Inside the Market’s roundup of some of today’s key analyst actions
Citing the expectation for further operating headwinds in 2019 as well as an “elevated” payout ratio and above-average financial leverage metrics, Industrial Alliance Securities analyst Brad Sturges downgraded American Hotel Income Properties REIT LP (HOT.UN-T) following weaker-than-anticipated fourth-quarter results.
On Wednesday after market close, the Vancouver-based REIT reported funds from operations for the quarter of 13 cents per unit, falling below both Mr. Sturges’s 15-cent estimate and the 17-cent result seen in the same period a year earlier. Same-property net operating income fell 0.8 per cent year-over-year, due largely to a 30 basis point decline in SP-NOI margin (to 35.1 per cent).
“Notably, premium branded hotel renovation activity in 2018 resulted impacted NOI by $4-million (or 5 cents per unit),” said Mr. Sturges. “Additionally, renovation activity during the year took longer than anticipated, due to a combination of permitting delays and the tight U.S. labour market. At Dec. 31, AHIP had $25-million in restricted cash (2 per cent of its total assets), earmarked for 11 remaining hotels comprising around 1,485 hotel rooms that are still scheduled for property improvement plan (PIP) renovations in 2019.”
Mr. Sturges sees the January shutdown of the U.S. government shutdown in January, hotel renovation activity, and inflationary pressures in its operating expenses as potential operating headwinds in 2019.
“Given AHIP’s limited access to capital, we believe AHIP’s board of directors should strongly consider revising AHIP’s distribution policy, as retained cash savings could be earmarked for debt repayment, unit repurchases, and to fund growth initiatives.” he said.
Moving the stock to “sell” from “hold,” Mr. Sturges dropped his target for HOT units to $4.50 from $5.50. The average on the Street is $8.18, according to Bloomberg data.
Pointing to higher profitability stemming from its recent $330-million acquisition of Visual Compliance, RBC Dominion Securities analyst Paul Treiber raised his target price for shares of Descartes Systems Group Inc. (DSGX-Q, DSG-T).
He pointed to the contributions of Toronto-based company as the chief reason for better-than-anticipated first-quarter baseline results.
On Wednesday, Descartes reported revenue and adjusted EBITDA of US$74-million and US$22-million, respectively, which exceeded Mr. Treiber’s projections of US$70.6-million and US$20.9-million.
“Assuming the same delta between baseline and actuals as Q4 suggests Q1 actuals at $78.5-million revenue and $28.1-million EBITDA, above the Street at $77.1-million and $27.4-million, respectively,” he said. “The upside likely stems from higher margins on Visual Compliance; we estimate baseline implies 53-55-per-cent adjusted. EBITDA margins at Visual Compliance, well above prior comments for 45 per cent. We believe management’s guidance for FY20 adjusted EBITDA up mid/high 20 per cent year-over-year is conservative. Our revised outlook calls for FY20 adjusted EBITDA to rise 31 per cent year-over-year to $123-million (prior $116-million).”
“Assuming 54-per-cent adjusted EBITDA margins on Visual Compliance suggests the acquisition is 11.8-per-cent accretive to FY21 estimated EPS, yields 16-per-cent IRR [internal rate of return], and is valued at 12-times EV/EBITDA, better than our initial estimates for 6.0-per-cent accretion, 11.9-per-cent IRR and 17-times EV/EBITDA. Moreover, higher margins from cost synergies are likely; assuming margins rise to 65 per cent suggests 19.6-per-cent accretion, 16.2-per-cent IRR and 10-per-cent EV/EBITDA takeout multiple.”
After raising his revenue and earnings projections to account for the impact of Visual Compliance, Mr. Treiber increased his target for Descartes shares to US$41 from US$38. The average is currently US$37.51.
“We believe the network effects inherent in Descartes’ business model are unique among the consolidators in our universe. Descartes has delivered 1,060 basis points margin expansion between fiscal 2018 and 2018 on economies of scale as the company has deployed capital on acquisitions,” he said. “Our Outperform thesis is based on: 1) strategic acquisitions fuel network effects; 2) consistent margin expansion and FCF growth; and 3) large, untapped acquisition opportunity.”
Meanwhile, citing its valuation, Laurentian Bank Securities analyst Nick Agostino downgraded Descartes to "hold" from "buy" with a US$35 target (unchanged).
Mr. Agostino said: “Fundamentals remain intact with DSG continuing to see organic growth opportunities fueled by a changing regulatory environment, complex logistics ecosystems, and growing interest in telematics, delivery visibility and data-driven solutions. Furthermore, ongoing global trade tensions have added another layer of end market demand in recent quarters, and should persist through DSG’s Q1/F20 (ending April). In addition, as DSG continues to work to fully harmonize its 3 acquisitions from F2019 and the recent VC transaction, we see further opportunities for both organic growth as well as margins expansion (through cost savings). Overall, we continue to like the macro drivers and tailwinds behind DSG as well as its competitive positioning and strong forward visibility.”
CIBC World Markets analyst Stephanie Price lowered raised her target to US$41 from US$40, keeping an “outperformer” rating.
Ms. Price said: “We view Descartes as well positioned, with recent margin expansion highlighting the power of the Descartes model. Given high incremental margins on the GLN, we expect further margin upside as Visual Compliance is integrated and Descartes continues to consolidate the logistics space.”
Teck Resources Ltd. (TECK.B-T) lacks positive catalysts in 2019, according to Citi analyst Alexander Hacking.
However, he called its stock “an attractive medium-term story.”
“The stock appears to be fairly priced on price-to-NAV [net asset value] valuation, while we see capital return yield potential of 7 per cent in 2019 providing downside support,” said Mr. Hacking in a research note released Thursday. “In the medium term (2020-22) the stock appears attractive with greater-than 10-per-cent FCF [free cash flow] yields and copper optionality from QB2 project and potentially NuevaUnion. We also see potential for upward re-rating as copper becomes a bigger part of the mix vs coal. In terms of relative near-term positioning we favor copper pure plays (SCCO and FM).”
In reaction to the company’s latest financial guidance, Mr. Hacking lowered his 2019, 2020 and 2021 earnings per share to $3.75, $2.49 and $1.88, respectively, from $3.82, $2.58 and $2.10, pointing to “1) lower coal production compared to earlier expectations offset by better copper volumes from higher expected grades at Highland Valley; and 2) generally higher cost guidance.”
He maintained a “neutral” rating and $30 target. The average on the Street is $38.11.
“Higher commodity prices and reduced capex spending post Fort Hills should support strong free cash flow over the next several years,” said Mr. Hacking. “This would allow the company to put debt concerns fully behind it and turn its focus toward attractive growth investment opportunities and increasing shareholder returns. Despite these positives we are taking a somewhat more cautious view on China headline risk. Given its commodity mix, Teck has relatively higher exposure to China.”
Believing its change in strategy is “worrisome," Canaccord Genuity analyst Yuri Lynk downgraded Stuart Olson Inc. (SOX-T) to “hold” from “buy.”
“Most worrying to us is management’s plan to pursue large, design-build (DB) projects,' he said. ”Here we have a contractor that traditionally pursues construction management (CM) assignments, which are cost reimbursable, that is going to compete for large, DB contracts, which are fixed price. Doing DB work is very different from CM in terms of how it is pursued, how risk is managed, and how one deals with the client during the length of the contract. With just 0.7 per cent of its backlog represented by DB projects, we don’t have a track record of success (yet) to provide us with the comfort that these new risks can be managed.
“It appears management and the Board share our view on the higher risk profile of the company. How else can we explain halving the dividend despite just a 54-per-cent payout ratio? In explaining why the Board chose to reduce the dividend to 6 cents per quarter (implying a 5.1% yield), management did note its desire to strengthen the balance sheet in order to diversify the company’s project delivery model to include larger DB projects.”
Mr. Lynk’s target fell to $4.50 from $8, which sits below the average on the Street of $5.75.
“It is uncharacteristic of us to downgrade a stock following a negative surprise that causes material share price weakness,” he said. “However, that’s exactly what we are doing following the 15-per-cent drop in Stuart Olson’s share price in reaction to a 50-per-cent cut to the dividend that management says will free additional capital required to pursue larger, fixed price projects. In our view, this introduces incremental risk to the Stuart Olson investment case that we don’t believe is adequately reflected in the stock price in order to continue to support a Buy rating.”
Though he thinks its near-term growth remains “on track,” Industrial Alliance Securities analyst Jeremy Rosenfield thinks TransAlta Renewables Inc. (RNW-T) “remains fully valued.”
On Wednesday before market open, TransAlta beat the Street with its fourth-quarter results, due largely to a stronger-than-anticipated performance from its Canadian Wind segment. Both EBITDA of $133-million and adjusted funds from operations of 41 cents exceeded the analyst’s projections ($126-million and 34 cents, respectively).
“RNW’s two U.S. wind projects remain on track: (1) Big Level, in Pennsylvania (acquired in March 2018; 90 MW; US$165-million investment; 15-year PPA; COD H2/19), and (2) Antrim, in New Hampshire (acquisition expected to close in March 2019; US$75-million investment; 29MW; two 20-year PPAs; COD in H2/19),” said Mr. Rosenfield. “RNW has funded US$81-million of equity toward the two projects, with smaller amounts of cash equity as well as tax equity still to come, but no external common equity expected.
“The portfolio of potential drop-down acquisition opportunities from TransAlta Corp. (TA-T/TAC-N, $8.25, “hold”, target $8.00) remains robust, including (1) Windrise (207MW; $270-million investment; COD Q2/21), and even (2) TA’s 50-per-cent equity ownership interest in the Pioneer Pipeline project ($90-million investment; COD in H2/19). TA has noted that Big Level, Antrim and Windrise together could generate $40-45-million of incremental run-rate EBITDA (we estimate slightly less than half of that in terms of potential run-rate CAFD to RNW, subject to financing).”
Maintaining a “hold” rating, Mr. Rosenfield raised his target by a loonie to $13. The average is $12.80.
“RNW offers investors (1) an 2.4GW net portfolio of gas & renewable infrastructure assets (~11-year weighted-average contract term), (2) an attractive dividend (8-per-cent yield, long-term 80-per-cent CAFD payout), and (3) potential longer-term growth via future acquisitions from TA or third parties,” he said. “However, with limited upside to our target we would wait for a better entry point into the name.”
In a research report entitled “The Big Brands – Fighting to Defend the Moat,” Credit Suisse analyst Kaumil Gajrawala initiated coverage of several U.S. household product and beverage companies on Thursday, pointing to slowing sales growth, “peak” margins and valuations.
Mr. Gajrawala initiated coverage of the following stocks:
Colgate-Palmolive Co. (CL-N) with an “underperform” rating and US$55 target. Average: US$63.94.
Analyst: “Colgate has leading market share globally in the growing oral care category (expected blended categories 4-6-per-cent 5-year CAGR). Our Underperform rating reflects market share losses over time and our view that the company's recent earnings rebase may be insufficient or investments may take more time to reverse trends in a changing consumer goods landscape.”
Constellation Brands Inc. (STZ-N) with an “outperform” rating and US$230 target. Average: US$208.64.
Analyst: “We believe Constellation should deliver a 6-per-cent top-line CAGR for the next three years, with free cash flow (FCF) growing 58 per cent in the same period (16-per-cent CAGR), the highest in consumer staples. A struggling wine segment, slowing yet on-plan beer segment, and uncertainty around the Canopy deal led to shares falling 24 per cent in 12 months and a P/E multiple contraction to a five-year low. STZ shares trade at a 20-per-cent discount (next 12-month P/E basis) to the group, nearly all of which have slower growth.”
PepsiCo Inc. (PEP-Q) with an “underperform” rating and US$100 target. Average: US$119.
Analyst: “We believe PepsiCo is a high-quality business, with a commanding presence in global snacks and a well-balanced beverage portfolio. However, a heavy need to invest-over a multi-year period-just to stay in place underscores a struggling beverage business and a snacking business with limited upside and growing competitive threat.”
Monster Beverage Corp. (MNST-Q) with an “outperform” rating and US$78 target. Average: US$67.
Analyst: “Supported by a strong brand and Coca-Cola distribution, Monster has grown at a more than 9-per-cent CAGR domestically since 2013 and its International business to $1-billion in revenues in a decade. Growth has been self-funded (debt-free). Monster's opportunity remains robust, while cash-flow contribution to its pristine balance sheet should drive a sizable cash return.”
Church & Dwight Co. Inc. (CHD-N) with a “neutral” rating and US$65 target. Average: US$63.55.
Analyst: “We believe that Church is uniquely structured to continue to succeed in the pressured home and personal care environment owing to its (1) brand portfolio in diverse, growing categories with contribution from both legacy and acquired brands; (2) industry-leading reinvestment in both strong years and weak years; and (3) small-size advantage. Elevated valuation (26 times) and peak margins are our main holdback.”
Procter & Gamble (PG-N) with a “neutral” rating and US$100 target. Average: US$98.31.
Analyst: “We believe P&G has made the necessary changes to drive top-line growth based on its competencies (function) rather than its aspirations (fashion). It is now better positioned to exploit its competitive advantages, in our view, and recent results suggest the plan is working (sequential organic revenue improvement over the past three quarters). We anticipate share gains and organic growth rates more closely aligned with its blended category growth of 3-4 per cent, which would be a notable improvement to recent years.”
The Coca-Cola Co. (KO-N) with a “neutral” rating and US$48 target. Average: US$50.63.
Analyst: “We are constructive on the company's new strategy to more aggressively expand its portfolio beyond carbonated beverages and focus on revenue and transactions over volume to drive growth. Ex-currency, these initiatives should drive organic top-line growth of 4-6 per cent and earnings of 8-10 per cent.”
The Clorox Co. (CLX-N) with an “outperform” rating and US$172 target. Average: US$156.24.
Analyst: “Clorox uses economic profit, a cash flow measurement, as a guiding metric for decision making and evaluation. This has (1) shaped the company's ability to earn industry-leading returns in slow-growth categories; (2) leveraged its ‘small-size’ advantage; and (3) justified strategically conservative operations abroad with a focus on profit over geographic expansion. An economic profit strategy is simple, but few companies have the discipline to trust the process. Altogether, we expect the stock's current premium (24 times) to expand as most of the rest of Bev/HPC struggles to grow, determining our Outperform rating.”
“After de-rating following the announcement of the NFX acquisition, ECA now trades at a 1.5 turn discount to peers on EV/DACF and a 25-per-cent discount on relative price/NAV yet offers attractive high-single-digit liquids growth, competitive debt-adjusted growth, and an above-average 7-per-cent free cash flow yield,” he said. “We believe the combination of executing on this plan, reducing costs and boosting oil volumes on the acquired NFX assets, and potential asset sales could serve as catalysts to re-rate its shares towards the peer average.”
Mr. Featherston’s target is US$10, which exceeds the average of 22 US cents.
“ECA should deliver 5-per-cent pro- forma companywide production growth this year (with liquids volumes up 7-per-cent year-over-year) driven by higher 15-per-cent liquids growth from its Core 3 assets (Permian, SCOOP/STACK & Montney),” he said. “Longer-term, ECA sees its portfolio sustaining high-single-digit per annum growth at relatively conservative commodity price assumptions, which we see enabling $400-$500 million per annum in surplus FCF (after divi) and an above-average FCF yield. This growth/FCF trajectory results in competitive cash flow per debt-adjusted share growth in 2019-22 but at a material valuation discount relative to peers.”
In other analyst actions:
Eight Capital analyst Graeme Kreindler downgraded Cronos Group Inc. (CRON-T) to “neutral” from “buy” while raising his target to $24 from $16. The average is $20.13.
Macquarie analyst Brian Kristjansen upgraded Baytex Energy Corp. (BTE-T) to “outperform” from “neutral” with a target of $3, rising from $2.75 but below the $3.75 average.
GMP analyst Robert Fitzmartyn upgraded Crew Energy Inc. (CR-T) to “buy” from “hold” with a target of $1.75, up from $1.50. The average is $1.85
Cormark Securities Inc. analyst Jeff Fenwick downgraded Crown Capital Partners Inc. (CRWN-T) to “market perform” from “buy” and lowered his target to $11 from $12. The average is $11.32.
Roth Capital Partners analyst Scott Fortune initiated coverage of Charlottes Web Holdings Inc. (CWEB-CN) with a “buy” rating and $26.50 target. The average is $25.75.
Eight Capital analyst Suthan Sukumar initiated coverage of Alithya Group Inc. (ALYA-T) with a “buy” rating and $6 target. The average is currently $6.15.