Inside the Market’s roundup of some of today’s key analyst actions
Pointing to a "material" reduction in uncertainty with the deal as well as a "promising" medium-term outlook, Mr. Wolfson raised his rating for Kinross shares to "outperform" from "sector perform."
On Monday, Kinross said it reached an updated agreement with Mauritania’s government for Tasiast Sud. The government will give Kinross a 30-year exploitation license for its new project Tasiast Sud. Mauritania will receive a 15-per-cent free carried interest in the project, with an option to purchase an additional 10 per cent after further feasibility work is completed.
"This news resolves a protracted a two-plus-year dispute that in our view was the single greatest identifiable uncertainty for the company," said Mr. Wolfson. "Our forecasts exclude the Tasiast Sud dump-leach project, where its production and low capital could be incrementally positive."
He did warn that short-term uncertainties remain, noting: “2020 production and project deliverable risks are above average for Kinross due to company-specific project deliverables and foreign exposure. For 2Q, results are expected to be affected by prior-outlined COVID-19 disruptions and an employee strike at Tasiast. While we acknowledge these uncertainties, upcoming improvements are expected from various ramp-ups (Fort Knox Gilmore Bald/Round Mountain projects, and Tasiast’s expansion today to 2023). In conjunction with this outlook and declining capital spending, at spot gold we forecast an FCF/EV of 6.5 per cent/10.4 per cent/11.8 per cent in 2020/21/22 (vs. senior group average 4.5 per cent/5.9 per cent/6.4 per cent) and Kinross could generate a compelling $4.8-billion in FCF over an upcoming 5-year period.”
Mr. Wolfson also sees “elevated” long-term risk from production decline pressures and geopolitical issues, but he emphasized the company’s “favourable management capital allocation and productive exploration.”
He raised his target for Kinross shares to US$7.50 from US$7. The current average target on the Street is US$8.45.
Believing the “bulk of the bad news” has passed and seeing initial signs of macro improvement emerging, Raymond James analyst Steve Hansen upgraded CanWel Building Materials Group Ltd. (CWX-T) following a better-than-anticipated business update and small-than-expected dividend reduction.
On Monday, the Vancouver-based company announced sales through the first five months of 2020 increased 8 per cent year-over-year, which was attributed to the initial reopening of the economy and "healthy" do-it-yourself business.
“Given that 1Q20 sales were already reported at up 16 per cent year-over-year, this implies that initial 2Q sales (April/May) paced slightly above breakeven, far better than the sizable decline previously forecast,” said Mr. Hansen.
“CWX also announced a smaller-than-expected dividend cut, reducing its quarterly payout (starting 3Q20) by 14.2 per cent to $0.12 (vs. $0.14 prior & our $0.07 est.). Based upon these changes, and modest upward revisions to our financial estimates, we now calculate a more reasonable/sustainable 2021 payout ratio of 73.0 per cent. Management also indicated that recent cost savings and working capital optimization have reduced total borrowings by $80-million versus 2Q19 (largely in-line).”
Though he thinks the impact of COVID-19 will “undoubtedly linger,” Mr. Hansen said he’s “increasingly upbeat over re-emerging 2H20/2021 macro tailwinds,” including a recent rally in lumber & building material price and anectodal reports of improving housing demand recently emanating from many of the largest U.S. homebuilders."
Also seeing the announcement of its multi-year national distribution partnership with CertainTeed Canada as “a solid incremental win,” Mr. Hansen moved CanWel to “outperform” from “market perform” with a $5 target, up a loonie. The average on the Street is $4
Elsewhere, RBC’s Paul Quinn raised his rating to “outperform” form “sector perform” with a $5 target, rising from $4.
Despite a recent share price rally, Citi analyst Jim Suva continues to see upside in Apple Inc. (AAPL-Q), raising his target price to a new high on the Street in a research note titled “Five Reasons Apple Stocks Can Trade Higher.”
"Apple shares have rallied over the past few months and are currently tracking 15 per cent year-to-date versus the broader S&P 500, which is down 5 per cent (and compares to our coverage portfolio down 10 per cent on a median basis)," he said. "This is against a broader macro backdrop, with smartphones declining by 12 per cent units year-over-year, followed by an expected 12-per-cent uptick in 2021, while PCs and tablets are likely to decline by 7-10 per cent in 2020 and see only a modest 2-3-per-cent gain in 2021."
Mr. Suva’s reasons for optimism are: the upcoming launch of the 5G iPhone; the belief the Street’s expectation for iPhone sales have declined enough to avoid the potential for disappointment; the opportunity to gain market share from Huawei; growth for its wearables remains high; and the acceleration in its Apple Services offerings.
After adjusting his financial expectations for the tech giant, Mr. Suva hiked his target price for Apple shares to US$400 from US$310 with a "buy" rating (unchanged). The current average on the Street is US$323.98.
“Our revised target price of $400 assumes a target multiple of 25 times, which is a 25-per-cent premium to the current market multiple of 20 times,” he said. “Over the past two years, Apple shares have traded in a range of 0.8-1.3 times price-to-earnings relative to the market, with a median multiple of 1 times. Given that we a are entering a period of smartphone demand recovery, coupled with our view of Apple’s accelerated shift to subscription services, product revenue diversification, and ample cash to withstand potential economic uncertainty and shareholder return policies, we assign a 25-per-cent premium to the market multiple of 20 times to get to our target multiple of 25 times. On a 25 times PE (including cash), we get to a target price of $400.”
Desjardins Securities analyst Gary Ho raised his financial expectations for AGF Management Ltd. (AGF.B-T) ahead of the June 24 release of its second-quarter financial results to account for its May reported assets under management and the recent market recovery.
"We believe investors will be focused on commentary on the recently revised S&W transaction," he said. "Given a new equity partner on board, we expect the merger to be completed by the end of 3Q FY20."
After increasing his wealth management expectations, Mr. Ho is now projecting earnings per share for the quarter of 8 cents, up from 5 cents previously but a penny below the consensus on the Street.
At the same time, he raised his full-year 2020 and 2021 expectations, increasing his EPS projections to 40 cents and 33 cents, respectively, from 31 cents and 23 cents.
Keeping a “buy” rating for its shares, he moved his target to $6.25 from $5.75. The average is $5.13.
“We foresee a few near- or medium-term positive catalysts: (1) closing of S&W in 2H FY20; (2) management paying down debt and buying back stock with the S&W proceeds; (3) growth in fees/earnings from its alt platform; (4) execution on SG&A cost reduction to improve EBITDA and EBITDA margins; and (5) the shares provide an attractive 6.7-per-cent dividend yield,” the analyst said.
Fronsac Real Estate Investment Trust’s (FRO.UN-X) triple-net leased portfolio and “necessity-based” tenants drives stable and growing cash flow, according to Canaccord Genuity analyst Brendon Abrams.
Calling the Pointe-Claire, Que.-based REIT, which holds interest in 62 properties in Eastern Canada, “an attractive vehicle for investors looking for a sustainable and growing yield, which is supported by a stable cash flowing portfolio and the opportunity for continued accretive growth in a unique asset class,” Mr. Abrams initiated coverage with a “buy” rating on Tuesday.
"Fronsac is internally managed and its portfolio features long-term triple-net leases, requiring minimal overhead," he said. "This provides for stable cash flows for the REIT, eliminating both property management overhead and most maintenance capital expenditures. Additionally, Fronsac’s internalized asset management enables it to gain scale with minimal incremental administrative overhead. This results in a greater proportion of revenue flowing to unitholders as the REIT continues to grow through accretive acquisitions."
“We believe Fronsac’s cash flow profile will remain very stable over the long term, given its current weighted-average lease term of 8.6 years and consistent 100% occupancy rate since its inception. This view is predicated on the REIT’s stable tenant base and its focus on tenants for which location is a critical driver of profitability, which drives high retention.”
Mr. Abrams also emphasized Fronsac's "consistent" track record of growing cash flow and distributions through accretive acquisitions.
“Since its inception in July 2011, Fronsac has raised its per-unit distribution at a CAGR [compound annual growth rate] of 8 per cent while growing FFO per unit at a CAGR of 18 per cent,” he said. “The consistent growth in cash flow per unit is largely a result of the REIT’s ability to efficiently scale its asset management overhead and source accretive acquisitions. The REIT’s distribution payout ratio is 63 per cent, based on our 2020 AFFO per unit forecast, which we believe is conservative. We forecast Fronsac’s distributable income will grow 16 per cent between 2019 and 2021, although we have not forecast any change to the distribution through the end of 2021.”
The analyst set a target of 60 cents for Fronsac units. The average on the Street is 75 cents.
“Year-to-date, Fronsac’s unit price has declined 20 per cent,” he said. “In our view, given the stability of the REIT’s portfolio, the recent selloff is overdone, and we believe the units are attractively valued at current levels.”
In other analyst actions:
* Echelon Wealth Partners analyst Rob Goff initiated coverage of Drone Delivery Canada Corp. (FLT-X) with a “speculative buy” rating and $1.80 target, exceeding the $1.75 consensus.
"We believe the commercial drone delivery industry is set to emerge as a major component in logistics planning with its initial focus on the B2B market for dedicated routes in remote regions and industrial supply chain delivery services," he said. "Initial considerations for the B2B phase are expected to be redefined as the sector’s ambitions evolve towards B2C deliveries."
“Our thesis rests on the ability of drones to deliver goods faster, with cost and reach advantages. The stringent regulatory overview that has governed its maturation is likely to represent a key competitive moat enabling first movers such as DDC to establish a profitable, sustainable business model where consumer safety is paramount. With the drone market projected to reach US$27-billion by 2030, we forecast DDC revenues/EBITDA surpassing $100-million/$50-million within five years.”
* CIBC World Markets analyst Chris Couprie raised Chartwell Retirement Residences (CSH.UN-T) to “outperformer” from “neutral” with a $12.50 target, rising from $12. The average target on the Street is $11.50.
* Evercore ISI initiated coverage of Enbridge Inc. (ENB-T) with an “outperform” rating and $55 target. The average is $51.39.