Inside the Market’s roundup of some of today’s key analyst actions
Citi analyst Stephen Trent opened a “negative, 30-day Catalyst Watch” on shares of Bombardier Inc. (BBD-B-T) after the Montreal-based manufacturer warned of lower-than-anticipated 2019 profits before the bell.
“Although the shares have been under some pressure, Canadian plane and train manufacturer Bombardier’s disclosures on Thursday morning could negatively surprise the market,” said Mr. Trent in a research note. “The company highlighted its expectations for a 4Q’19 transportation segment EBIT of a loss of US$230-million. This includes a US$350-million charge, related to the company’s Aventra platform in the UK, commercial negotiations with Swiss Federal Railways, and higher costs on its German transport projects. Over the short-term, these factors could pressure on the shares. Bombardier expects to release full-blown 4Q’19/2019 results on Feb. 13, prior to the market’s open.”
In reaction to the announcement, Mr. Trent trimmed his target price for Bombardier shares to $2.10 from $2.70. The average target on the Street is $3, according to Bloomberg data.
“Forecast adjustments for Buy-rated Bombardier include the incorporation of weaker expected transportation segment revenue and margins, higher 2019 estimated FCF burn, and slightly lower aviation-related revenue into our model," he said "In light of the expected near-term disruption, we also shift our forward EV/EBITDA target multiple from 8 times to 9 times, as it no longer seems reasonable to apply a normal cycle multiple to the shares.”
Mr. Trent maintained a “buy” rating for the stock, noting: “On the back of successive corporate reshufflings and production adjustments, concerns about the company’s expected margin improvement are fading. On a long-term basis, Bombardier’s broad customer base and its large backlog should also continue to support the story.”
Granite Real Estate Investment Trust (GRT.UN-T) is “well positioned for growth,” said Industrial Alliance Securities analyst Brad Struges, who sees it “laying the a rock-solid foundation as a blue-chip North American and European Industrial Operator."
In a research report released Thursday, Mr. Sturges initiated coverage of the Toronto-based REIT with a “buy” rating.
“Granite is uniquely positioned in the Canadian REIT landscape as the only Canadian-listed REIT to solely focus on owning, acquiring, and developing institutional-quality distribution/warehouse and logistics facilities in targeted North American and European industrial property markets,” he said. “Granite provides investors an opportunity to invest in a globally focused industrial real estate platform that separates itself from other publicly traded Canadian commercial REITs/REOCs, which can provide an attractive way to diversify their investment exposure.”
The analyst said Granite has transformed its global industrial facility portfolio through a combination of acquisitions and development growth initiatives.
“In the past decade, Granite has undergone a significant transformation, including major changes such as: 1) terminating its previous relationship with the Stronach Group (Stronach); 2) reconstituting Granite’s senior management team and board of trustees; 3) achieving a sizeable reduction in its Magna International Inc. (Magna, MG-T, Not Rated) tenant concentration partly due to certain noncore asset sales of Magna-tenanted special purpose properties (SPPs); and 4) growing the REIT’s exposure to modern distribution facilities through the completion of acquisition activity within targeted global property markets,” he said.
Mr. Sturges said those changes have led to leading adjusted funds from operations per unit growth among its TSX-listed peers, and he sees the potential for future distribution increases, calling it a “annual distribution grower."
“From 2014 to 2019, Granite is estimated to deliver a 2-per-cent compound annual growth rate (CAGR) in its forecasted AFFO/unit, above the relatively flat Canadian-listed industrial REIT peer average over the last five years,” he said."Furthermore, Granite is forecasted to generate an AFFO/unit CAGR of 8 per cent from 2019 to 2021. Due to its AFFO/unit growth, Granite has consistently increased its annualized distribution rate by 44 per cent (CAGR: 5 per cent) over the past eight years."
Mr. Sturges set a 12-month price target of $75 per unit. The average target on the Street is $71.97.
“Granite is uniquely positioned to benefit from improving global industrial property fundamentals, its best-in-class balance sheet, senior management’s historical track record of generating unitholder returns, the potential to deliver AFFO/unit growth year-over-year (which could support further distribution increases), and the execution of the REIT’s development plans that may augment its unlevered returns,” he said. “Further transformation and a continued high grading of Granite’s global industrial facility portfolio may result in a higher price-to-AFFO multiple over time.”
Mercer International Inc. (MERC-Q) is “a compelling and underappreciated green growth company,” according to Raymond James analyst Daryl Swetlishoff.
He thinks the Vancouver-based pulp and paper company is set for a re-rating, calling it “an undersold Environmental, Social and Governance (ESG) story.”
“For many investors when considering environmental and sustainable investments, pulp and lumber don’t immediately come to mind,” he said. “However, 100-per-cent of Mercer’s solid wood products are sourced from certified sustainable forests. These products are used in construction and renovation end uses, displacing carbon intensive concrete and steel. As CEO David Gandossi points out, if the concrete industry was a country it would be the 3rd worst carbon emitter (after China & India)! Pulp products are produced primarily from wood waste materials including sawmill residuals and low quality forest wood. End uses include bio-degradable tissue and packaging (incl. alternatives to plastics). Mercer’s modern recovery boilers produce sufficient green energy to run its mills with excess power sold to the grid. In most jurisdictions Mercer’s green power is displacing dirty coal-fired electricity.”
Accordingly, Mr. Swetlishoff said he considers Mercer to be a “core sector holding,” especially for ESG-focused funds. He recommentds investors “opportunistically add to positions.”
“A top producer of Northern Bleached Softwood Kraft (NBSK) pulp, Mercer’s mills are amongst the world’s largest and most modern with resulting low production costs and maintenance capital requirement,” he said. "The 2018 Mercer Peace River (MPR) pulp acquisition expands its product offering to hardwood pulp while increasing exposure to growing Asian markets. The 2017 acquisition and material upgrade of the Friesau, Germany sawmill launched Mercer into the global wood products market; offering product diversification and fibre synergies. Operating with sustainably sourced, certified forest resources and products with much lower carbon footprints than alternatives, sustainability is the common element underpinning all of Mercer’s operations. We highlight that the company produces stable green energy and bio-chemical revenues in the US$100-million range annually.
“Despite these positive attributes, we see material upside in Mercer’s third party ESG scores with resultant positive fund flow potential. A prudently managed balance sheet provides flexibility for growth while committing to the quarterly dividend (4.6-per-cent yield). While near-term pulp markets remain challenged, based on favourable supply/demand fundamentals we are bullish over the medium- to long-term.”
Expecting a “tighter” global pulp pricing market in 2020, Mr. Swetlishoff lowered his target for Mercer shares to US$19 from US$20 with an “outperform” rating (unchanged). The average on the Street is US$13.90.
Credit Suisse’s Fahad Tariq expects gold prices to “perform well” in 2020.
The analyst said he expects prices to US$1,540 per ounce with a peak of US$1,560 in the first half of the year following by a gradual fall to US$1,525 by year-end.
“Despite some near-term optimism on equities and economic conditions, we generally expect a risk-off skew in 2020 amid continued uncertainty on the U.S.-China trade war (details/timing of a more comprehensive deal are unknown), Brexit, and lingering fears of a global economic slowdown/recession, for which we are seeing clearer signs in Europe and Asia but less so in the U.S.,” he said. “This uncertainty is leading to most central banks around the world cutting rates, which is supportive of gold prices (lower yields tend to lead to higher gold). In the US, the Fed has indicated a pause in rate cuts, but this stance could change quickly, as we saw last year, if economic fundamentals weaken. It is worth highlighting that what really moves gold equities is the commodity price, followed by company-specific factors.".”
“Among the main supportive factors for gold prices in 2019 were low/negative yields and central bank buying, as countries increasingly diversify reserves away from the USD. Currently over US$10-trillion worth of bonds globally are negative-yielding. Low/negative yields support gold prices as the opportunity cost for holding gold diminishes and gold screens as a more attractive safe haven asset. Central banks have been net buyers of gold for 10 consecutive years, and Asian central banks still have very low gold holdings which could mean countries like China continue to switch treasury holdings into gold. For gold, an increase to 20 per cent of central bank reserves implies 22,000 tons additional demand (5 times 2018 demand).”
Mr. Tariq thinks the top performing gold stocks will be from companies positioned to generate “meaningful” free cash flow at current prices and siting in a position to increased dividends and buybacks.
“This past year, when gold prices increased 18 per cent, it became clear that investors (including generalist investors on the sidelines) wanted to see FCF generation, and we expect this sentiment to persist,” he said. "Increasingly, investors appear wary of production growth via M&A, as reflected in the initial negative market reactions to NEM/GG, KL/DGC, and EDV/CEY. At current gold prices, the focus appears to be on controlling costs, growing margins, and harvesting cash flow for shareholders, to satisfy existing shareholders and attract generalists. Companies have taken note, with NEM, GOLD, AEM, AUY, and KL increasing dividends (NEM also introduced a US$1B buyback program).
“Keeping with the quality and FCF theme, our top picks are Agnico Eagle, Newmont, and Endeavour Mining, as these companies are poised to generate significant FCF in 2020 and return capital to shareholders, and have lower financial/operational risk vs. peers.”
He lowered the following stocks
Centerra Gold Inc. (CG-T) to “neutral” from “outperform” with a $12 target, falling from $13. Average: $13.33.
In a research note previewing 2020 for Canadian Infrastructure & Construction companies as well as select property services providers, Raymond James analyst Frederic Bastien said he expects continued consolidation and the presence of “powerful urbanization tailwinds."
“Further supporting this secular shift from rural to urban developments will be technology, a key enabler of socially and environmentally sustainable cities, and historically low interest rates," he said. "This latter theme has also driven pension and institutional funds aiming for reasonable returns to allocate ever more capital into alternative investments such as infrastructure, renewable power and real estate.
“We should note the markets did a very good job pricing in the above factors into the large, defensive and globally diversified stocks we cover in 2019. That was particularly true for Brookfield Renewable and WSP Global, which both exited the year at healthy valuations and through our target prices. The Street was far less friendly to our smaller cap names, but for understandable reason given their exposure to Canada’s structurally challenged oil and gas sector. We believe this unduly punished Aecon Group, which finished 2019 roughly where it started despite generating consistently solid operating results and facing strong business prospects in the transportation and power sectors.”
Mr. Bastien named Bird Construction Inc. (BDT-T) his “Top Pick” for 2020, believing “its diversification efforts are now bearing fruit, most notably in the high-margin industrial sector.”
With an “outperform” rating, he increased his target to $10 from $9, which exceeds the consensus of $8.88.
“BDT is mobilized on four of five nuclear sites in Ontario, active with natural gas producers across Western Canada and already executing multiple contracts for LNG Canada,” he said. “This multi-billion dollar project is being built on a postage stamp area along the Pacific Northwest’s rugged coast line, presenting significant barriers of entry to any potential competing contractor. In the P3 sector, Bird has been deliberate in its pursuits for well over a year now, bidding only on jobs where it boasts an unparalleled competitive advantage (such as bundles and compost facilities). The result is a backlog of wellperforming P3 projects about a tenth of the size it stood at three years ago. Further adding to Bird’s transformation is its embrace of technology. This forward thinking already led to the purchase of a 50-per-cent stake in Stack Modular, which last summer shipped fully furnished modules from Shanghai all the way to Baffin Island, where Bird assembled them in a mere 9 days. Moving our valuation parameters out six months (to calendar 2020) allows us to extract a new target of $10.”
He also raised his target for the following stocks:
WSP Global Inc. (WSP-T, “outperform”) to $100 from $90. The average on the Street is $94.08.
Analyst: “We expect an enviable position at the intersection of horizontal and vertical infrastructure to see Outperfrom-rated WSP Global in good stead over the foreseeable future. A globally diversified footprint also means the business should be in a position to weather softness in the UK private markets, for example, and still produce organic net revenue growth of 3 per cent for 2020. Just as importantly, there are a number of levers WSP can pull to push profitability higher, such as the firm-wide adoption of the open space concept and the cross-selling of additional services at little to no incremental cost.”
Analyst: “Brookfield Renewable found itself at the nexus of the global renewable power, ESG and low interest rate trends last year. This helped fuel a capital gain of 80 per cent for 2019 that far outstripped all other stocks included in Raymond James’ Infrastructure & Construction (I&C) universe. BEP did a whole lot of catching up after years of underperformance, to be fair, but it also ran ahead of the Street’s expectations. That explains why we continue to rate the stock Market Perform even after: (i) incorporating the proposed privatization of TerraForm announced yesterday (which we expect to be accretive to FFO to the tune of roughly 5 per cent); (ii) rolling our valuation parameters out to 2021, and (iii) increasing our target AFFO multiple to 18x from 17x previously. This brings the units’ valuation more in-line with that of Canada’s largest utilities, which we view as reasonable considering management’s dual ambitions to accelerate capital deployment and create via a tax-free special distribution a corporate entity similar to the one announced by its sister LP Brookfield Infrastructure.”
Analyst: “We believe FirstService’s valuation has improved sufficiently in recent months to warrant an upgrade to Outperform. We also figure that with the U.S. economy healthy and the housing sector on much firmer footing than it was in the mid-2000s, FSV boasts excellent revenue visibility over the next twelve months.”
He lowered his target for Stuart Olson Inc. (SOX-T, “undeperform”) to $1.50 from $2. The average is $1.78.
“Unlike its peers, Stuart Olson enters the year in a precarious position,” said Mr. Swetlishoff. “Construction markets are reeling in its home province of Alberta, competition isn’t cooperating and the balance sheet is deteriorating. So not exactly the best time for a new executive, Bharat Mahajan, to take the CFO seat, if you ask us. Mr. Mahajan has nearly 30 years of senior and executive level experience, most recently as CFO of US trucking giant Daseke. He and CEO David LeMay will unquestionably have to draw on it to navigate a beleaguered oil sands sector and lack of imminent infrastructure-related catalysts. While we’re still of the view SOX isn’t a lost cause longer term, we fear further downside risk in the stock after revisiting our financial model.”
Credit Suisse analyst Andrew Kuske’s focus centered on Alberta in a research note released Thursday on Canadian utilities.
“With more than two decades of industry coverage, we witnessed the start of Alberta’s Power Purchase Arrangements (PPAs), selected PPAs expire and the coming end of the remaining PPA at year end (2020),” he said. "In recent years, a considerable amount of change included an accelerated mandated phase out of coal from the previous government, the debate over a capacity market or an energy market along with the Federal question of carbon. Collectively, these issues created an investment climate that was unfavourable and, in our view, unfortunate for the significantly Alberta exposed power generators: Capital Power Corporation (CPX) and TransAlta Corp. (TA). At this stage, we now see a favourable environment for capital allocation, in part, given the coming end of the PPAs, market structure clarity and, insofar as possible, the carbon question. These factors look to support a multi-year window for margin expansion aiding the overall market transition and Alberta’s decarbonization.”
“The dispatch curve will be the area to watch as, practically, coal will continue to set marginal power prices the vast majority of the time. That marginal price setting should naturally rise given Canada’s carbon price framework. As a result, CPX and TA should benefit from margin expansion – first on the transitioning plants and then the broader portfolio. Naturally, the potential for margin expansion tends to attract more capital – although we note the impact of Suncor Energy’s (SU) proposed cogeneration facility (with a 2023 start date) will likely have a chilling effect on some of that potential capital along with being a likely bookend to the margin expansion story.”
Saying he likes TransAlta Corp. (TA-T) exposure to the province, he raised his rating for its stock to “outperform” from “neutral” with a $14 target, rising from $10. The average on the Street is $10.57.
In reaction to a surge that has seen its shares jump by more than 35 per cent over the past month, Morgan Stanley analyst Adam Jonas lowered his rating for Tesla Inc. (TSLA-Q) on Thursday.
""Near-term momentum and sentiment around the stock is admittedly very strong, but we ultimately question the sustainability of the momentum," said Mr. Jonas, adding “We believe the current share price discounts a fully ramped up China, Berlin and Model Y.”
Moving the electric carmaker to an “underweight” rating for the first time since September of 2012 from “equal weight” previously, Mr. Jonas raised his target for Tesla shares to US$360 from US$250 to reflect the recent increases. The average on the Street is US$357.92.
“We are increasing our expectations for the core auto business and decreasing our expectations for the mobility business, resulting in a net material increase in our target price,” he said. “Our revenue forecast through 2030 increased approximately 10 per cent on average vs. our prior forecast, culminating in a roughly 300,000 unit increase by 2030 (to a total of 2 million units in annual volume) vs. our previous forecast of 1.7 million in volume by 2030.”
In other analyst actions:
Seeing the recent pullback in share price as “a good entry point” ahead of the release of an“important" preliminary economic assessment for its Kiena mine in Val-d’Or, Que., Echelon Wealth Partners Inc analyst Ryan Walker raised Wesdome Gold Mines Ltd. (WDO-T) to “buy” from “hold” with a $10 target. The average on the Street is $10.22.
RBC Dominion Securities analyst Paul Treiber assumed coverage of Information Services Corp. (ISV-T) with a “sector perform” rating and $17 target. The average on the Street is $17.75.
Mr. Treiber also assumed coverage of Evertz Technologies Ltd. (ET-T) with a “sector perform” rating and $19 target, which sits 50 cents below the consensus.