Inside the Market’s roundup of some of today’s key analyst actions
Several equity analysts on the Street raised their ratings for Inter Pipeline Ltd. (IPL-T) on Tuesday in response to its dividend reduction, exploration of partnership options for its Heartland Petrochemical Complex and the suspension of the sale of its European Bulk Liquids Storage business.
Industrial Alliance Securities analyst Elias Foscolos thinks the “right steps are being taken” by the Calgary-based multinational petroleum transportation and infrastructure limited partnership to adjust to the current market environment.
Accordingly, he raised his rating to “speculative buy” from “hold” on Tuesday based on its return relative to his coverage universe.
On Monday before the bell, Inter announced a cut to its monthly dividend by 72 per cent to 4 cents per share from 14.25 cents and a a suspension to its premium dividend and dividend reinvestment plan (DRIP), a move Mr. Foscolos thinks was not surprising and provides it greater flexibility for its capital program.
"Following [Monday's] announcement of IPL’s dividend cut, the company’s share price slightly fell just marginally more than the sector," said Mr. Foscolos. "Given IPL’s large capital program and previously non-sustainable payout ratio, a dividend reduction and elimination of the DRIP will help. We have maintained our long-term outlook as the actions being taken by the company to preserve its financial flexibility are its best options given the current economic environment. While a JV in the PDH/PP plant is an ideal measure, we do believe that the sale of other core assets, particularly the BLS business, should not be ruled out just yet."
Mr. Foscolos maintained an $11 target price for Inter shares. The average target on the Street is currently $15.22.
Elsewhere, Raymond James analyst Chris Cox called the moves “a painful step, but a step in the right direction.”
“On the whole, we are encouraged that the company is finally taking steps in the right direction toward a manageable and prudent funding outlook, especially given the acute pressures on the sector and the added capital constraints likely to face the industry,” he said. “While the dividend cut may still weigh on the shares over the near-term - especially given the company’s retail-heavy ownership - we believe the move was a necessary step in the right direction, particularly given the significant dilution the company was incurring with the DRIP. Strategically, we agree with the initiative to bring in a partner for Heartland, as we continue to view the decision to go at this project alone as outside of what we would view ‘reasonable’ risk parameters. However, we are skeptical that a potential buyer at this juncture will be willing to pay an attractive enough price to justify the sizable premium we see in IPL shares - trading at 12.0 times 2020 estimated EBITDA vs. peers in the 7.5-10.0-times range. All told, we believe the company has taken enough steps to reduce the risk profile, such that an Underperform rating is no longer warranted, but we see a relative valuation that leaves us on the sidelines at Market Perform.”
Mr. Cox raised his target by a loonie to $10 per share.
CIBC World Markets analyst Robert Catellier raised the stock to “neutral” from “underperformer” and raised his target to $13.50 from $11.
“The company announced significant corporate actions designed to retain cash flow and self-fund the equity portion of its capital plan,” said Mr. Catellier. We view these actions as appropriate given the current global energy market and COVID-19 pandemic. We are raising our EV/EBITDA-multiple-based price target to $13.50 (was $11). With the funding risk resolved and the potential return to our price target, we are raising our rating to Neutral."
Stifel FirstEnergy analyst Ian Gillies raised the stock to “buy” from “hold” with a $22 target, jumping from $16.
Expecting a “fairly moderate” near-term impact from COVID-19, Canaccord Genuity analyst Aravinda Galappatthige raised his rating for Thomson Reuters Corp. (TRI-N, TRI-T), seeing its large subscription component protecting against downside.
“We expect the near-term impact from COVID-19 on TRI to be moderate due to its 75-per-cent-plus subscription revenue mix,” he said. “We also know that much of the subscriber base comprises larger business customers (e.g. large law firms), which suggests a lower near-term impact. In fact, only roughly a quarter of TRI’s customer base can be deemed small businesses. However, the longer-term impact of a recessionary environment is less clear at this stage. We believe that the impact of such conditions on the Legal and Tax divisions will be more lagged and reflected only in fiscal 2021 returns. We know that the impact of the 2008/2009 recession was 400-500 basis points on revenue growth. We suspect it will be lower in this cycle due to the depth of the previous downturn and the structural transitions that were in play in the legal profession during that time.”
Mr. Galappatthige thinks the company’s recently acquired Reuters Events business will be the most affected component by the ongoing market turmoil, and he also “moderated” his Global Print revenue expectations while making minor downward adjustments to its Legal and Corporate segments.
That led to adjusted EBITDA reductions of 3.2 per cent from fiscal 2020 and 4 per cent for 2021.
“Fiscal 2020 revenue growth has been shaved 100 basis points to 3.5 per cent. We thus expect that F2020 guidance will be revised down from the current 4.5-5.5-per-cent revenue growth and 31.5-32-per-cent EBTIDA margin expectation when the company reports Q1/20 in May,” the analyst said.
Moving the stock to “hold” from “sell,” Mr. Galappatthige lowered his target for Thomson Reuters shares to US$63 from US$71. The average on the Street is US$73.94.
“TRI’s stock (US) is down 11 per cent for the month of March and compares with 6 per cent and 7 per cent for its two closest comps – Wolters Kluwer and RELX, respectively,” he said. “The slightly higher downswing in TRI is not surprising, in our view, given the recent out-performance of the stock. TRI now trades at 14.8 times fiscal 2020 and 14.0 times F2021 EV/EBITDA [enterprise value to EBITDA]. This is lower by 2.5-3 timesvs a month ago. Wolters and RELX are now at 12.6 times and 12.7 times EV/F21 EBITDA, respectively.”
The correction in Canadian Western Bank’s (CWB-T) share price has gone too far, said Desjardins Securities analyst Doug Young, leading him to raise his rating to “buy” from “hold.”
“CWB’s share price has declined 45.2 per cent year-to-date [through Friday’s close],” he said. “While clearly CWB will face more pressure versus its large-cap banking peers given a higher sensitivity to interest rates (eg 150 basis points cut to BoC rate) and exposure to Alberta (and drastic decline in O&G prices), we believe the market reaction has been overdone.”
Mr. Young pointed to several factors in justifying his move, including a current book value that is “below the trough in 2008–09 and 2015–16;” execution of a “good job diversifying geographically” and capital flexibility.
The analyst did lower his 2020 and 2021 cash earnings per share projections to $2.60 and $2.80, respectively, from $3.25 and $3.40.
He also reduced his target for CWB shares to $26 from $30. The average is currently $26.91.
“We believe the market has overreacted to the various risks we see with CWB,” he said.
In a research note on Canadian banks, Scotia Capital analyst Sumit Malhotra made a pair of rating changes.
“After starting with the obvious caveat that uncertainty will clearly remain the order of the day for some time to come, following the ‘deep dive’ that we have conducted into our numbers, we remain of the view that the financial impact of the COVID-19 fallout for the Canadian banks is more of an income statement issue than a balance sheet one," he said.
“In contrasting the current environment with the 2007-09 credit crisis our synopsis would be (1) the capital position of the sector is materially stronger (up 450 basis points on CET1), and ‘write-down risk’ arising from esoteric derivative products is not as apparent; (2) the measures enacted by global governments, central banks, and regulators have been swift and significant; and (3) as was the case post the prior downturn we think that there will be a longer-term impact on Bank ROE, this time around largely caused by the ‘even lower for even longer’ interest rate outlook.”
Mr. Malhotra raised National Bank of Canada (NA-T) to “sector outperform” from “sector perform” with a $63 target, down from $80. The average is $59.75.
He cut Laurentian Bank of Canada (LB-T) to “sector underperform” from “sector perform” with a $25 target, down from $37. The average is $32.80.
The analyst also made the following target price changes:
- Toronto-Dominion Bank (TD-T, “sector outperform”) to $68 from $78. Average: $68.54.
- Royal Bank of Canada (RY-T, “sector outperform”) to $99 from $117. Average: $101.
- Canadian Western Bank (CWB-T, “sector perform”) to $22 from $34. Average: $26.91.
- Canadian Imperial Bank of Commerce (CM-T, “sector perform”) to $98 from $120. Average: $98.50.
- Bank of Montreal (BMO-T, “sector perform”) to $82 from $107. Average: $86.25.
Hexo Corp.'s (HEXO-T, HEXO-N) better-than-expected second-quarter adjusted EBITDA was overshadowed by near-term funding requirements, said Desjardins Securities analyst John Chu, prompting him to lower his rating for the Ottawa-based cannabis company’s stock to “hold” from “buy.”
Before the bell on Monday, Hexo reported an adjusted EBITDA loss of $10.3-million, beating both Mr. Chu's projection of a $19-million deficit and the consensus of a loss of $14.9-million.
At the same time, it said its working capital and forecasted cash flows will require additional capitalization in order to meet its obligations, commitments and budgeted expenditures through Jan. 31. It estimates it will need $40-million by April 30.
"The company has been in discussions with key shareholders and is confident it can raise the necessary funds," said Mr. Chu. "Regarding its ATM [at-the-market offering], reporting 2Q results appears to be the last hurdle before it submits its application to the OSC and management believes it can receive approval next week. In the event it does not receive approval for its ATM by April 10, 2020, HEXO will need to raise $15-million in equity as per its amended covenants (above and beyond the $40-million required by April 30, 2020).
"Ideally, the company would need $150-million to accelerate market leadership in new categories and increase automation, which could drive additional gross margin gains. At a minimum, HEXO would require $40-million to meet its near-term capital needs through to Jan. 31, 2021."
Pointing to lower prices, Mr. Chu reduced his financial forecast for the company. His adjusted EBITDA projections for 2020 and 2021 slid to a loss of $67.3-million and a loss of $3.7-million, respectively, from a $65.5-million loss and $15.1-million profit. Net sales slid to $84.1-million and $191-million from $85-million and $253-million.
"We factored in higher volumes sold to reflect the 2Q beat and ongoing success of its Original Stash value product," he said. "However, this was more than offset by an ongoing decline in average realized 2Q price (due mostly to a greater sales mix toward Original Stash and, we suspect, ongoing pricing pressures across the industry). We also removed international sales as we assume any international expansion plans will be put on hold past FY23. 2Q gross margins were better than expected and, as such, we have not changed our gross margin outlook. We also factored in $55-million in equity financings in the coming quarters to reflect the amended covenants (at a 15-per-cent discount to current market prices). The capex outlook was reduced substantially to $25-million over the next two quarters vs our previous assumption of $60-million for the period."
Mr. Chu also dropped his target for Hexo shares to $1.40 from $3.50. The average on the Street is $1.57.
“We have downgraded our rating to Hold (was Buy before we placed it under review following the company missing its 2Q filing deadline); this is reflective of the current risk-off market conditions, likely requiring a higher ROR [rate of return] for higher-risk stocks,” he said.
Elsewhere, Laurentian Bank Securities’ Chris Blake moved Hexo to “hold” from “speculaitve buy,” given the total rate of return to his revised target of $1 (from $1.20) is negative 9 per cent.
AltaCorp Capital analyst David Kideckel lowered his target to $1.05 from $1.20, keeping an “underperform” rating.
Mr. Kideckel said: “We believe that near-term headwinds affecting the Canadian cannabis industry, a lack of derivative products available throughout Canada, and the COVID-19 global crisis continue to impose significant uncertainty and risk to HEXO’s outlook. As such, we have chosen to remain on the sidelines until the overall market environment and our visibility improves.”
Citing “declining cannabis sales, deepening losses and material inventory write-offs,” Canaccord Genuity analyst Matt Bottomley downgraded Cronos Group Inc. (CRON-T, CRON-Q) after making “significant” downward reductions to his projections for the company.
On Monday after the bell, the Toronto-based cannabinoid company reported fourth-quarter 2019 results that fell well short of Mr. Bottomley's expectations.
“On the back of disappointing Q4/19 results that saw continued declines in Cronos’ domestic cannabis penetration and deepening operating losses, we have made substantial revisions to our forecasts, including pushing out our revenue ramp (until there is more clarity surrounding Cronos’ execution in Cannabis 2.0), reducing our terminal Canadian adult-use market share to 4 per cent (from 5 per cent) and lowering our longer-term international cannabis sales forecasts,” he said.
Mr. Bottomley cut his 2020 revenue estimate to US$82.7-million from US$100.9-million with a modest increase to his adjusted EBITDA expectation to a US$6.8-million loss from a US$9.6-million loss.
However, his revenue and adjusted EBITDA estimates for 2021 fell to US$132.3-million and $19.3-million, respectively, from US$154.8-million and $24.1-million.
Mr. Bottomley also dropped his target for Cronos shares to $7 from $12. The average is $11.15.
Meanwhile, Raymond James analyst Rahul Sarugaser trimmed his target to $10.50 from $12 with an "outperform" rating.
He said: “Cronos Group (CRON) reported 4Q19 earnings last night, after a 4.5-week delay: the results weren’t a disaster, but they sure weren’t exciting. Without CRON’s massive cash pile, compliments of Altria (MO)—and the potential of its cannabinoid biosynthesis efforts with Ginkgo Bioworks (private) and other IP-generating initiatives—this would be a very different story.”
Though COVID-19 has had a significant impact on demand, Raymond James analyst Steve Hansen thinks Boyd Group Services Inc. (BYD-T) is “well positioned to survive (and thrive).”
On Friday, the Winnipeg-based company said it has "experienced significant COVID-19 related reductions in demand and now estimates demand to be down in the range of 40 per cent to 50 per cent from normal level."
“While Boyd enjoys a highly variable cost structure that will flex with lower volumes, in our view, we do expect several cost items will lag, ultimately translating into short-term margin pressure,” said Mr. Hansen. “To this end, while management remains keen to uphold service levels through the crisis, it has not ruled out select site closures & associated load balancing within well serviced regions,an obvious advantage over smaller, single-store independents, and an effective tactic when pursuing any/all available volumes. FX is also expected to provide a solid buffer given the steep slide in the Canadian loonie.”
“While the duration of the current crisis remains difficult to forecast/model, we stress that, in almost all conceivable scenarios, we see Boyd emerging stronger in the aftermath (vs. its largest competitors). Put another way, we expect the crisis to exert significant pressure on the industry’s largest(highly-levered) PE-backed competitors, a strain that should allow Boyd to more aggressively advance its M&A strategy as storm clouds begin to dissipate.”
Mr. Hansen slashed his 2020 earnings per share projection to $1.89 from $5.65, while his 2021 estimate shrunk to $6.19 from $6.58.
Keeping a "strong buy" rating for its stock, he cut his target to $200 from $230. The average is currently $192.
“While all of BYD’s locations remain open at this juncture, management has notably: 1) started to implement temporary staff reductions; and 2) fully drawn on its credit facility in order to maximize short-term financial flexibility (positioned with US$575-million in cash). Notwithstanding these latest developments,and commensurate revisions to our near-term financial estimates, our conviction in Boyd’s long-term growth prospects remains unwavering.”
Elsewhere, TD Securities analyst Daryl Young raised Boyd to "buy" from "hold" with a $175 target, down from $190.
TD Securities analyst Linda Ezergailis upgraded a group of TSX-listed utilities on Tuesday.
Her moves were:
Hydro One Ltd. (H-T) to “buy” from “hold” with a $28 target. The average is $27.54.
Fortis Inc. (FTS-T) to “action list buy” from “hold” with a $62 target. Average: $58.24.
Canadian Utilities Corp. (CU-T) to “buy” from “hold” with a $40 target, down from $43. Average: $37.88.
In other analyst actions:
* Raymond James analyst Andrew Bradford raised Strad Inc. (SDY-T) to “strong buy” from “outperform” with a $2.39 target (unchanged). The average is $2.60.
"We are increasing our rating on Strad to Strong Buy and adding Strad to our Analyst Current Favorites list due to the special situation of management's $2.39 cash buyout," he said. "Strad has set a Special Shareholder Meeting for April. 20, and the Arrangement should be completed on or about that date. If required, Strad has approval to hold the meeting through other means than traditional in-person shareholder meetings.
"The $1.78 price on Strad clearly reflects a high degree of deal risk. However, both the buying group (management) and their lenders are contractually obligated to proceed with the deal. Nor is it likely that either the management group or lenders could credibly allege the market malaise constituted a Material Adverse Change, which would provide an 'out' to terminate the deal. The 'MAC-out' clause in the Arrangement explicitly excludes adverse macroeconomic conditions and any condition affecting the Canadian oilfield services industry as a whole. We cannot be sure of the language within the lenders agreement and the buying group ...
In our view, this acquisition has a high probability of proceeding on schedule, implying an unusually high rate of return."
* TD Securities analyst John Mould raised TransAlta Renewables Inc. (RNW-T) to “buy” from “hold” with a $17.50 target. The average is $16.22.