Inside the Market’s roundup of some of today’s key analyst actions
Though he deemed Power Corp. of Canada’s (POW-T) first-quarter results “messy” given the reorganization of Power Financial, Desjardins Securities analyst Doug Young said he’s “encouraged by the actions to simplify the corporate structure and improve communications.”
Seeing its current valuation as “attractive,” he raised his rating for its stock to “buy” from “hold” on Tuesday.
“Adjusted earnings per share for PowCo was above our estimate and consensus but was noisy,” he said. "First, it changed the calculation of adjusted EPS to incorporate a new metric (base earnings). By our math, adjusted EPS would have been lower than our estimate had there been no change in methodology. Second, there was accounting noise with the PowFin reorganization (completed February) as well as at Pargesa (IFRS 9 vs IAS 39). Third, there was higher income from PowCo’s other investments vs our estimate (difficult to model).
“We applaud management for hosting a conference call. In addition, it is making progress on various initiatives. It realized 35 per cent of targeted expense reductions. The investment platforms (Sagard, Power Energy) are developing plans to bring in third-party AUM [assets under management]. And management seems committed to realizing value on non-core investments.”
Mr. Young thinks Power management is "comfortable" with its dividend, despite the macro pressures. He also emphasized it has $1.4-billion in cash on hand at the end of the quarter.
He maintained a $25 target for Power shares. The average on the Street is $25.57.
“The recently completed reorganization with PowFin makes sense, it is making progress on various initiatives (eg simplified structure, improved communication) and we view valuation as compelling (27.2-per-cent discount to NAV),” the analyst said.
WPT Industrial Real Estate Investment Trust (WIR.U-T) sits “well positioned” to benefit from its diversified U.S. industrial facility portfolio, according to Industrial Alliance Securities analyst Brad Sturges, who sees it weighted toward a “strong mix of credit-quality and e-commerce and third-party logistics tenants” that appears poised to grow despite the fallout from COVID-19.
Following last week's release of first-quarter results, which saw a year-over-year increase in funds from operations per unit and same-property rental income, Mr. Sturges raised his rating for the Toronto-based REIT to "strong buy" from "buy," expecting "relatively more limited" credit losses and rent deferral exposure and seeing a valuation discount.
“The average age of the REIT’s property portfolio is 15 years,” he said. “WPT’s e-commerce and third-party logistics related tenants are estimated to account for 67 per cent of WPT’s U.S. industrial real estate portfolio, while consumer products companies account for the remaining 33 per cent of the REIT’s tenant base. We believe that the U.S. industrial real estate sector could relatively recover faster than other property sectors due to accelerating e-commerce retail sales penetration. The potential also exists for global supply chains to be altered to from just in time to just in case inventory strategies given recent COVID-19 related disruptions experienced. This may even further improve long-term leasing demand fundamentals for U.S. industrial real estate.”
While smaller-bay industrial users have struggled due to the COVID-19 pandemic, Mr. Sturges said WPT’s larger-bay distribution and logistics tenants, which include FedEx Corp. and IKEA Distribution Services Inc., have seen an increase in activity.
Mr. Sturges also thinks its private capital business, including joint ventures with Alberta Investment Management Corporation (AIMCo) and Canada Pension Plan Investment Board (CPPIB), could provide “possible access to a U.S. industrial facility acquisition pipeline and a growing management fee income stream.”
He trimmed his target for WPT units to US$14.25 from US$14.50. The average on the Street is US$13.41.
In separate research reports, Mr. Sturges reduced his target prices for three other TSX-listed REITs.
His changes were:
Automotive Properties REIT (APR.UN-T, “strong buy”) to $10.25 from $11. The average on the Street is $9.79.
“Potential behaviour changes like wanting more personal space could increase automotive car usage during and after the pandemic,” he said. “While dealership profitability in Q2/20 has been materially impacted by COVID-19 and Canadian new car sales are expected to fall 30 per cent in 2020, dealership profitability may recover with increased parts, repairs and service, and used car sales revenues as personal transportation may move to automobiles and away from public transit.”
Invesque Inc. (IVQ.U-T, “hold”) to US$3.75 from US$4.50. Average: US$4.02.
“Invesque’s share price could remain very depressed in the current market environment, due to Invesque’s above-average investment risk profile (e.g., greater financial leverage, below-average balance sheet liquidity), a lack of earnings visibility, and factoring in greater operating challenges during the pandemic that may result in lower operating NOI and/or reduced NNN [triple-net] rents," said Mr. Sturges.
Nexus REIT (NXR.UN-X, “buy”) to $2 from $2.30. Average: $2.37.
“Nexus is positioned to navigate expected negative near-term COVID-19 virus impacts due to its below-average financial leverage metrics, and 2020 estimated FD AFFO payout ratios versus its small capitalization commercial REIT peers,” he said. “In the medium term, Nexus could still benefit from future positive catalysts such as a new TSX listing, and the execution of value creation initiatives including the completion and stabilization of its redevelopment sports mall project in Richmond, B.C.”
Desjardins Securities analyst Kyle Stanley said Automotive Properties Real Estate Investment Trust’s (APR.UN-T) “defensive portfolio attributes give us comfort.”
"In our view, the REIT’s prudent underwriting standards, focus on primary markets, quality tenant roster and brand diversification should provide some shelter from the downturn in the automotive sector," he said.
Though he's now projecting a 12-per-cent year-over-year decline in funds from operations (FFO) per unit in 2020 due to the headwinds facing the auto industry and sees its external growth strategy stalling, Mr. Stanley raised his rating for the Toronto-based REIT to "buy" from "hold."
"APR’s portfolio is well-diversified by: (1) geography — 86 per cent of rent is generated from the greater VECTOM markets (21 per cent from Alberta), and (2) brand segment—mass market brands represent 54 per cent of rent (luxury 33 per cent/ultra luxury 13 per cent)," the analyst said. "APR has collected 75 per cent of base rent for April and May; three-month deferrals (partial and full) have been granted to tenants representing 31 per cent of base rent (12 per cent of which was paid in April)—negotiations with the remaining auto group (6 per cent of base rent) are progressing. The REIT’s prudent underwriting standards (target 2.5-3.5 times rent coverage) and exposure to top auto group tenants (Dilawri represents 62 per cent of rent) should provide a buffer for deteriorating auto sales through the balance of 2020. Moreover, excluding Montreal (10 per cent of rent), dealerships across the country are expected to be open for business as of May 19 as government restrictions are lifted. Our FFO outlook through 2021 assumes (1) transitional occupancy erosion of 400–450 basis points, and (2) no speculative transaction activity."
He also emphasized the REIT remains “well-capitalized,” adding: “Below-average leverage (D/EBITDA of 6.7 times), ample liquidity ($85-million or 21 per cent of total debt at 1Q20) and a large pool of unencumbered assets ($129-million) provide APR with substantial flexibility to (1) navigate current headwinds, and (2) take advantage of dealership consolidation opportunities once the pandemic subsides. The distribution payout ratio is 91 per cent on our 2020 FFO, higher than where APR has historically run due to deleveraging associated with equity issued in late 2019.”
Pointing to a 40-per-cent potential total return, Mr. Stanley raised his rating to “buy” while lowering his target by 50 cents to $9.50. The average is $9.79.
“Our shift reflects (1) APR’s attractive 11-per-cent cash distribution yield, (2) discounted valuation (trades at a 27-per-cent discount to our NAV versus the historical average NAV discount of 1 per cent), and (3) the extended duration and resiliency inherent within the existing asset base,” he said.
Elsewhere, Raymond James analyst Johann Rodrigues trimmed his target to $8.50 from $9, keeping a "market perform" rating.
Mr. Rodrigues said: “A dealerships’ ability to operate has varied across Canada given varying provincial guidelines. Dealerships have largely been permitted to operate in B.C. and Alberta while Ontario and Montreal has permitted only limited to no operations. As these markets open up once again and restrictions are lifted, the hope is that there is enough pent-up demand that dealerships will see a significant improvement in activity. It is too early however, to know if that will be the case as consumers may opt to wait out larger purchases. Certainly if we enter a prolonged recession, auto sales will drop. While Auto Properties’ portfolio remains 100-per-cent leased, the stock often trades partly based on sentiment. All in all, given the current market, we believe retail continues to be the most vulnerable asset class.”
Suggesting its “gearing up” liquidity for a potential acquisition in a “fragmented U.S. collision repair industry on the brink of a shakeout,” Desjardins Securities analyst David Newman resumed coverage of Boyd Group Services Inc. (BYD-T) with a “buy” rating in the wake of the release of “strong” first-quarter results.
“Despite modest financial leverage, BYD has negotiated for suspended covenants (3Q–4Q20) and expanded covenant flexibility until 2Q21,” he said. “It raised $222-million through a bought-deal financing, bringing its liquidity war chest to $1.2–1.3-billion (including US$40-million swing lines and US$275-million accordion), which leads us to believe it is gearing up for a major acquisition, beyond single shops, MSOs and greenfield/brownfield locations,” he said.
“Looking at the U.S. auto collision repair landscape, one of the Big 3, Service King (346 locations), is reportedly struggling on a stretched balance sheet and looming debt maturities. At the right valuation, a takeout by BYD (eg US$1.2-billion at 10–11 times EBITDA; can be lowered by 1.5 pts with synergies) could be very accretive and potentially add $50 to its share price. The deal would be highly complementary, bolstering BYD’s presence in the key Texas and California markets. It is worth courting the King!”
Though he cut his 2020 and 2021 earnings per share projections to 26 cents and $5.87, respectively, from $1.80 and $6.56, Mr. Newman hiked his target for Boyd shares to $220 from $180. The average is $214.73.
"While challenged near-term, BYD is well-positioned post-pandemic, especially given its pristine balance sheet and significant war chest," he said.
“Our constructive outlook is based on BYD’s rustproof business model amid COVID-19 and the ensuing recession (evidenced by its encouraging 1Q20 results), continued superior capital allocation with ample liquidity and a pristine balance sheet, as well as a nice set-up for a strong recovery in 2021, with a robust M&A pipeline. BYD currently trades at 13.8 times on our 2021 EBITDA vs peers at 11.8 times.”
Though its third-quarter results exceeded his expectations, Canaccord Genuity analyst Matt Bottomley sees Aurora Cannabis Inc.'s (ACB-T) “path to profitability still on rocky ground,” leading him to maintain a “cautious” near- and medium-term outlook for the Edmonton-based company.
"The company’s outsized opex spend (and the utilization of its ATM as a primary source of funding in the interim) continues to be the primary area of concern for most investors (in our view)," he said.
"Although ACB was able to make meaningful progress in reducing these expenses via a number of cost control measures in place (with G&A, sales and R&D expenses coming in 20 per cent lower quarter-over-quarter at $85.5-million), it still printed a sizable FQ3/20 adj. EBITDA loss of $50.9-million, behind our forecast loss of $47.2-million, albeit improved over the previous quarter’s loss of US$80.2-million. In addition, as part of its release, management reiterated its expectation of eventually lowering its opex to C$40-million to $45-million and inflecting into positive adj. EBITDA territory in FQ1/21 (ended Sept/20)."
Mr. Bottomley said he's "encouraged" by the "re-acceleration" in revenue in the quarter, however he trimmed his target for Aurora shares to $24 from $27, keeping a "hold" recommendation, after updating his financial model to account for the recent 12-to-1 share consolidation. The average on the Street is $13.12.
Separately, Mr. Bottomley maintained a “speculative buy” rating and $15 target for shares of Curaleaf Holdings Inc. (CURA-CN), which remains his top pick in the sector. The average target is $14.38.
“Curaleaf reported strong Q1/20 financial results that came in a bit under our sales forecasts for the period while beating our estimates on profitability/Adj. EBITDA,” he said. “As a result, the company now boasts the highest top line in the space among MSO’s (on both a stand-alone and pro forma basis) and the third highest adj. EBITDA line in the sector (after TRUL and GTII).”
He lowered his target for Supreme Cannabis Co. (FIRE-T) to 50 cents from $1 with a “speculative buy” rating (unchanged). The average is 57 cents.
“On the back of another disappointing quarter that saw little progression in its top line and a balance sheet that we believe will make it challenging for Supreme to re-accelerate its growth initiatives (with significant maturities coming due in 2021), we have lowered our medium/longer-term assumptions that peg the company’s Canadian market share to a range of 3 per cent to 5 per cent (down from 5 per cent to 7 per cent),” he said.
Chorus Aviation Inc.'s (CHR-T) risk-reward proposition now appears “balanced,” according to Scotia Capital analyst Konark Gupta.
Pointing to the “material underperformance” of its stock since the market peaked three months ago (down 69 per cent versus an 18-per-cent slide in the TSX), he raised his rating to “sector perform” from “sector underperform."
“While we still think the risks remain elevated for CHR and the aviation industry in general, we believe CHR is relatively more well-positioned than large-aircraft lessors given regional airlines are less impacted and recovering first," he said.
He maintained a $3.50 target. The average on the Street is $4.56.
After its first-quarter results exceeded his expectations, Raymond James analyst Johann Rodrigues reaffirmed Boardwalk Real Estate Investment Trust (BEI.UN-T) as his “top deep value pick.”
“There is no doubt that Alberta has been hit with a double whammy with the impacts of COVID-19 and the deterioration in oil prices affecting the local economy,” he said. "The stock is down 44 per cent year-to-date compared to Ontario-based peers who are collectively down 12 per cent.
“The question investors must ask is whether exposure to Alberta or the drag-on effect of lower oil prices on that economy is worth such a discount? Boardwalk entered the year poised to outpace almost all peers (except InterRent) on the SPNOI [same-property net operating income] and FFO [funds from operations] growth front, and after Q1 this still seems probable. While we are typically prominent proponents of NAV, given the current dynamics, it isn’t the most sound metric to use in evaluating Boardwalk. Yet, on an AFFO multiple perspective (10.6 times), the stock looks very attractive relative to the ’08 GFC trough (12.3 times) and current Ontario peers (25.0 times). The current market value per door ($125k/suite) is not only half of Ontario peers ($260k/suite) but less than BSR REIT ($140k/suite) and only$5k/suite more than Mainstreet Equity. For those investors with a long-term horizon, we see Boardwalk as perhaps the best value play in Canadian REIT-land.”
Maintaining an “outperform” rating for Boardwalk units, he hiked his target to $35 from $27.75. The average target is $38.51.
In other analyst actions:
Echelon Wealth Partners analyst Frederic Blondeau lowered BTB REIT (BTB.UN-T) to “hold” from “buy” with a $4 target, matching the current consensus and down from $4.50.