Inside the Market’s roundup of some of today’s key analyst actions
Desjardins Securities analyst David Newman initiated coverage of Pinnacle Renewable Energy Inc. (PL-T) with a “buy” rating on Thursday, seeing the Vancouver-based company poised for accelerated growth with a shift toward Asia.
“Pinnacle Renewable Energy Inc. (PL) is a leading producer and distributor of industrial wood pellets, a biofuel which is increasingly used by global utilities and power producers to replace coal in the generation of baseload power, especially with the move toward decarbonization,” he said in a research report. “PL’s competitive advantage is fuelled by its leadership position, multiple production facilities diversified across sustainably managed fibre baskets, vertically integrated operations, favourable logistics, growing scale and low costs, as well as its alignment with the growing Asian market and large contracted backlog. The company’s long-term offtake agreements and low-cost contracted cost structure lend themselves to greater stability in the financial model and a fairly predictable earnings and cash flow stream, which should ramp with greater production, operating leverage and capacity expansion.”
Mr. Newman expects Pinnacle to benefit from a rising supply gap as demand for industrial pellets grows.
"PL is well-positioned to take advantage of growing demand given its leadership position, multiple production facilities (11 in total), access to sustainably managed fibre baskets, vertically integrated operations, favourable logistics, low-cost status and large contracted backlog ($7.1-billion, including $4.6-billion won in Asia)," he said.
"PL experienced several challenges in 2019, including fibre supply (sawmill curtailments in BC) and start-up issues (a fire at its facility in Entwistle, Alberta). PL is slowly moving past these challenges given (1) a pick-up in lumber demand, potential tariff cuts by the U.S. on Canadian lumber, expected lower stumpage fees and its own supply mitigation efforts; and (2) steady improvements following a period of heavy investment in its facilities, eg Entwistle, Alberta, and Aliceville, Alabama."
Mr. Newman said Pinnacle should see “greater stability and a fairly predictable earnings and FCF stream” moving forward, given 100 per cent of its capacity is fully contracted through 2026 as well as its “s low-cost (contracted) structure.”
"As it taps into growth and expands at a measured pace, greater operating leverage should drive an improvement in margins and balance sheet metrics, aided by a renewal of its UK contracts at better prices around 2022," he said. "Our forward five-year CAGR in EBITDA is 19.0 per cent."
Mr. Newman set a target of $13 per share. The average is currently $12.50.
“PL offers a potential total return of 30 per cent, including a dividend yield of 5.7 per cent,” he said.
After a “sluggish” 2019, Scotia Capital analyst Sumit Malhotra is expecting a “decent” start to 2020 for Canadian banks.
In a research note released Thursday previewing earnings season for the sector, Mr. Malhotra said he thinks there’s an opportunity for banks to “reclaim some of the ‘lost ground’ of 2019, seeing “a favourable set-up for market-sensitive segments.”
“Maybe it’s the fact that the Grapefruit and Cactus League schedules get going this weekend, but after a choppy-at-best fundamental performance from the Canadian banking sector in 2019 we have adopted more of a ‘hope springs eternal’ mindset towards the stocks heading into the initial round of results of 2020,” he said. “As compared to the muted 3-per-cent increase in operating EPS that the industry generated last year, aided by the combination of favourable market conditions and mild year-over-year comparisons we expect to see a much-improved performance from the group to start 2020 with respect to both the market-sensitive business lines (Wholesale net income up 30 per cent year-over-year, Wealth Management earnings up 14 per cent), and the ever-important metric of allbank operating leverage (up 1.7 per cent, with a well-telegraphed restructuring charge from CM likely alongside the Q1 results set to assist its efficiency progress going forward).”
"After the modest upward move in our numbers the stocks now trade at 10.7 times our 2020 estimates & 10.2 times our 2021 estimates, on par with the comparable metrics seen a year ago. While these valuation parameters are not overly demanding, from a fundamental perspective they must be balanced against the combination of (1) our expectation that core NII - which accounts for more than half of total industry revenue - will slow to a 3-per-cent year-over-year growth rate in Q1; and (2) the need for a measure of stability in the core PCL ratio, which had climbed to 39bp by the end of 2019. Bottom line, while the step-down in valuation has occurred alongside the deceleration in earnings power, given that our estimates envision a respectable 2020-22 CAGR of 5 per cent we remain mindful of the fact that ‘slow growth’ is not the same as ‘no growth’. Reflecting the blend of their diversified business models, conservatism towards provisioning levels, and pro forma capital ratios at the high-end of the sector, TD and RY remain our only sector outperform-rated bank stocks.”
Forecasting 6-per-cent year-over-year operating earnings per share growth for the quarter, he raised his financial expectations for the banks and adjusted his target price for several stocks.
He raised his target for the following:
Bank of Montreal (BMO-T, “sector perform”) to $110 from $107. The average on the Street is $106.31.
Canadian Imperial Bank of Commerce (CM-T, “sector perform”) to $118 from $119. Average: $113.50.
Laurentian Bank of Canada (LB-T, “sector perform”) to $42 from $41. Average: $43.45.
National Bank of Canada (NA-T, “sector perform”) to $79 from $77. Average: $73.32.
Royal Bank of Canada (RY-T, “sector outperform”) to $116 from $114. Average: $113.83.
Toronto-Dominion Bank (TD-T, “sector outperform”) to $82 from $81. Average: $78.86.
He maintained a $35 target, matching the consensus, for Canadian Western Bank (CWB-T, “sector perform”).
In the wake of the release of "sound" fourth-quarter results after the bell on Thursday, Mr. Morrison raised his rating for the oil and gas producer, formerly known as Encana Corp., to "neutral" from "outperformer."
He said that the company’s “washout” after being deleted from the TSX index is largely in the rear-view, and incremental buying from its re-domicile into U.S. indexes “should soon arrive."
He increased his target to US$22.50 from US$20. The average is US$29.39.
In the wake of Wednesday’s release of “mixed” fourth-quarter financial results, RBC Dominion Securities Douglas Miehm thinks the Street remains skeptical about the prospects for Bausch Health Companies Inc.'s (BHC-N, BHC-T) growth.
“Bausch provided 2020 guidance that bracketed consensus estimates,” he said. Even though the company has guided toward nonlinear growth over 20′-22′, we believe the flat to marginally higher growth suggested as per the 2020 guidance is likely to keep the growth debate in focus."
“Management is moving away from focusing exclusively on the significant seven products as it excludes other growth levers (ex. Trulance, Solta, B&L Ultra). On balance, we see this is a prudent approach as it should shift investor focus to what really matters in our view - B&L and Salix. We estimate 2022 significant seven revenues of $700-million (vs. mgmt. target of $1-billion) but model Trulance, Solta, etc. essentially making up the $300-million variance. However, the move, combined with some admittedly underwhelming script growth, is likely to cast doubt on the growth prospects for these products."
Mr. Miehm thinks the company’s first quarter of 2020 could face pressure from the spread of coronavirus, noting: “Management expects the bulk of the $50-million coronavirus top line hit to come in Q1. When combined with the fairly recent LOE of Apriso, we think Q1 results could be challenging and have moderated our estimates accordingly.”
After reduced his 2020 and 2021 EBITDA expectations narrowly, Mr. Miehm lowered his target for Bausch shares to US$31 from US$33, keeping a “sector perform” rating. The average on the Street is US$34.24.
“We believe Nutrien has set realistic targets for 2020 EBITDA ($3.8-$4.3-billion versus RBC’s estimate at $3.9-billion), with the low-end representing prices remaining at current depressed levels while a potential 2H/20 recovery would push earnings into the mid-point,” he said. “We expect strong U.S. ag fundamentals and a significant increase in planted acreage should support growth in the Retail segment, nitrogen prices are expected to improve from current levels as we move into spring season (although some risk of pull-back during the summer lull), and potash prices should bottom over the next 3-months after a Chinese contract settlement.”
Mr. Wong expects potash to “remain under pressure” in the near term, however he thinks it’s nearing a trough, noting: “We expect potash to remain under pressure near-term due to the lack of a contract with China while temporarily curtailed capacity is coming back on-line and new capacity continues to gradually start-up. Contract discussions have likely stalled as coronavirus-related logistics challenges slow the draw-down of excess inventory. We expect a China contract settlement in mid-2020 should help set a global price floor and support a 2H/20 recovery. We are lowering our 2020 and 2021 price forecast (Brazil) to $245/tonne and $270/tonne, from $285/tonne and $300/tonne”
Concurrently, he also lowered his nitrogen price projections following a weaker-than-expected start to 2020. However, he sees improvement into the U.S. spring season.
“We expect Nutrien to continue generating solid FCF [free cash flow] even in a challenging environment and forecast $2.1-billion sustainable FCF in 2020,” said Mr. Wong. “We earmark $1-billion for dividends, $400-500-million on growth capex (nitrogen brownfield, potash upgrades, Retail build-out) and $500-million for acquisitions, which would result in $200-300-million excess cash available for share repurchasing throughout the year.”
Given the current headwinds, Mr. Wong lowered his 2020 and 2021 earnings per share projections to US$1.98 and US$2.69, respectively, from US$2.43 and US$3.12.
Reiterating an “outperform” rating for Nutrien shares, he reduced his target to US$55 from US$60. The average on the Street is US$56.
“Although fertilizer markets have been challenging to start the year, we believe Nutrien remains a solid investment backed by strong operations and should benefit from a fertilizer market recovery in 2H/20,” the analyst said. “We expect Nutrien to continue generating steady FCF that should support ongoing dividend increases, share buybacks, and long-term growth.”
Following a period of “substantial” appreciation, RBC Dominion Securities analyst Brian Abrahams sees Galapagos NV’s (GLPG-Q) valuation reflecting “overly optimistic” expectations for its drug pipeline.
Accordingly, he lowered his rating for the Belgium-based pharmaceutical research company to "underperform" from "sector perform."
"While we remain positive on lead drug filgotinib's regulatory and commercial prospects, we believe GLPG's share of the drug is now more than baked in, and while we believe the company does have a promising autoimmune-focused R&D platform, we believe the Street may be underappreciating that risks remain to their early/mid-stage pre-POC programs," he said. "We acknowledge there may be structural reasons - e.g., scarcity value of European biotechs, the company's low tax rate, uniquely strong cash position - that likely help increase shares, and that valuation calls in the face of strong momentum can be challenging. Nonetheless, given the difficulty we have justifying a fair value near where the stock currently trades, and the low likelihood of M&A catalyzing additional upside, even absent a discrete expected negative driver we believe any clinical or regulatory setback with filgotinib or the rest of the pipeline would catalyze a substantial downside reversion to fairer valuations."
Mr. Abrahams maintained a target of US$175, which falls below the US$209.11 consensus.
In a separate note, Mr. Abrahams lowered New Jersey-based PTC Therapeutics Inc. (PTCT-Q) to “sector perform” from outperform" based on its valuation following a nearly 80-per-cent rise in share price since early October.
"We remain positive on risdiplam’s market opportunity, even if recent SUNFISH data potentially takes best-case scenario off the table," he said.
"Risdiplam’s promise along with upside optionality from the Huntington’s program and potential Translarna approval in the U.S. are balanced by commercial and clinical risks, in our view."
His target fell to US$60 from US$63. The average is US$60.44.
Elsewhere, Citi analyst Joel Beatty downgraded PTC to "neutral/high risk" from "buy/high risk" with a US$71 target, rising from US$55.
Mr. Beatty said: “We’re increasing our TP.... to reflect our very high conviction that Risdiplam will be approved for the treatment of SMA (PDUFA action date May 24, 2020) but are downgrading to Neutral/High Risk because: 1) we believe Risdiplam is now fairly valued in the stock, 2) we have a lack of conviction that catalysts over the next year will lead to upside, 3) we have fairly modest expectations for the first year of the Tedsedi launch, and 4) in our view there remains some risk that PTC could hit some manufacturing/regulatory delays with AADC gene therapy.”
CIBC World Markets analyst Stephanie Price thinks Kinaxis Inc.'s (KXS-T) recent contract wins are likely to support the “reacceleration” of subscription growth into 2020.
Following the announcement of contracts with H. Lundbeck A/S and Dr. Reddy’s Laboratories Ltd., Ms. Price noted the Ottawa-based supply chain software company had already enjoyed growth of 27.5 per cent in the third quarter, versus a high-teens increase in the first half of 2019.
“We expect solid Q4 results when Kinaxis reports on Tuesday, Feb. 25, given strong backlog conversion and believe the focus will be on 2020 guidance,” said Ms. Price. “We are expecting 2020 subscription revenue growth of 24 per cent, up from 21 per cent in 2019. We are 60 bps above consensus 2020 EBITDA estimates and see upside to Street EBITDA expectations.”
Maintaining an “outperformer” rating, she raised her target for Kinaxis shares to $125 from $110. The average is $114.50.
In other analyst actions:
Wells Fargo Securities analyst Edward Kelly cut Dollarama Inc. (DOL-T) by two notches to “underweight” from “overweight,” seeing “numerous concerns creeping into the picture." His concerns included the discount retailer’s diminishing pricing power and a potential tough fourth quarter given “overall sluggishness in Canada.”
His target dropped to $37 from $53. The average on the Street is $47.79.
National Bank Financial analyst Zachary Evershed lowered Uni-Select Inc. (UNS-T) to “underperform” from “sector perform” with a $10 target, down from $12. The average is $12.38.
BMO Nesbitt Burns initiated coverage of Endeavour Mining Corp. (EDV-T) with an “outperform” rating and $36 target. The average is $34.33.