Inside the Market’s roundup of some of today’s key analyst actions
Shares of WSP Global Inc. (WSP-T) remain “attractively valued" even as they reach new heights, according to Raymond James analyst Frederic Bastien.
In a research note released Thursday, Mr. Bastien contends the market is not properly taking to account the Montreal-based professional services firm’s “expanding and increasingly diversified platform, impressive acquisition track record and strong technical know-how in transportation.”
“It is our belief that in recent times, the misfortunes of other Canadian engineering firms have unreasonably dragged WSP’s stock price,” he said. "What we believe the Street appears to missing (or at least not fully appreciate) is the significant prowess the firm has recently demonstrated in both absolute and relative terms.
“WSP ranks well on all metrics we consider key to the engineering consultancy industry — revenue growth, margins, return on invested capital, cash flow growth, DSO and leverage. It further stands out when other important factors such geographic and sector diversification, earnings consistency and management credibility are factored in. While this should naturally lead to a premium in the market, WSP’s valuation has remained only modestly above the peer group average and well off those of more concentrated engineering firms like Tetra Tech and Sweco. Accordingly, it’s time for us to cry foul.”
In his review of 10 publicly traded engineering and design firm, Mr. Bastien said WSP came out “claimed the title of best-rounded," followed “closely” by Tetra Tech Inc. (TTEK-Q) and Sweden’s Sweco AB.
“Now if the market saw these three stocks with a similar lens, we argue it should naturally reward them with healthy premium valuations. We find logic has been respected for U.S.-listed Tetra Tech, which commands a 2020 estimated EV/EBITDA multiple of 16.1 times that compares favourably to the global engineering peer group average of 10.1 times,” ge said. “The same goes for Sweco, which trades at 2.6 multiple points above the mean. Where does WSP’s valuation fall? Only at 0.7 multiple point premium and behind those of AF Pöyry and NV5. We have nothing against these high-quality companies, but firmly believe our Best Pick for 2019 should trade at higher valuations given its strong track record, proven roll-up strategy, dynamic management team and diversified operations.”
Keeping an “outperform” rating for WSP shares, Mr. Bastien hiked his target to $90 from $86. The average target on the Street is currently $82.81, according to Bloomberg data.
Feeling its capital position looks “challenged,” Canaccord Genuity analyst Derek Dley lowered his financial expectations and target price for shares of The Green Organic Dutchman Holdings Ltd. (TGOD-T) following Wednesday’s announcement that it’s reviewing financing alternatives in order to complete construction at its facilities in Ancaster, Ont., and Valleyfield, Que.
The Toronto-based cannabis company had previously disclosed that it was engaged in discussions for ordinary course commercial bank facilities and equipment leasing. However, citing “challenging” market conditions, it found financing was unavailable on “acceptable” terms within the timeframe desired.
“As of the end of Q2/19, TGOD had $123-million in cash and restricted cash which we expected to be used primarily for funding construction needs in Ancaster and Valleyfield,” said Mr. Dley. "We estimated these projects would require approximately $105-million to complete. As of this morning, the company noted it has $56.7-million in cash on hand, inclusive of $40.2-million in restricted cash for construction at the facilities. We expect the cash on hand as of today is enough, when combined with spend to date, to complete construction at the Ancaster facility and Phase 1a at Valleyfield. However, we do not think TGOD currently has enough capital to complete Phases 1b and 2 at Valleyfield, which together represent approximately 120,000 kilograms of cultivation capacity.
“Importantly, while the company mentioned it would begin a review of financing alternatives, TGOD noted there is no assurance it will obtain another form of financing. The company cited changing market conditions as one of the reasons why they could not obtain financing on favourable terms, which coincides with the overall bearish sentiment on the Canadian cannabis sector over the past several months. Given this overhang, we think it remains unlikely they will obtain financing on any favourable terms from lenders. This may require the company to raise equity capital in near-term.”
Mr. Dley thinks there is now a greater likelihood that construction at both facilities will be delayed, which will force Green Organic to push back its goal of becoming operating cash flow position past its previous expectation of the second quarter of 2020.
The analyst lowered his 2020 sales and EBITDA projections to $211.1-million and $37.6-million, respectively, from $281-million and $47.8-million. His earnings per share expectation fell to a 1-cent loss from a 1-cent profit.
Keeping a “hold” rating, he dropped his target to $1.25 from $2.75, pointing to “uncertainty regarding the company’s near-term outlook.” The average target on the Street is $3.68.
Trisura Group Ltd. (TSU-T) is a “uniquely high-growth, ROE expansion story in the Specialty P&C insurance market,” said Raymond James analyst Brenna Phelan.
She initiated coverage of the Toronto-based specialty lines insurance and surety company with an “outperform” rating.
“Trisura’s operations feature an attractive mix of a well-established Canadian business with an impressive 13-plus year track record complemented by a high-growth, capital-light U.S. Fronting business, currently benefiting from hard markets and oversupply of reinsurance capital,” said Ms. Phelan. “Ultimately, we see Trisura evolving into an integrated North American Specialty Lines insurance platform, generating a 15-per-cent-plus ROE once at scale. In the meantime, we think that its defensive business attributes, continued strong execution on near-term growth opportunities in the U.S. and consecutive, consistent quarters of ROE expansion support the stock’s valuation multiple and we see the stock grinding higher with its outsized BVPS [book value per share] growth.”
Seeing a “significant growth” runway from Trisura Specialty, its U.S. entity, and ongoing “strong" performance from Trisura Guarantee, its Canadian segment dealing with the surety, warranty and niche corporate markets, Ms. Phelan set a target price of $40 per share. The average on the Street is now $37.30.
Nutrien Ltd. (NTR-N, NTR-T) is “blockin’ and tacklin’ in an uncertain ag macro environment,” said Credit Suisse analyst Christopher Parkinson following recent investor meetings with president and chief executive officer Chuck Magro.
“NTR is clearly optimistic for ’20/’21, but acknowledges 2H19 is still facing a modest degree of uncertainty, including U.S./China trade negotiations (or at least investor perception), the recent stagnation in potash demand (near-term in nature) and the degree to which the North American fall application season will be condensed,” he said. "On the latter, NTR was quick to flag that U.S. farmers are investing in their operations despite noise on the trade front. Over the next few weeks, weather in Western Canada and the Northern Tier States are key risks for fall applications, but it’s worth flagging that activity in the U.S. South appears healthy on a preliminary basis. It’s also worth flagging that early frosts and / or 4Q weather events can have adverse effects on yield prospects and harvest rates, so 2019 production is far from in the books."
Mr. Parkinson thinks Nutrien’s “healthy” balance sheet and “strong” cash flow “represent upside optionality,” adding: “NTR is confident in its ability to appropriately leverage its balance sheet (dedicated to investments grade rating) to create value for shareholders via M&A, share buy-backs, and / or increase the dividend. On the M&A front, NTR appears optimistic on its prospects across the Americas, including tuck-in and larger sized deals (while maintaining discipline); expect NTR’s market share to grow more than 1 per cent per year in NA retail. NTR firmly believes current fertilizer prices do not justify any greenfield projects; expect smaller high-return brownfields.”
The analyst maintained a “neutral” rating and US$57 target, which falls short of the US$61.82 average.
Though Canada Goose Holdings Inc. (GOOS-T, GOOS-N) are likely to remain volatile in the near term, RBC Dominion Securities analyst Kate Fitzsimons said she remains a buyer, pointing to a valuation that does not “appreciate” the apparel marker’s top- and bottom-line growth prospects.
“After three years of 40-per-cent-plus growth, what’s the sustainability of the 20-per-cent-plus top line profile?” said Ms. Fitzsimons in a research note released Thursday. “'How many $1000 coats can they sell?' is a consistent question we hear given the brand’s rapid rise over the last few years. Considering luxury, more outerwear focused peers are 2.5-6 times bigger than GOOS, there remains ongoing market share opportunity in that luxury, logoed outerwear market. Further, with just 12 stores as of 1QF20, we see ongoing unit opportunity towards at least 30-50 boxes over time, particularly in China with just five stores in that market estimated by year-end. Additionally, we see gains in knitwear, spring wear, lighter-weight down, and footwear in the coming years as ongoing opportunity as GOOS evolves into a three-season brand. Bottom line, we see the building blocks for a 20-per-cent-plus top line as in place, with interestingly, expectations further recalibrated compared to the last few years when investors were focused on the size of top line beats.”
Ms. Fitzsimons attributed a portion of the stock’s recent weakness to concerns about growth in Hong Kong, in which it has a single store, following “more cautious, recent peer comments.”
“At estimated low-single digit percentage of sales growth, we expect any sales impact from Hong Kong could in part be mitigated as that Mainland China customer shops closer to home,” she said. “We highlight takes from the RBC luxury team’s recent HK trip affirming that Mainland repatriation trend. Simply stated, we don’t expect any potential Hong Kong weakness to derail GOOS’s 20-per-cent-plus outlook in the near-term.”
Ms. Fitzimons maintained an “outperform” rating and $75 target for Canada Goose shares, which exceeds the $67.38 average.
“With negative margin surprises (mix shifts, labor pressures) in recent quarters fueling the stock’s volatility, select investors are focusing on the sustainability of GOOS’s superior margins as the mix evolves,” she said. “The stock’s recent volatility in part suggests concerns about whether investments will be needed down the road to fund the growth, particularly with retail margins in the mid-50s. Looking out, we are comfortable with GOOS’s margin expansion story as the Direct mix shift buoys gross margings all in, pricing and supply chain efficiencies flow through, and, on the channel front, considering GOOS’s superior productivity levels (recall NYC and Toronto opened up at $3k-$4k/sqft).”
Desjardins Securities analyst Keith Howlett thinks Dollarama Inc.'s (DOL-T) third-quarter financial results may “may shed better light” on whether major retailers are targeting it with their pricing decisions.
“We continue to assess whether Dollarama’s recent lack of pricing power is the result of targeted actions of major retailers, or alternatively is the unintended by-product of intense competition between major retailers,” he said. “The former would reduce Dollarama’s future playing field, while the latter is a temporary hindrance. We do know that three major retailers all have their eyes on the party goods category, where Dollarama is a major player.”
Mr. Howlett said the Montreal-based company has had “more challenges” dealing with major retailers outside of the discount segment than its competitors.
“Dollarama has felt the need to restrict price increases over the last year in order to maintain its price position of offering ‘compelling value’ relative to prices of like goods sold at major retailers,” he said. "Each year, on an ongoing basis, Dollarama shifts a small percentage of items from one price tier to a higher one. It also replaces 30 per cent of its product items each year with new ones. This process refreshes its product mix while also refreshing the gross margin profile of the items it sells.
“Lack of price movement by major retailers on competitive products has resulted in a lower year-over-year gross margin rate at Dollarama. Dollarama has not been able to shift as many items as usual from one price tier to another. Our supposition is that Dollarama attracted the attention of major retailers as its top price point first reached $3 and then moved higher to $4. At a price point of $4, Dollarama may be affecting sales of goods priced $5–10 elsewhere. In our view, major retailers will attempt to impede Dollarama from intruding into their playing field.”
Mr. Howlett said major retailers, like Walmart, Canadian Tire and Loblaw, have focused, in particular, on the party products category, an important portion of Dollarama’s business. He said “It is a key category for young mothers with children, has a high emotional quotient with all consumers, has special appeal to millennials and drives store traffic.”
Though he emphasized earning growth has slowed despite a growing store count and same-store sales, he maintained a “hold” rating and $48 target. The average is $51.17.
PI Financial analyst Gus Papageorgiou initiated coverage of a group of stocks on Thursday.
Open Text Corp. (OTEX-T) with a “sell” rating and $53 target. Average: $60.98.
Celestica Inc. (CLS-T) with a “neutral” rating and $9.30 target. Average: $9.84.
Lightspeed POS Inc. (LSPD-T) with a “buy” rating and $38 target. Average: $48.
Elsewhere, Eight Capital analyst Suthan Sukumar initiated coverage of Lightspeed with a “buy” rating and $50 target.
In other analyst actions:
Scotiabank analyst Robert Hope upgraded Enbridge Inc. (ENB-T) to “sector outperform” from “sector perform” and raised his target to $55 from $52. The average on the Street is $56.57.
Mr. Hope downgraded TC Energy Corp. (TRP-T) to “sector perform” from “sector outperform” with a $72 target. The average is $69.63.
BMO Nesbitt Burns analyst Fadi Chamoun upgraded TFI International Inc. (TFII-T) to “outperform” from “market perform” with a $47 target, up from $45 but below the average of $53.43.
TD Securities analyst Michael Tupholme downgraded Russel Metals Inc. (RUS-T) to “hold” from “buy” with a $22 target, down from $24. The average is $24.17.