Inside the Market’s roundup of some of today’s key analyst actions
Canaccord Genuity analyst Mark Rothschild thinks the presence of a "wall" of capital and low interest rates should help support the continued recovery in unit prices of Canadian real estate investment trusts.
“While it is difficult to confidently ascertain true property values in the current environment, we believe that, as various parts of the economy begin to open, private market property transaction activity will pick up,” he said in a research report released Tuesday. “Though initially we expect this will be slow, as it takes time for ‘price discovery’, low financing costs and a wall of private capital lined up to pursue acquisitions should lead to reasonable, if not attractive, values for vendors. In our view, this has created a temporary valuation gap between public REITs and private real estate, which we expect will narrow over time.”
Mr. Rothschild expects REIT prices to move higher over the next several quarters. In the meantime, he thinks they could attract interest from private investors, seeing them as undervalued to the intrinsic value of their real estate.
“We continue to favour sectors supported by strong fundamentals,” he said. "On a risk-reward basis, we continue to favour multi-family and industrial REITs, as we believe both sectors should prove defensive during an economic slowdown and there is not likely to be any impact on property values. In addition, we expect investors will gravitate towards these sectors given the stronger cash flow visibility, and therefore, the stocks should outperform on a relative basis. "
Pointing to "increased optimism on property values," he raised his target price for several REITs, adding: "While the near-term outlook for most real estate asset classes remains far from clear, we have increased confidence that cap rates should remain stable relative to pre-COVID-19 levels for some asset classes."
His changes were:
- Automotive Properties Real Estate Investment Trust (APR.UN-T, “buy”) to $10.50 from $9.75. The average on the Street is $9.78.
- Granite Real Estate Investment Trust (GRT.UN-T, “buy”) to $73.75 from $71.50. Average: $73.79.
- WPT Industrial Real Estate Investment Trust (WIR.U-T, “buy”) to US$14.10 from US$12.75. Average: US$13.25.
At the same time, Mr. Rothschild downgraded Sienna Senior Living Inc. (SIA-T) to “hold” from “buy,” pointing to “negative headlines” surrounding some of its long-term care facilities and the uncertainty stemming from the investigation into Ontario’s long-term care system.
“We are also lowering our rating ... [to reflect] elevated near-term operational and regulatory risks relating to the company, which we believe will continue to weigh on the stock price, and ultimately lead to lower operating margins,” he said.
His target slid to $11.75 from $13.50. The average is $15.45.
“While we believe Sienna’s current share price offers attractive upside potential to long-term oriented investors, it is difficult for us to see how the company’s multiple will improve materially over the next 12 months,” he said.
Though he cautions that the outlook remains “challenging,” Industrial Alliance Securities analyst Elias Foscolos thinks the recent rise in oil prices has brought an improve valuation for both Shawcor Ltd. (SCL-T) and the energy sector as a whole.
"Broad markets have been on the rebound, as social distancing restrictions and business shutdowns have been relaxing across the world amidst easing COVID-19 concerns," he said. "Demand for oil is returning, which combined with lower supply, both as a result of shut-ins and OPEC+ supply curtailments, have led to a recovery in oil prices. This has resulted in a pronounced recovery in the Oil & Gas sector, and in particular for small cap Energy Services companies, with the S&P/TSX Energy Equipment Index up 59 per cent quarter-to-date. Due to improved equity valuations, we are increasing our valuation multiples."
That move came despite the fact Mr. Foscolos expects the second quarter of 2020 to be "weaker" than the first. He also expects North American oil and gas-related operations to "remain subdued for a prolonged period."
"Even before COVID-19, industry trends were negative, centred around a) low growth in Canada stemming from limited offtake capacity, b) declining investment in maturing U.S. shale, and c) a measured approach to CAPEX by producers, aiming to spend within cash flow amidst increasingly unsupportive capital markets. We expect international pipe coating to perform well over the next few quarters, driven by a strong backlog of projects that have already been booked. Projects that are yet to be sanctioned will likely be delayed, resulting in backlog winding down through the year as work is completed. We believe Q2/20 will be weak for SCL’s Automotive & Industrial (A&I) business line due to manufacturer shutdowns, but that segment’s revenue will rebound quicker than SCL’s oil & gas-related businesses, albeit at lower levels. SCL’s composite tank business should continue to generate relatively stable, low-beta revenue in North America."
Maintaining a "hold" rating for Shawcor shares, he hiked his target to $4 from $1.75. The average on the Street is $2.39.
Scotia Capital analyst Konark Gupta sees some “green shoots” emerging for TSX-listed transportation and aviation companies.
He said the positive signs “have recently lifted investor sentiment and put a bid into many of our covered stocks, particularly laggards.”
“Our analysis of macro indicators (PMI and consumer sentiment) and industry data (railroad traffic and trucking conditions) shows that the freight markets have likely stabilized or rebounded in late May/early June,” said Mr. Gupta in a research note released Tuesday. “In particular, railroad traffic started to show some improvement in late May, while FTR’s trucking indices have significantly improved since April. Similarly, data points from the civil aviation industry (airport traffic and airline capacity) are showing signs of modest and gradual recovery, led by the domestic markets. Globally, the number of flights operating today is now down 65 per cent year-over-year, slightly improving from 70-per-cent decline in early May, according to OAG. China is leading the aviation industry with the number of flights down only 20 per cent year-over-year today vs. 55 per cent in February, but Canada and the U.S. are showing some improvement in domestic flows.”
“While we await confirmation of the fundamental rebound, we believe an improving investor sentiment should continue to bode well for our cyclical names. However, given several of our covered stocks have outperformed either since the market peaked on Feb 19 or since it troughed on Mar 23, we encourage investors to consider leverage ratio outlooks and long-term valuations in order to avoid any shocks during this risk-on environment."
Mr. Gupta made a series of rating changes for stocks in his coverage universe on Tuesday.
He upgraded these stocks:
- Bombardier Inc. (BBD.B-T) to “sector perform” from “sector underperform” with a 50-cent target, up from 35 cents but below the 57-cent target.
- Heroux-Devtek Inc. (HRX-T) to “sector outperform” from “sector perform” with a $16.50 target, up from $13. The average is $14.08.
- TFI International Inc. (TFII-T) to “sector outperform” from “sector perform” with a $54 target, up from $43. Average: $46.78.
“Our TFII, HRX and BBD.B upgrades reflect an improving macro backdrop as well as, in the case of TFII and HRX, attractive valuations and expected reasonable leverage ratios,” he said.
Mr. Gupta downgraded CAE Inc. (CAE-T) to “sector perform” from “sector outperform” with a $29 target, rising from $24. The average is $24.30.
“Our CAE downgrade is due primarily to limited upside potential to our increased target, given its significant rebound (up 92 per cent) since the market troughed on Mar 23, which doesn’t leave much room for multiple expansion,” the analyst said.
RBC Dominion Securities analyst Kate Fitzsimons expects Lululemon Athletica Inc. (LULU-Q) to emerge from the COVID-19 pandemic with “even stronger tailwinds.”
Ahead of the release of its first-quarter earnings report on Thursday, Ms. Fitzsimons raised her revenue and earnings expectations for 2020 and 2021, leading her hike her target price for its stock.
She expects investors to look past the quarterly results and focus on the Vancouver-based company's commentary on its digital momentum, productivity at reopened stores and regions and longer-term, post-pandemic growth opportunities.
"We expect slightly better results than we have seen from peers given brand heat, favorable category exposure, and our expectation for strong digital demand (consistent with industry commentary about accelerating trends into April and especially May," she said.
Ms. Fitzsimons is forecasting a 15-per-cent decline in revenue to US$668-million and earnings per share of 3 US cents. Though those results fall short of the consensus on the Street (US$683-million and 23 US cents), she emphasized the vast range of estimates on the Street.
For full-year 2020 and 2021, she's projecting revenue of US$3.989-billion and US$5.017-billion, respectively, rising from US$3.436-billion and US$3.766-billion. Her EPS estimates rose to $3.55 and $5.76 from $3.36 and $4.42.
“Behind our raised estimates are assumptions that productivity is rebounding faster than we previously had anticipated,” she said. “We see this as fair given digital momentum at LULU into the quarter on top of lateral reads from the group on digital acceleration into April and May, strength of casual and athletic focuses especially in a WFH world as customers exercise at home, and still innovation focuses. In addition to commentary on men’s vs. women’s, we note recent job postings for footwear in Portland, OR, suggest category expansion opportunities are top of mind.”
Keeping an "outperform" rating, Ms. Fitzimons moved her target to US$360 from US$225. The average on the Street is US$271.70.
“With LULU shares up 126 per cent from March lows (SPX up 34 per cent) and trading near all-time highs at 8.4 times FY2 consensus revenues, they appear to be pricing in a brand bigger versus the $6-billion 2023 sales target,” she said.
“While the shares have run recently, we maintain our view that LULU is poised for LT tailwinds on the other side of COVID-19, given its sweetspot of innovation, loyalty, and casual/athletic focused assortments. We also expect that comments on a better than expected productivity rebound, digital momentum, and managed inventories and markdowns can actually be positively received with the 1Q print. We would view a pullback as a buying opportunity. With category and digital dynamics, we expect the resilience of the LULU model can allow a faster productivity and earnings snapback, with a wider TAM [total addressable market] on the other side of COVID-19.”
Elsewhere, Piper Sandler analyst Erinn Murphy raised her target for Lululemon to US$360 from US$265 with an “overweight” rating.
Seeing it poised to become the largest West Africa-focused gold producer and one of the top 15 in the world following the closing of its acquisition of Semafo Inc., Canaccord Genuity analyst Carey MacRury initiated coverage of Endeavour Mining Corp. (EDV-T) with a “buy” rating on Tuesday.
“With the acquisition of SEMAFO, Endeavour now has a core portfolio of four high-grade assets (Houndé and Ity from Endeavour, and Boungou and Mana from SEMAFO) that represent almost 80 per cent of our mining NAV [net asset value],” the analyst said. "We forecast that these core assets sustain gold production at 800-900,000 ounces through 2026 with potential for mine life extension beyond.
“We note that these four mines are among the highest-grade mines in West Africa with an average open-pit grade of 2 grams per ton, almost double that seen in open-pits commonly seen in developed countries like Canada and Australia. We forecast these four mines producing just over 800,000 ounces in 2020 at an average AISC [all-in sustaining cost] of $840 per ounce.”
Also seeing a pipeline of further growth through its Kalana Project in Mali and Fetekro property in Ivory Coast, Mr. MacRury said Endeavour has shown a "track record of operational execution and mine building," noting it has met or exceeded its annual production and cost guidance for seven consecutive years.
Though he acknowledged the turmoil in West Africa is a concern for investors, he thinks the acquisition of Semafo “creates a larger, more diversified producer with a stronger balance sheet and critical mass that should help mitigate the risks of operating in the region.”
Mr. MacRury set a $38.50 target. The average on the Street is $37.80.
“On a pro forma basis, EDV is trading at 0.76 times NAV and 3.2 times 2021 estimated EBITDA (3.7 times on consensus pro forma estimates). The senior gold producers are trading at 1.01 times NAV and 5.5 times 2021 estimated EBITDA respectively. Endeavour’s West African-focused peers are trading at 3.7 times 2021 estimated EBITDA on average; following the acquisition, we think the combined company should trade at a premium to its smaller, generally higher cost, and less diversified African peers.”
Citing a “markedly stronger than anticipated iron price environment,” Scotia Capital analyst Orest Wowkodaw raised his target price for shares of Labrador Iron Ore Royalty Corp. (LIF-T).
He sees "escalating" supply constraints from Brazil after Vale SA suspended activities at its Itabira complex on June 5 due to COVID-19 concerns.
"Although we have left our Fe price deck unchanged for now (current 65-per-cent Fe spot of US$119 per ton is 29 per cent and 39 per cent above our 2020-2021 estimates of US$92 per ton and US$85 per ton, and 49 per cent above our long-term price of US$80 per cent), we have increased our 2021-2022 estimated dividend mutliple to 12.0 times (from 10.0 times) and our 8% NAVPS multiple to 1.2 times (from 1.0 times) to reflect the higher price environment," said Mr. Wowkodaw.
Though he thinks the elevated spot prices are unsustainable over the medium to long-term, Mr. Wowkodaw raised his target to $30 from $25. The average on the Street is $25.07.
He kept a “sector outperform” rating, which he said its based on valuation and a “strong” dividend outlook.
“At current elevated spot prices (62 per cent and 65-per-cent Fe of US$106 per ton and US$119 per ton; US$30 per ton pellet premium; CAD of 0.75), we forecast LIF to generate 2020E-2021 estimate adjusted cash flow per share of $3.10 and $4.04, or 44 per cent and 82 per cent above our current estimates of $2.16 and $2.22, respectively,” he said. “With cash now back to more normal levels, we believe adjusted cash flow serves as the best proxy for potential dividends (we forecast 2020-2021 dividends per share of $2.35 and $2.21 currently). Our 2020-2021 spot adjusted cash flow estimates imply robust potential dividend yields of 12.5 per cent and 16.3 per cent. We note that despite the elevated current Fe price, estimated Chinese steel mill margins remain in positive territory due to lower met coal prices and recovering steel prices.”
Concurrently, Mr. Wowkodaw raised his target for Champion Iron Ltd. (CIA-T) shares to $4 from $2.75. The average is $3.23.
“We rate CIA Sector Outperform based on Bloom Lake’s high-grade and premium concentrate, strong margins, capital efficient near-term growth, and attractive valuation,” he said.
In other analyst actions:
* Citing improving economic/auto supplier outlook, a positive outlook for free cash flow derivation, potential for a stabilization/improvement in its industrial outlook for 2021 and a stable balance sheet, TD Securities analyst Brian Morrison raised Linamar Corp. (LNR-T) to “buy” from “hold” with a $55 target, jumping from $35. The average is $38.17.
* TD’s Cherilyn Radbourne upgraded ATS Automation Tooling Systems Inc. (ATA-T) to “buy” from “hold” with a $24 target. The average is $25.42.
* TD’s Greg Barnes raised First Quantum Minerals Ltd. (FM-T) to “buy” from “hold” with a $14 target, up from $10.50. The average is $12.12.
* Morgan Stanley upgraded First Quantum Minerals Ltd. (FM-T) to “overweight” from “equal-weight” with a $12.20 target, up from $8.50.
* National Bank Financial analyst Patrick Kenny raised Superior Plus Corp. (SPB-T) to “outperform” from “sector perform” and raised his target by a loonie to $13. The average target is $12.46.
* Eight Capital initiated coverage of Hamilton Thorne Ltd. (HTL-X) with a “buy” rating and $1.80 target, which exceeds the $1.63 consensus.
* Canaccord Genuity analyst Aravinda Galappatthige reduced his target for Transcontinental Inc. (TCL.A-T) shares to $17 from $19 with a “buy” rating. The average is $18.
“With COVID-19 causing significant reductions in TCL’s printing operations, we have reduced our estimates for the segment for F20 with a modest recovery occurring in F21,” he said. “While the packaging segment has been deemed largely essential, the printing segment has been forced to close several plants to accommodate social distancing regulations. We expect this to drive a 45-per-cent decline in printing revenue for Q2 and 25 per cent for F20 overall translating into a 30-per-cent decline in EBITDA for Q2 and a 15-per-cent decline for F20. Beyond this year, we expect a slight bounce back in the segment but note that the secular decline in the business will likely be accelerated by the current pandemic.”
* Haywood Securities analyst Geordie Mark initiated coverage of Fiore Gold Ltd. (F-X) with a “buy” rating and $2 target. The average on the Street is $1.57.
“Fiore is on the cusp of a new phase of its organic growth plan having now bedded down incremental production expansion at the Pan Gold Mine in Nevada, and together with mine and near mine exploration discovery looks well positioned to extend Pan’s operating life," said Mr. Mark. "With the projected start of the Goldrock mine, only 5 miles away, in early 2023, we see the Company growing to a dual asset 110,000 ounce gold per annum producer over the nearer term.”
With a file from Reuters