Inside the Market’s roundup of some of today’s key analyst actions
Rogers Communications Inc. (RCI-B-T, RCI-N) is “bending but not broken,” according to RBC Dominion Securities analyst Drew McReynolds, who sees an “attractive entry point” for investors and believes a sector-wide pullback on Wednesday looks “overdone.”
Following Wednesday’s release of Rogers’ third-quarter financial results and updated 2019 guidance, Mr. McReynolds raised his rating for its stock to “outperform” from “sector perform.”
“The stock has declined 17 per cent since reaching a high in February 2019 and now trades at a FTM EV/EBITDA [forward 12-month enterprise value to earnings before interest, taxes, depreciation and amortization] multiple of 7.1 times based on our revised forecast versus an average of 7.5 times for other large cap peers. While timing-wise our upgrade could prove a quarter or two early, we believe current levels provide for an attractive entry point that now more than adequately reflects the company’s transitional impact to unlimited plans. Furthermore, we see the potential for renewed multiple expansion from current levels as Rogers navigates a promotionally intense Q4/19, improved H2/20 performance post-transition comes into view (H1/20), and the CRTC wireless review is completed (2020). Although Rogers’ accelerated transition to unlimited plans shaves approximately -200bps-300bps off 2020E NAV growth, this deceleration should prove relatively short-lived with our forecast 2018-2022 NAV CAGR [net asset value compound annual growth rate] of 6 per cent for Rogers largely unchanged from 7 per cent previously, and still in-line with peers.”
Mr. McReynolds said he expects wireless “uncertainty,” stemming from competition in the fourth quarter as well as the outcome of the CRTC wireless review next year, to weigh on the sector as a whole in the near term.
“Nevertheless, we believe [Wednesday’s] pullback is overdone with little change to our broader outlook: (i) ongoing expansion in the Canadian wireless market should provide a constructive-enough loading backdrop for all operators; (ii) national wireless incumbents should eventually fully align on unlimited plans/EIPs thus generating significant churn and margin benefits for all incumbents; (iii) regional operators with measured responses should have sufficient oxygen to continue to meet wireless growth objectives; and (iv) incremental measures that are likely to be instituted as an outcome of the CRTC wireless review should be manageable by both incumbents and regional operators,” he said.
The analyst lowered his target price for Rogers shares to $70 from $73. The average target on the Street is currently $71.11, according to Bloomberg data.
“We have updated our forecast mainly to reflect: (i) a lower wireless ARPU [average revenue per user] trajectory in H2/19; (ii) slightly lower wireless EBITDA margins; and (iii) updated 2019 capex guidance,” he said.
“Our updated forecast translates to consolidated EBITDA growth of 4.2 per cent for 2019 (versus our estimate of 5.6 per cent previously and revised guidance of 3-5 per cent), 1.2 per cent for 2020 and 3.2 per cent for 2021E. We believe our forecast leaves room for Rogers to surprise to the upside on EBITDA growth in 2020 and 2021 should the churn and margin benefits of unlimited plans/EIPs be realized sooner than expected.”
Elsewhere, Accountability Research analyst Mark Rosen raised Rogers to “buy” from “hold” with a $68 target.
Desjardins Securities analyst Maher Yaghi lowered his target to $71 from $79, keeping a “buy” rating.
Mr. Yaghi said: “Looking at the sector’s stock price movement [Wednesday], one could question if the king’s men will be able to put Humpty Dumpty back together again. Investors are nervous and questioning if the telecom space is fundamentally broken. It is difficult to be super bullish in this environment. However, we believe financial results could improve for RCI mid-2020, at which point valuation could improve as well.”
“Our call on RCI at this point is more based on the stock’s valuation vs peers rather than a view that results will rebound significantly in the short term. Actually, the company is likely to report worse year-over-year comparisons in 4Q19 than in 3Q19. However, we expect improvement in 2H20, which should strengthen RCI’s valuation.”
Acquisitions and dispositions took “centre stage” during an “eventful” third quarter in the Canadian midsteam sector, said Industrial Alliance Securities analyst Elias Foscolos, who now thinks companies will “continue to engage in asset dispositions and acquisitions for the remainder of 2019 and into 2020 as a means to fund growth.”
In a research note released Thursday, he expects the sector to draw “strong” interest from both private equity and infrastructure funds, pointing to the potential divestiture of Superior Plus Corp.'s (SPB-T) Specialty Chemicals business and Inter Pipeline Ltd.'s (IPL-T) Bulk Liquids Storage Business.
“[AltaGas Ltd.] was also an active player in asset dispositions as it faced credit rating pressures,” he said. “We anticipate that [Tidewater Midstream] will also need to either sell off assets or announce a JV in the expansion of the Pipestone Plant in order to fund its current capital programs and right-size its burgeoning debt. In acquisitions, we note Pembina Pipeline, Parkland Fuel and Tidewater were all active during the quarter.”
Mr. Foscolos raised his rating for Pembina Pipeline Corp. (PPL-T) shares to “strong buy” from “buy,” citing price weakness and seeing it “as a good opportunity to enter.”
“Pembina’s pending $4.35-billion acquisition of Kinder Morgan Canada and the U.S. Cochin pipeline should close in early 2020,” he said. “This acquisition along with organic growth projects set the stage for dividend increases that could be 10 per cent in 2020. Due to share price weakness, we have upgraded our rating to Strong Buy.”
His target for the stock is $56. The average target on the Street is $55.95.
“Our current Strong Buys are Gibson, Keyera, Pembina, and Superior,” he said. “We maintain our Strong Buy recommendation for Keyera and Gibson as we believe their pipeline of growth projects will provide steady EBITDA growth. On Oct. 4, we published a piece on our opinions of the potential divestiture of SPB’s Specialty Chemicals business which we believe to be the catalyst event in the upcoming months.”
Concurrently, Mr. Foscolos said he’s “proceeding with caution” on Tidewater Midstream and Infrastructure Ltd. (TWM-T) due to uncertainty surrounding its recent acquisition of Husky Energy Inc.’s (HSE-T) Prince George light oil refinery.
In the short term, the analyst said he’s concern about the Calgary-based company’s leverage and ability to fund an expansion to its Pipestone Gas Storage near Grande Prairie, Alta.. He also emphasized the “significant” contract renegotiation risk stemming from the Prince George Refinery risk over the long term.
That led Mr. Foscolos to move to “the sidelines” on the Calgary-based company, downgrading its stock to “hold” from “speculative buy.”
“The purchase of the PGR includes a five-year offtake agreement with Husky for 90 per cent of the plant’s nameplate capacity,” he said. “The PGR is a small and complex refinery, which makes it relatively inefficient and expensive. We believe there is a strong risk that whoever owns HSE’s retail downstream business in five years will carefully evaluate contract renewal versus transportation of refined product throwing long-term profitability into question.”
“We have trimmed our near-term forecasts, while eliminating PGR’s contribution to TWM beyond 2025.”
Though he’s projecting a “significant” jump in EBITDA between the second quarter of fiscal 2019 and the first quarter of 2020, Mr. Foscolos said such “aggressive” growth brings increased leverage.
“We calculate TWM’s net debt following the acquisition at $710-million, equating to 3.6-times net debt/EBITDA on our 2020 estimates (target 2.5-3.5 times),” he said. “Additional spending related to various expansions will further increase debt. TWM is counting on the PGR to perform as expected to achieve deleveraging, resulting in what we would consider elevated execution risk and commodity price risk.”
His target for Tidewater shares fell to $1.60 from $1.75. The average on the Street is $1.90.
Though its third-quarter results fell “largely” in line with his expectations, Raymond James analyst Andrew Bradford lowered his rating for Western Energy Services Corp. (WRG-T), believing its stock “needs a substantial macro-driven recovery.”
On Wednesday after the bell, the Calgary-based company reported EBITDA of $5-million for the quarter, including $0.7-million in one-time costs stemming from restructuring and U.S. well service start-up costs. That result exceeded Mr. Bradford’s $4-million projection.
“WRG investors today require a material upswing to drive an equally material EBITDA recovery - considerably more than we’re forecasting under our formal US$70 WTI scenario next year,” he said.
“The greater concern for WRG investors is that if current strip pricing were to persist through 2020, it would implies no going concern value for WRG’s equity: at strip pricing (currently in the low US $50s for WTI), WRG’s 2020 EBITDA would come in at roughly $17-million against a $240-million debt load; interest would consume 100 per cent of its EBITDA, with nothing left over for maintenance capital.”
Both dayrates and demand also met his expectations, however he noted: “Dayrates were down less than $200 year-over-year, and to be frank, rates today are sufficiently low that we don’t believe there is sufficient margin on the table to allow any material degradation. By definition, Canadian rates are at ‘the bottom’, though how long they reside here remains an outstanding question. In the U.S., Western ran just under 5 rigs, which is slightly lower than we had anticipated while rates were consistent recent quarters.”
Moving the stock to “underperform” from “market perform,” Mr. Bradford also reduced his target to 15 cents from 25 cents, which falls below the average of 27 cents.
“Based on traditional EBITDA multiples, which average around 6 times for contract drillers, WRG has no residual equity value,” he said. “However, the equity markets have been pricing WRG equity for the ‘optionality’ it might have in consideration of a traditional cyclical recovery. Therefore, our approach is to acknowledge the market will likely continue with this practice by maintaining the same enterprise value through time. This implies a $0.15 target one year out as WRG is cash flow negative under our forecast market conditions.”
Xebec Adsorption Inc. (XBC-T) is “well-positioned to capture opportunities in waste-to-energy,” according to Desjardins Securities analyst Frederic Tremblay, who advises investors to “do the same.”
In a research report released Thursday, Mr. Tremblay initiated coverage of the Blainville, Que.-based gas purification company with a “buy” rating, calling it a “50-year overnight success story in renewable gas.”
“Renewable natural gas (RNG), also known as biomethane, is a major opportunity fuelled by new government laws and GHG reduction efforts around the globe, as well as increasing demand for pipeline- and vehicle-grade renewable energy from gas utilities and other businesses (including those with large truck fleets like UPS and Waste Management) amid concerns about climate change,” the analyst said. “RNG is derived from biogas (which comes from decomposing organic waste), making it a green alternative to fossil fuels in many applications. The market for system sales is currently estimated at more than $6-billion in Xebec’s target markets. Given the company’s strong position in biogas upgrading and lack of pure publicly traded comps, XBC is a rare way for investors to gain exposure to the rapidly emerging biogas upgrading/RNG sector.”
Mr. Tremblay noted Xebec’s revenue, profitability and backlog have “all been on a sharp upward trend” since 2018. He’s currently projecting revenue to increase by 130 per cent in 2019, which includes internal growth exceeding 100 per cent and another 33 per cent in 2020.
He also says EBITDA have “reached an inflection point” and forecasts $6.3-million in 2019 and $10.2-million in 2020 from a loss in 2018.
“Xebec is looking to grow its services business through the acquisition, at 4–6 times EBITDA, of companies that will become the local service providers for its growing installed base of RNG equipment," the analyst said. "In addition to generating high-margin recurring revenue, this approach should prove beneficial in winning large contracts. In addition, Xebec is looking to collaborate with partners to build, own and operate renewable gas assets and sell RNG to offtakers.”
“Important milestones could materialize in the coming months, potentially before the end of 2019: (1) large contract win in the landfill gas market, (2) acquisition activity, and (3) first BOO project announcement. While we assume continued internal growth in our model (new contract wins), developments on the M&A and BOO fronts would represent upside to our current forecasts.”
Mr. Tremblay set a target for Xebec shares of $2.25. The average is currently $2.38.
“We believe Xebec is a potential takeover target as large players should find its proven technology and expertise in the renewable gas space attractive,” he said.
Following Wednesday’s release of its third-quarter results, which he deemed strong, Loop Capital Markets analyst Rick Paterson raised Canadian Pacific Railway Ltd. (CP-T) to “buy” from “hold.”
Mr. Paterson thinks CP’s near-term volume outlook is the “least bearish” while being the “cheapest stock in the group."
His target is $340 target, exceeding the average on the Street of $329.59.
Neovasc Inc. (NVCN-T) is “forging paths in new frontiers in the heart,” said H.C. Wainwright analyst Vernon Bernardino.
He initiated coverage of the Vancouver-based specialty medical device company with a “buy” rating.
“Neovasc is a medical device company with two specialty cardiac products: Tiara, a transcatheter mitral valve replacement (TMVR) system in clinical development for mitral valve disease, and Reducer, a novel catheter-based treatment for refractory angina that has CE Mark in Europe,” said Mr. Bernardino.
"We are bullish on Neovasc shares based on: (1) the substantial amount of high-quality clinical evidence supporting the effectiveness of the Reducer in treating refractory angina; (2) the developments in regulatory discussions that are positive for Reducer approval in the U.S.; (3) the resolution of all litigation that negatively impacted Neovasc shares from late 2017 through 2018; and (4) Tiara’s demonstrated advantages inTMVR safety and performance. We believe Neovasc’s hurdles are past and its turnaround underappreciated. "
The analyst set a target of $9 per share. The average is currently $16.56.
“We think it’s important to note here that Neovasc shares were negatively impacted in late 2018 relating to matters of litigation,” the analyst said. “Like the broader medical device industry, Neovasc’s success depends on its ability to obtain patents or practice rights to patents and commercial secrets in order to develop and commercialize its products. Neovasc became engaged in litigation with Edwards CardiAQ between June 2016 and November 2017 pertaining to patents Neovasc allegedly used to develop Tiara. Neovasc was also similarly involved in separate litigation with Endovalve and Micro Interventional Devices (MID), which acquired Endovalve, a cardiovascular device company considered the first to attempt to commercialize a percutaneous approach to replacing a damaged mitral valve. In February 2019 and April 2019, Neovasc resolved its litigation with Endovalve and Edwards CardiAQ, respectively. We believe the litigation is a testament of the disruptive potential of Tiara, which in our view, offers clinically meaningful advantages versus other TMVR devices. We believe it is important to highlight litigation matters as they point to agreements that allow Neovasc to move forward with completion of Tiara’s clinical development.”
In other analyst actions:
National Bank Financial analyst Mike Parkin initiated coverage of Newmont Goldcorp Corp. (NGT-T) with an “outperform” rating and $64 target. The average is $61.39.
GMP analyst Ian Parkinson cut Superior Gold Inc. (SGI-X) to “hold” from “buy” with a $1.15 target, which tops the average by 13 cents.
With a file from Bloomberg News.