Inside the Market’s roundup of some of today’s key analyst actions
BMO analyst Troy MacLean downgraded Pure Multi-Family REIT (RUF-UN-T) to “market perform” now that no competing takeover bid is likely for the company.
The REIT previously announced it has an agreement to be purchased by Cortland Partners LLC for US$7.61 per unit in an all-cash transaction valued at US$1.2-billion including net debt.
After Wednesday’s market close, the REIT announced that the financial adviser running the “go shop” process related to its agreement with Cortland has advised the board that no superior proposals have been received. American Landmark/Electra America, which also made an offer for the REIT, has informed Pure Multi-Family that it “wished Cortland all the best in bringing the transaction to a satisfactory conclusion."
“Given the absence of a higher bid, and the relatively short time remaining in the ‘go shop’ period, we are downgrading Pure units,” said Mr. MacLean. His price target is $7.61.
“Turning more cautious” based on “worse than expected” global trade tension, Citi analysts lowered his metal price forecasts for the second half of 2019.
“Our 2H19 bear scenario has rapidly become our base case, on the back of an unanticipated ratcheting up of U.S.-China trade frictions,” the firm said in a report released late Wednesday.
"In recent Metals Weeklies we’ve recommended clients wait out the summer, with prices likely drifting lower before a potential upward turn in the Autumn (September) on the back of a sustained improvement in the Chinese credit impulse. The recent trade war escalation has made the landscape more bearish, however. With both the U.S. and China hardening in their stances, it appears that the only way out is for the markets to move lower, and growth to move lower, in order to encourage President Trump to ease up. Even if Trump eases up, the market may increasingly fear that US-China trade tariffs and tensions may remain through to the next Presidential election. Longer-term, our 2020 baseline expectation of a rebound in growth on a 1Q’20 trade deal and further Chinese easing is intact – but barely so."
Copper and aluminum saw the largest reductions in price forecast, while the firm said precious metals remain a “relative” safe haven.
"2020E forecasts are largely unchanged and the team is most bullish on copper assuming that a trade deal is reached," they said.
With those changes, analyst Alexander Hacking lowered his financial expectations for First Quantum Metals Ltd. (FM-T) based on copper price cuts.
That led to a drop in Mr. Hacking’s target price for shares of First Quantum to $11 from $13 with a “neutral” rating (unchanged). The average target on the Street is $16.47, according to Thomson Reuters Eikon data.
"We are also using a slightly lower multiple (consistent with Freeport McMoRan) to reflect increased risk around trade wars & global growth," he said.
Mr. Hacking added: “We rate First Quantum at Neutral. The company is ramping up the Tier 1 Cobre Panama mine that should generate strong FCF. Yet, this is offset by increased Zambia risk (1/3rd of NAV) and relatively high debt levels, in our view. Zambia sales tax implementation was recently delayed from Sept 1 to Jan 1.”
Though he acknowledged the timing isn’t ideal, Raymond James analyst Ben Cherniavsky raised his rating for shares of Finning International Inc. (FTT-T) following a “solid” second-quarter earnings beat “in light of prevailing headwinds and the ‘tough comp’ nature of 2Q18′s high watermark.”
“We are upgrading our rating on Finning shares to Outperform,” he said. “We realize that this may appear to be an inauspicious time to turn more constructive on such an historically cyclical business with exposure to emerging markets, copper, Brexit, and pipeline politics. Indeed, following the ‘reaction rally’ to the company’s 2Q19 'beat, we would not be surprised to see the shares drift lower on mounting macro concerns. However, for reasons provided below we would view this as an opportunity for long-term investors to begin accumulating a position in the stock.”
In justifying his move to "outperform" from "market perform," Mr. Cherniavsky pointed to four variables:
- Finning's current valuation, noting: "Since our Feb-21-19 downgrade, Finning's shares have declined 6 per cent (vs. a rise of 2 per cent for the TSX) while our EPS forecasts have moved up on stronger than expected execution and an operating environment that has held up better than we had initially feared. As a result, the 2019 P/E multiple for Finning has compressed to just 12 times, which is at the low end of its long-term valuation range."
- Finning South America’s (FINSA) margins “appear to be back on track following the derailment of its ERP system implementation late last year.”
- He sees "enough bright spots in Finning's regions to keep the lights on and lend support to the company's declining backlog. These include: (i) the infrastructure narrative; (ii) replacement/rebuild demand in the mining sector; (iii) production growth in the oil sands; (iv) LNG in British Columbia; and (v) recent changes to more business-friendly governments in Alberta and Chile."
- Operational improvements, which he refers to as “the New New Finning narrative.”
Mr. Cherniavsky increased his target for the stock to $28 from $27, which exceeds the current consensus of $27.89.
In the wake of the release of largely in-line second-quarter financial results after the bell on Wednesday, Industrial Alliance Securities analyst George Topping increased his target for shares of Franco-Nevada Corp. (FNV-T).
The Toronto-based miner reported earnings before interest, taxes, depreciation and amortization of $138-million, matching Mr. Topping's forecast and exceeding the consensus on the Street by $2-million. Cash flow per share of 65 cents met the consensus projection while falling just short of the analyst's view.
The company's gold equivalent ounce (GEO) result also narrowly missed Mr. Topping's estimate. He noted: "The miss on GEOs to our estimate was due to lower mining on FNV royalty covered ground at Guadalupe and less GEOs received due to mining sequences at several underlying operations."
He added: “The Company maintained its GEO guidance of 465-500,000 ounces from its mining royalty and stream assets in 2019. In spite of a lower Q2, we estimate that FNV will end up at the higher end of this guidance driven by Candelaria’s rebound and Cobre Panama’s start-up. Five-year (2023) GEO guidance is at 570-610,000 ounces (Industial Alliance estimate: 634,000 ounces), which will be primarily driven by Cobre Panama ramping to 85Mtpd throughput. 2019 O&G revenue guidance was increased to $100-115-million (from $70-85-million previously) but five-year guidance was not yet updated from the previous $140-160-million (including Marcellus, we estimate $194-million in 2023).”
Pointing to net asset value from its Marcellus royalty, Mr. Topping raised his target for Franco-Nevada shares to $136 from $125, maintaining a “buy” rating. The average on the Street is $121.60.
“Franco is the go-to option for generalists and/or those looking to hedge their portfolio with a quality, dividend paying, safe gold equity,” he said. “It is the first recipient of funds flow and as such requires and receives a premium valuation. We expect a better H2/19 as GEO and O&G growth resumes (Candelaria, Cobre, and now Marcellus).”
Elsewhere, RBC Dominion Securities analyst Stephen Walker said: “We expect a positive reaction to Franco-Nevada’s Q2/19 report, with financial results coming in relatively ahead of estimates and the company increasing 2019 guidance. Despite total revenue coming in slightly lower than expected, margins benefited given the greater contribution from zero cost royalties, with earnings benefiting from lower depreciation. The company expects a strong H2/19 as Cobre Panama ramps up and energy revenues continue to grow following the Marcellus royalty acquisition.”
Though he acknowledged Uni-Select Inc. (UNS-T) has made progress on cost and debt reduction, Desjardins Securities analyst Benoit Poirier said he’s waiting for the outcome of its strategic review “before revisiting our investment thesis given lingering uncertainty.”
Mr. Poirier called the Brampton, Ont.-based company's second-quarter results, released Wednesday before market open, "decent" given a "challenging" macro environment.
The distributor of automotive products and paint and related products reported revenue of US$456-million, down 1 per cent year-over-year and below the Street’s US$462-million expectations. Adjusted earnings per share of 25 US cents met the consensus estimate.
“Management continues to make progress on performance improvement plan, but it takes time to realize the benefits,” said Mr. Poirier. "UNS has now realized US$29.2-million of savings, up from US$21.4-million at the end of 1Q. UNS has also identified additional cost savings of US$5-million at FinishMaster on top of the US$5-million of savings targeted at Parts Alliance; the total target is US$45-million on an annualized basis (up from US$35-million previously). Overall, we believe these initiatives should help to improve margins at Parts Alliance and the Automotive Group, while it might stabilize margins at FinishMaster. In 2Q19, corporate costs declined to C$7.6-million in 2Q19 (from C$8.3-million in 2Q18).
“Indebtedness remains high despite solid FCF and net debt reduction in the quarter. In 2Q, UNS generated free cash flow of US$32.1-million, above our forecast of US$25.9-million. It was therefore able to reduce net debt by US$93.5-million in the quarter, and funded debt to adjusted EBITDA declined to 4.0 times from 4.5 times (we were expecting 4.8 times). Management expects that the ratio should remains stable in 3Q despite the one-time US$55-million cash outflow associated with a change in payment terms by an important supplier. We expect UNS to end 2019 with net debt to EBITDA of 4.1 times. Nevertheless, we note that indebtedness remains elevated, especially considering ongoing uncertainties at Parts Alliance and FinishMaster. This reinforces the rationale behind the strategic review and potential divestiture (partial or full) to free up capital and solidify its balance sheet (net debt/EBITDA ratio of 2.7 times for U.S. peers on average).”
Pointing to “growing uncertainties” stemming from Brexit, Mr. Poirier reduced his earnings expectations for the remainder of 2019 and 2020.
With those changes, he dropped his target for Uniselect shares to $17 from $19 with a “hold” rating. The average is $14.40.
Though wet weather and rising costs led to a weaker-than-anticipated second-quarter results for Badger Daylighting Ltd. (BAD-T), Industrial Alliance Securities analyst Elias Foscolos said his long-term outlook remains relatively unchanged.
On Wednesday morning, the Calgary-based company reported revenue and adjusted EBITDA of $161-million and $39-million, falling short of the Street's expectations of $166-million and $43-million.
“BAD’s Q2/19 results were below expectations, with abnormally wet weather, particularly in the U.S., and declining margins negatively impacting performance,” said Mr. Foscolos. "Activity is expected to substantially pick up in H2/19, and the Company is maintaining its previous guidance ranges for EBITDA and truck builds. Excluding IFRS 16, we calculate a 250 basis points EBITDA margin contraction year-over-year, mostly due toreduced asset utilization, increased labour costs, and implementation costs associated with the Common Business Platform.
"We have trimmed our outlook, which is offset by rolling our valuation timeframe forward."
Despite reductions to his 2019 and 2020 financial projections, Mr. Foscolos increased his target by a loonie to $46 with a “hold” rating (unchanged). The average on the Street is $52.75.
Elsewhere, Canaccord Genuity analyst Yuri Lynk said the “tough” quarter has led to a “good entry point,” leading him to increase his target to $54 from $53 with a “buy” rating.
“The 5.7-per-cent pullback in Badger shares in response to the quarter affords investors an opportunity to add to positions, in our view,” he said.
Dream Industrial Real Estate Investment Trust’s (DIR-UN-T) “strong” leasing spreads in Ontario and Quebec “shine [the] spotlight on future cash flow growth potential,” according to Canaccord Genuity analyst Brendon Abrams.
"Dream Industrial's Q2/19 results were highlighted by extremely strong leasing spreads in Ontario and Quebec, which increased, on average, by 20 per cent and 18 per cent, respectively," he said. " This not only exceeded our expectations, but we believe provides further evidence of the cash flow growth potential inherent within the REIT's portfolio as leases rollover/expire in future years. Dream Industrial has nearly 4.5 million sf (20 per cent of portfolio) expiring in Ontario and Quebec before the end of 2022. We view this as an opportunity given that industrial fundamentals in Canada remain red-hot and we expect them to remain as such based on the macro secular trends driving demand and the relatively low levels of new supply currently under construction."
“For Q2/19, Dream Industrial reported strong SPNOI [same property net operating income] growth of 4.7 per cent which was attributable to a combination of higher occupancy and rental rates across most of its portfolio. However, the REIT reported FFO [funds from operations] per diluted unit for the quarter of $0.20, below consensus of $0.21 and down 3.5 per cent year-over-year. The decline was primarily driven by the REIT operating at even lower leverage as compared to the prior-year quarter with D/GBV and D/EBITDA declining to 37.4 per cent and 6.4 times, respectively. With leverage set to trend lower following the sale of the REIT’s Atlantic Canada portfolio, Dream Industrial will have ample financial liquidity/capacity to execute on its acquisition pipeline which management estimates at approximately $300 million. We are not concerned by the temporary near-term impact to cash flow per unit as capital is redeployed into higher growth opportunities.”
Maintaining a “buy” rating for the Toronto-based REIT, Mr. Abrams increased his target to $13.25 per unit from $12.25. The average is currently $13.06.
“Overall, we believe Dream Industrial offers investors an attractive opportunity to gain exposure to strong North American industrial fundamentals with a diversified portfolio that is trading at a compelling valuation,” he said.
“Combined with a 5.8-per-cent distribution yield, our target price implies a one-year total return of 14.9 per cent.”
The decline in share price for Mediagrif Interactive Technologies Inc. (MDF-T) without improvement in revenue trends is “not enough” to make it an attractive investment option, said Desjardins Securities analyst Maher Yaghi following weaker-than-anticipated quarterly results.
"MDF continues to generate decent FCF, but the underlying trend of the company’s assets is weak," he said. "Even with the stock trading at a low valuation, without a return to a more sustainable positive revenue growth rate, we do not see a reason to move to a bullish stance. Our valuation of the stock continues to decline steadily as the company’s revenue run rate continues to sputter. Hence, we see downside risk to our estimates until operations stabilize."
On Tuesday, the Longueuil, Que.-based e-commerce solutions provider reported quarterly revenue and adjusted EBITDA of $20.2-million and $4.1-million, respectively. Both missed Mr. Yaghi's estimates ($20.9-million and $4.7-million).
"The company is still working on its strategy, which is expected to be completed by the fall," he said. "Recall that it is expected to shed its B2C operations to focus on B2B, a move that we support. Moreover, MDF is still looking for a CEO, which could lengthen the amount of time required to set and roll out the new strategy.
"That being said, the current net cash position gives the company a good cushion to work on this transition and invest in the company’s more interesting B2B assets. However, we continue to have little visibility in the long-term growth outlook of those assets, and until we see steady improvements in revenue generation, we expect the company’s valuation to remain under pressure."
With a “hold” rating, the analyst dropped his target to $7.75 from $10. The average on the Street is $10.30.
“The company has started to disclose revenue segmented between B2B (strategic assets) and B2C operations (expected to be sold off),” he said. “While this improved level of disclosure is interesting, until we see a steady return to revenue growth, we do not expect a material positive re-rating of the stock price.”
Following “good” second-quarter results, Laurentian Bank Securities analyst Yashwant Sankpal sees BSR Real Estate Investment Trust’s (HOM.U-T) “capital recycling drive” continuing to strengthen as it works to enhance its the quality of its portfolio.
“In the Sunbelt region, smaller markets are seeing more cap rate compression than that in larger markets (partly attributable to demand for higher yield properties and to the new supply in larger markets), and the spread between the two markets has declined to the lowest levels in the past 15 years,” he said. “As a result, HOM is planning to exit, by 2019, some of its smaller markets (2,200 suites accounting for $200-million of value) and deploy that capital in larger, higher-growth markets: Dallas, Austin and Houston. Year-to-date HOM has sold six properties for $54-million (1,109 suites at a price of $49K per door) and acquired one property in Dallas, TX, for $53-million (336 suites at $145K per door). Management expects to be a net acquirer in 2019.”
With a “buy” rating, Mr. Sankpal increased his target to US$12.25 from US$11.50 per unit. The average is US$11.53.
“HOM offers an opportunity to participate in the rental market of the U.S. Sunbelt region at a discount valuation. HOM’s large insider ownership and a fully internal management platform provide us with the confidence that this business can be grown many times over. Improving rental fundamentals in HOM’s core markets provide us additional confidence in our cash flow estimates. Despite these positive attributes, HOM trades at a one of the lowest P/FFO multiple among its North American peers, mainly because of its relative newness to the Canadian stock market and its small market cap.”
Elsewhere, Canaccord Genuity’s Brendon Abrams hiked his target to $12 from $11 with a “buy” rating.
Mr. Abrams said: “One of the driving factors behind management’s decision to accelerate this program is the low cap rate spreads between primary and secondary markets within its geographic territories. On the call, management referenced cap rate spreads of approximately 100 bps to 150 bps for the type of product the REIT would look to buy and sell. We agree with management and believe this represents a very attractive opportunity to high-grade the REIT’s portfolio by increasing its exposure to larger markets with greater long-term rental growth potential. We think this trade is well worth the potential near-term cash flow dilution which could transpire under this portfolio transformation.”
In other analyst actions:
RBC Dominion Securities upgraded Home Capital Group Inc. (HCG-T) to “outperform” from “sector perform” with a $30 target, rising from $25. The average on the Street is $25.56.