re-rating in 2019 with the start-up of Krumovgrad, while the company continues to build on a strong operational year in 2018 at Chelopech and Tsumeb. Gold production for Q4/2018 was 45.8koz, exceeding our expectations of 44.5koz. For 2019, we expect DPM to produce 240,000 ounces at AISC of $742/oz, representing production growth of 20 per cent year-over-year at comparable costs.”
In other analyst actions:
Mr. Reardon also upgraded Capital Power Corp. (CPX-T) to “sector perform” from “sector underperform” with a $28 target, falling below the average of $29.95.
He downgraded Brookfield Renewable Partners LP (BEP-UN-T) to “sector underperform” from “sector perform” and lowered his target by a loonie to $37. The average is $41.08.
Macquarie reinstated coverage of Intact Financial Corp. (IFC-T) with an “outperform” rating and $111 target, falling short of the $113.38 average.
With a file from Reuters