Inside the Market’s roundup of some of today’s key analyst actions
“The dog days are over” for Boardwalk Real Estate Investment Trust (BEI-UN-T), according to Desjardins Securities analyst Michael Markidis, who sees “significant” momentum heading into the second half of 2019.
“BEI has now delivered seven consecutive quarters of sequential same-property revenue growth,” he said. “Economic occupancy has been remarkably consistent since the beginning of 2018 and average occupied rents have increased by nearly 6 per cent over this period. As a result, we are confident that recent top-line momentum will carry through to the rest of this year. In addition, utilities expenses will fully benefit in 3Q19 from the recently elected provincial government’s decision to repeal carbon taxes on transportation and heating fuels (effective May 30, 2019). Taken together, we believe BEI is positioned to generate strong same-property NOI [net operating income] growth in 2H.”
However, in a research note released Thursday, Mr. Markidis said "greater conservatism" is now embedded in his outlook for 2020.
"Average market rent estimates (including incentives) for Alberta and Saskatchewan were marginally (1–2 per cent) higher than occupied rents at the end of 2Q19," the analyst said. "A resurgence in population growth suggests that the cyclical rental rate recovery that has unfolded over the past 12–18 months has further room to run. On the other hand, the data suggests there is still considerable slack in the housing market and we are concerned that both regions could experience increased transition to home ownership, particularly if participation in the CMHC’s soon-to-be-launched First-Time Home Buyer Incentive is strong."
Mr. Markidis raised his 2019 and 2020 adjusted funds from operations expectations to $2.05 and $2.22, respectively, from $2 and $2.15.
Keeping a "hold" rating for Boardwalk units, he increased his target by a loonie to $48 to reflect a higher net asset value and FFO per unit outlook,. The average on the Street is $49.54.
“BEI’s 1H operating performance exceeded our expectations and we see considerable momentum heading into 2H19,” he said. “However, the stock price has rallied 8 per cent over the past five trading sessions and we are still somewhat cautious in our outlook for 2020.”
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Calling it a “natural fit,” Raymond James analyst Christopher Cox thinks Pembina Pipeline Corp.'s (PPL-T) $4.35-billion acquisition of Kinder Morgan Canada Ltd. (KML-T) assets is likely to both “bolster what is already a best-in-class integrated value chain” and improve its cash flow.
“While the headline valuation does not strike us as particularly compelling, we’re inclined to give Management the benefit of the doubt, especially given the company’s strong track record with respect to adding value through M&A,” he said. Furthermore, the acquisition also provides the company with a significant position in the Edmonton storage market, filling one of the few ‘blind spots’ within the Western Canadian portfolio."
Mr. Cox raised his 2020 EBITDA and adjusted funds from operations per share projections for Pembina to $3.414-billion and $1.25, respectively, from $3.167-billion and $1.21.
He maintained an “outperform” rating and $54 target for Pembina shares. The average is $56.44.
Elsewhere, Industrial Alliance Securities analyst Elias Foscolos increased his target by a loonie to $56 with a "buy" rating.
Mr. Foscolos said: “We see this transaction as moderately accretive for Pembina adding an incremental 3-per-cent uplift to our 2020 and forward projections. We do see this asset base as a strategic addition to Pembina’s current value chain, providing opportunity for future expansion opportunities and more realized synergies. We do also highlight that there are several potential transactional risks with the acquisition including the call on to the Right of First Refusal (ROFR) by a competitive buyer, shareholder approval, and regulatory approvals.”
Canaccord Genuity's David Galison also raised his target by $1 (to $59) with a "buy" rating (unchanged).
Mr. Galison said: “During the acquisition conference call, management suggested that with the acquisition of KML, it would make strategic sense to also layer in TMX [Trans Mountain pipeline]. However, management also stressed that while the TMX would make strategic sense and while Pembina would be uniquely fit to construct and operate the pipeline, they would not be interested in the headline risk associate with the project considering the many obstacles facing it. On the other hand, should management negotiate an agreement with the Government of Canada to help construct the pipeline (and be paid for services rendered), management could at the same time also seek to negotiate a purchase option at the end once the pipeline was completed and flowing, significantly de-risking the opportunity, in our opinion.”
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Following a “mixed” second-quarter for TSX-listed Canadian infrastructure companies, CIBC World Markets analyst Mark Jarvi made a trio of rating changes in a research report released Thursday.
“For the independent power producers (IPPs) there were a mix of beats (AQN, BLX, RNW, and TA) and misses (CPX, INE) relative to consensus that were largely driven by weather and one-time items,” he said. “Midstreamers/Pipelines largely outperformed (no misses) as volumes and lower commodity prices were not as impactful as expected. GEI and KEY posted very strong results due to favourable marketing trends (tightening of differentials and crack spreads tempers the outlook post Q2 results). Utilities were also mixed (ACO.X, BIP and CU beat while AQN, FTS and H missed), largely driven by weather impacts on load and regulatory adjustments.”
Mr. Jarvi cut Fortis Inc. (FTS-T) to “neutral” from “outperformer” with a $55 target. The average on the Street is $55.46.
“The shares have trended higher since Q2/19 results and the share price is now approaching our $55 target price (unchanged),” he said. “At the current trading level, the implied total return to our target is a modest 4 per cent, below the level we look for in an Outperformer-rated stock. We still view Fortis as a top-quality name with strong diversification and expect a positive message to be put forth at the upcoming investor day (Sept. 10), but don’t believe investors should add to positions at the current time. Our price target is based on 20 times our 2020 adj. EPS estimate, while shares currently trade at 19.9 times our 2020 estimate. Fortis’ average P/E (FY2) trading multiple has been 17.3 times over the last five years and has peaked out at 21.0 times.”
Mr. Jarvi raised Just Energy Group Inc. (JE-T) to “neutral” from “underperformer” witha $2 target. The average is $4.01.
“We only recently downgraded the shares to Underperformer following the poor FQ1/20 results that were accompanied with a guidance cut, higher impairment expense than pre-released, and a decision to suspend the dividend,” he said. “However, with its current valuation down some 30 per cent in the last week (vs. the TSX Composite at 1 per cent), the shares now sit below our $2.00 price target. We generally do not like to make short-term rating adjustments, but do believe it’s prudent to adjust our rating to Neutral from Underperformer given the pronounced move in the shares and we believe there is less downside risk at current levels. While we acknowledge there continues to be operational and financial risks on this name, and therefore believe investors should be cautious, we believe the potential of a partial or outright sale that could surface some value creates a more balanced upside/downside setup for the stock.”
He also raised TransAlta Renewables Inc. (RNW-T) to “neutral” from “underperformer” with a $13.50 target, which falls 38 cents below the consensus.
“There is no change to our fundamental forecast," he said. “Our prior rating was predicated on our view that the shares were extended and slightly over-valued relative to our $13.50 target (unchanged) based on our DCF valuation approach. With shares having pulled back 7.5 per cent in the last month vs. the TSX composite at down 1.7 per cent and the TSX Capped Utility Index at 4.0 per cent, the share price now sits below our target price. Our target implies an 11-per-cent total return from the current share price. Further, we believe the sustainable 7.2-per-cent dividend yield should provide some support for the shares, particularly in the current low-interest-rate environment.”
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RBC Dominion Securities analyst Shelby Tucker sees further upside in Pattern Energy Group Inc. (PEGI-Q, PEGI-T) under a take-over scenario.
In the wake of the San Francisco-based renewable energy company’s confirmation that it has “drawn interest from third parties and is responding to such inquiries as appropriate,” Mr. Tucker thinks a buyer could unlock hidden value in its privately held affiliate Pattern Development and sees Pattern providing “significant growth opportunities for a buyer with deep pockets.”
“PEGI has access to a significant development pipeline through its $190 million investment in Pattern Development and its predecessor entities (PD) over the past two years,” the analyst said. “We believe the lack of public disclosures on PD makes the entity difficult for investors to value, and bidders with access to more details may place more value on PD. Management expects to receive $15-20 million of sustainable distributions from PD starting in late 2020.”
"Regarding drop-downs from PD, PEGI has often co-invested in some projects, while other projects from PD have been divested to third parties. We believe a buyer with deep pockets would be able to participate in a broader range of projects in PD's pipeline, such as U.S. solar. A buyer would also eliminate the need for a financial partner, which provided PEGI with the financial flexibility to reduce the cash outlay for drop-downs."
To reflect a higher likelihood for a sale, Mr. Tucker increased his target to $28 from $24 to include a $4 per share take-out premium. The average target on the Street is US$24.71.
"We believe that in a take-out scenario, a conservative assumption would be that an acquirer would be able to reduce G&A expenses by at least one half (~$25 million), while also continuing to capitalize on management’s O&M savings initiatives including recontracting outsourcing arrangements or self-performing," he said. "Under this scenario, we would expect an acquisition price of at least $28/share. We note however, if there is no sale, we would expect the shares would trade back down to levels prior to the announcement (around $23-24)."
He maintained an "outperform" rating.
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Separately, Mr. Tucker lowered his rating for TerraForm Power Inc. (TERP-Q) based on recent share price appreciation.
TerraForm is a New York-based renewable energy company that announced on July 22 a US$720-million deal to to acquire a high-quality, unlevered distributed generation platform with up to 320 megawatt of capacity in the United States from AltaGas Ltd (ALA-T).
“Management continues to execute well on various growth initiatives, driving total shareholder returns of 23 per cent and 54 per cent over the last three months and year-to-date, respectively (exceeding peers)," he said.
Mr. Tucker thinks a combination with Pattern Energy would "make strategic sense."
"We believe TERP’s access to a competitive source of capital (either through the public markets or via its sponsor), combined with the sponsor’s track record of value creation, will drive accretive transactions from an acquisition of PEGI or other opportunities," he said.
“TERP’s sponsor, Brookfield Asset Management, has consistently sourced attractive M&A opportunities for Brookfield Renewable over the years, and more recently for TERP since becoming its sponsor. TERP’s management previously highlighted M&A opportunities in Mexico and Spain, and we expect TERP to realize value from its pending acquisition of U.S. distributed generation assets.”
Mr. Tucker moved the TerraForm to "sector perform" from "outperform" with a US$17 target, rising from US$15 to reflect a "more favourable M&A outlook." The average is US$16.06.
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Wednesday’s 20.4-per-cent jump in share price for Target Corp. (TGT-T) following the release of better-than-anticipated quarterly results was “well-deserved,” according to Citi analyst Paul Lejuez.
In a research note titled Ten Reasons To Like This Retail Winner, he raised his rating for the U.S. retailer to “buy” from “neutral.”
"As painful as it is to upgrade a stock after such a move, we want to catch the next 20 per cent, which we believe will be achieved as the company continues to prove to the market that it is a winner in this retail landscape," he said. "TGT is demonstrating their investments (which once seemed never-ending) are paying off as comps have been strong, including positive store traffic (rare in retail these days). EBIT dollars are headed higher after several years of decline and capex is expected to moderate significantly in F21 and beyond, which will drive higher FCF and improving ROIC."
Pointing to higher sales and margins, Mr. Lejuez hiked his 2019 and 2020 earnings per share estimates to US$6.40 and US$7.35, respectively, from US$6.05 and US$6.52.
He also increased his target price for Target sharres to US$130 from US$80, pointing to "forecast increases, a reduction in capex in F21 and beyond, and an increase in our terminal multiple as we view TGT as a long-term winner." The average on the Street is US$103.97.
"We believe TGT is a winner in this retail landscape and the stock will continue to move higher," he said. "TGT is one of the few retailers driving positive store level comps, a sign that their bricks and mortar locations are important to customers. We had been concerned in the past about never-ending investments to drive that sales growth, but there is an end in sight to these investments as capex is expected to moderate significantly in F21 and beyond."
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In a separate note, Mr. Lejuez said he thinks Nordstrom Inc. (JWN-N) will continue to struggle to achieve higher profits.
Stock of the luxury department store operator jumped 5.5 per cent on Wednesday on the release of quarterly results that exceeded the expectations of both Mr. Lejuez and the Street.
"The quarter was weak on an absolute basis (though perhaps not as bad as what the market expected), with sales down 5 per cent and GP$ down 6 per cent," he said. "But the company uncharacteristically reduced expenses (expense dollars were down 4 per cent, though helped somewhat by an incentive accrual adjustment) leading to a big beat on the bottom line. While the earnings quality wasn’t good, pulling back on spending is something that JWN hasn’t been great at in the past, so in some ways it is good to see the reduction. Looking more broadly, JWN is in a difficult spot struggling to drive traffic to its bricks and mortar stores. We estimate full line store-level comps were down double digits in 2Q despite being in the best malls."
Though he raised his 2019 EPS estimate to US$3.24 from US$3.14 to reflect the second-quarter beat, he lowered his target to US$32 from US$37 "based on a lower terminal multiple in our DCF-analysis, to better reflect the structural challenges faced by the company, which is showing up as a weak sales/GM equation." The average on the Street is US$33.63.
Mr. Lejuez maintained a "neutral" rating.
"Results have been volatile particularly outside of the Anniversary sale, limiting visibility into F19 and beyond," he said. "Although it is one of the better positioned department stores given its small store base, we believe the challenging retail environment will continue to make it difficult for the company to grow sales and earnings."
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Successful fundraising has diminished the balance sheet risk facing Spectra7 Microsystems Inc. (SEV-T), said Canaccord Genuity analyst Robert Young.
In the wake of last week’s release of “unspectacular” quarterly results and Wednesday’s announcement of the closing of a $7.9-million equity raise, Mr. Young raised his rating for the San Jose-based semiconductor manufacturer to “hold” from “sell.”
"We previously commented on the need for a larger cash infusion as opposed to smaller dilutive rounds, with the announcement (dollar size and dilution) lining up closely with our previous model," he said. "The raise generates liquidity for the business, which we believe affords management the opportunity to focus more closely on the DCI [data centre interconnect] opportunity exiting 2019."
“While our WACC [weighted average cost of capital] is unchanged at 19.7 per cent, we are upgrading our recommendation to reflect our increased confidence in the company’s ability to convert on a pipeline of prospective APAC customers with the recent cash infusion providing liquidity through to 2020.”
Despite lowering his 2019 and 2020 revenue projections to reflect uncertainty around the timing of the ramp-up in DCI sales, Mr. Young maintained a 5-cent target for its shares, which is 1 cent below the consensus.
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Citing recent share price depreciation, Canaccord Genuity analyst Yuri Lynk raised his rating for Fluor Corp. (FLR-N) to “buy” from “hold.”
The move comes following a non-deal roadshow through Toronto and Montreal last week, which he called timely "given that Fluor took $714 million in project charges on August 2, 2019, the largest amount in a single quarter that we can recall."
"Fluor shares are down 44 per cent since Aug. 1, the day before the company surprised investors with Q2/2019 results that included $714 million of project charges," said the analyst. "We believe the sheer magnitude of these charges should allow for at least a quarter or two of improving results, which could catalyze the stock. In the meantime, the results of the company's strategic review will be announced on Sept. 24 and could represent another catalyst as we expect an already strong balance sheet to be strengthened further. At 9 times 2020 estimated EPS, investors are getting Fluor for what has historically represented a trough multiple on potentially neartrough EPS."
Mr. Lynk maintained a US$25 target, which falls below the average of US$30.08.
“We continue to value Fluor by applying an unchanged 12.0 times multiple to our H2/2020 – H1/2021 EPS estimate,” he said. “Fluor currently trades at 9.3 times 2020 estimated EPS versus its global E&C peers at 12.5 times. In terms of its 7-year average NTM P/E multiple, Fluor currently trades at a 29-per-cent discount to its average multiple of 15.3 times representing poor execution and worries about these trends continuing. We believe the charges taken to date provide at least a quarter or two of cover before any potential negative cost reforecast are taken during which time the stock could rally from multi-decade lows.”
David Leeder