Inside the Market’s roundup of some of today’s key analyst actions
Industrial Alliance Securities analyst Frederic Blondeau’s strategy for investing in North American real estate is “focused on risk management.”
In a research report released Tuesday, he re-instated coverage of the sector by expressing a preference for Apartment and Industrial Real Estate Investment Trust, given the current economic environment.
“Although we have been more than eight months into the pandemic, we believe it is still relatively early in the game,” he said. "Nevertheless, in this context, no matter the noise, we believe the global investment community should consider global macro scenarios that include inflation, and even stagflation (especially in light of the continued increase of Permanent Job Losses). According to the Federal Reserve Bank of Cleveland, in some cases, U.S. consumers are now expecting the economy to be affected by the pandemic over a period of more than 24 months, with a peak expected inflation impact of 14.5 per cent in mid-next year.
"In such scenarios including inflationary pressures, we believe that the Multi-Residential asset class would further outperform other real estate sub-sectors. We would also highlight Apartments' relatively strong fundamentals across Canada, notably in terms of demand for rental products, in a context where home affordability is under pressure, single-family residential construction costs should continue to rise and, notably in the U.S., total student debt continues to increase. And notwithstanding Americans currently exploring the idea of moving to Canada (especially following the September 29 debate, after which Google went through a major surge in “move to Canada” searches), we believe the fact that the Canadian government has performed relatively well in the pandemic should result in a ‘post-pandemic’ robust number of applications for immigration to Canada."
Mr. Blondeau said the demand for Multi-Family and Logistics/Industrial properties remains “relatively robust” result in stable capitalization rate trends. He said those conditions support his strategy to focus on those to asset classes and two avoid beta/sector rotation ideas.
“Our top ideas are local apartment sharpshooters InterRent REIT (IIP.UN) and Canadian Apartment Properties (CAR.UN) at this juncture,” he said. “In addition, our top Risk/Return ideas are European Residential (ERE.UN) and Granite REIT (GRT.UN). Our higher (qualitative) beta/value picks are NorthWest Healthcare Properties (NWH.UN), Dream Hard Asset Alternatives (DRA.UN), and Artis (AX.UN). In the current context, Boardwalk (BEI.UN) would be our ultimate value pick.”
Mr. Blondeau initiated coverage of the following stocks:
Office
Allied Properties REIT (AP.UN-T) with a “hold” rating and $42 target. The average on the Street is $51.10.
NorthWest Healthcare Properties REIT (NWH.UN-T) with a “buy” rating and $12 target. Average: $12.21.
Slate Office REIT (SOT.UN-T) with a “hold” rating and $5 target. Average: $4.65.
Inovalis REIT (INO.UN-T) with a “hold” rating and $8.25 target. Average: $8.13.
Industrial
Granite REIT (GRT.UN-T) with a “buy” rating and $84 target. Average: $78.63.
Summit Industrial Income REIT (SMU.UN-T) with a “hold” rating and $12.50 target. Average: $13.
Dream Industrial REIT (DIR.UN-T) with a “buy” rating and $13.50 target. Average: $12.25.
WPT REIT (WIR.U-T) with a “buy” rating and $14.50 target. Average: US$14.78.
Senior Housing
Sienna Senior Living Inc. (SIA-T) with a “hold” rating and $13.50 target. Average: $14.03.
Invesque Inc. (IVQ-T) with a “hold” rating and $3.50 target. Average: $2.87.
Retail
Slate Grocery REIT (SGR.UN-T) with a “hold” rating and $11 target. Average: $7.50.
Plaza Retail REIT (PLZ.UN-T) with a “hold” rating and $3.20 target. Average: $3.60.
Fronsac REIT (FRO.UN-T) with a “buy” rating and 75-cent target. Average: 75 cents.
Diversified
Cominar REIT (CUF.UN-T) with a “hold” rating and $9 target. Average: $8.55.
Artis REIT (AX.UN-T) with a “buy” rating and $11 target. Average: $10.63.
Dream Hard Asset Alternatives Trust (DRA.UN-T) with a “buy” rating and $7.40 target.
BTB REIT (BTB.UN-T) with a “hold” rating and $4 target. Average: $3.25.
Pro REIT (PRV.UN-T) with a “hold” rating and $5 target. Average: $5.81.
Nexus REIT (NXR.UN-X) with a “buy” rating and $2.10 target. Average: $2
Firm Capital Property Trust (FCD.UN-T) with a “hold” rating and $5.25 target. Average: $6.13.
Mortgage Investment Corporation
Timbercreek Financial Corp. (TF-T) with a “buy” rating and $9.25 target. Average: $8.93.
Atrium Mortage Investment Corp. (AI-T) with a “buy” rating and $13.50 target. Average: $11.96.
Firm Capital Mortgage Investment Corp. (FC-T) with a “buy” rating and $14 target. Average: $12.50.
Multi-Residential
Canadian Apartment Properties REIT (CAR.UN-T) with a “buy” rating and $59.50 target. Average: $55.76.
InterRent REIT (IIP.UN-T) with a “buy” rating and $18.50 target. Average: $16.18.
Killam Apartment REIT (KMP.UN-T) with a “hold” rating and $20.50 target. Average: $20.58.
Boardwalk REIT (BEI.UN-T) with a “buy” rating and $45 target. Average: $38.58.
Morguard North American Residential REIT (MRG.UN-T) with a “hold” rating and $16 target. Average: $20.25.
European Residential REIT (ERE.UN-T) with a “buy” rating and $5 target. Average: $5.54.
BSR REIT (HOM.U-T) with a “buy” rating and US$12 target. Average: US$11.76.
Firm Capital Apartment REIT (FCA.UN-T) with a “buy” rating and $8 target.
=====
Citing an “attractive” valuation, “significant” leverage to higher copper and gold prices and the presence of several near- to medium-term catalysts, Scotia Capital analyst Orest Wowkodaw upgraded Hudbay Minerals Inc. (HBM-T) on Tuesday.
The move was linked to changes to the firm’s commodity price deck.
Scotia’s 2020 forecast for copper and zinc rose by 10 per cent and 9 per cent, respectively, to US$2.74 and US$1 per pound, while its gold forecast rose by 4 per cent to US$1,775 per ounce from US$1,700. Its long-term projections also increased.
“HBM shares have significant commodity price leverage,” he said.
Mr. Wowkodaw raised his EBITDA forecast for 2020 through 2022 by an average of 14 per cent to reflect the price deck changes, offset narrowly by a delay in mining at its Pampacancha deposit in Peru.
“Several catalysts [are] on the horizon,” he said. “Under the stewardship of the new, and in our view, impressive senior management team, we anticipate several potential future catalysts on the horizon, including (1) the early start-up of gold production and future expansion potential in Manitoba, (2) exploration results in both Manitoba and Peru, and (3) the potential monetization of the Manitoba gold camp post 2021.”
Moving the stock to “sector outperform” from “sector perform,” Mr. Wowkodaw raised his target to $7.25 from $5. The average on the Street is $6.24.
“HBM shares are currently trading at attractive 2021-2022 estimate EV/ EBITDA multiples of 4.6 times and 3.4 times vs. the mid-to-large cap peers at 5.0 times and 4.7 times,” he said. “However, the shares are trading at a premium on a P/NAV basis (1.09 times versus 0.96 times).”
Separately, Mr. Wowkodaw lowered Nevada Copper Corp. (NCU-T) to “sector perform” from “sector outperform” with a 20-cent target, down from 25 cents and below the 45-cent average.
“We are lowering our investment rating on Nevada Copper... based on heightened operating and liquidity risks associated with recently disclosed geotechnical issues at Pumpkin Hollow, which will serve to slow the expected ramp-up and, in our view, likely increase operating costs,” he said.
“Although the shares are trading at a very compelling valuation (currently at only 0.29 times our 10% NAVPS), we anticipate the market to take a ‘wait and see’ approach on the production ramp-up given renewed operating and balance sheet challenges. We note that our estimates already conservatively assume a more protracted ramp-up schedule. Our estimates have been updated to reflect our revised copper price deck.”
=====
Ahead of the release of its third-quarter results next week, Citi analyst Itay Michaeli raised his earnings expectations for Tesla Inc. (TSLA-Q) to reflect higher-than-anticipated deliveries during the period as well as its recent capital raise.
Mr. Michaeli is now forecasting earnings per share for the quarter of 73 US cents, up from 70 US cents. His 2020, 2021 and 2022 estimates increased to US$2.41, US$3.15 and US$4.15, respectively, from US$2.33, US$3 and US$3.84.
“Our 2020-22 EPS estimates (non-GAAP) go up modestly to mostly reflect higher delivery expectations, though our 2020 delivery estimate remains at the low-end of company targets (480k),” he said.
“Our price target moves to $117 from $110 on a favorable adjustment to our discounted terminal value scenarios (bull/base/bear probabilities go to 15 per cent/80 per cent/5 per cent from 15 per cent/70 per cent/15 per cent prior) to reflect continued balance sheet improvement. Key metrics we’re watching in Q3: (a) Vehicle ASP and gross margin progression post the Model Y ramp (we’re modeling 21-per-cent auto gross margin ex. credits); (b) An update on expected Q4 deliveries (we’re at 161k) and the prior planned Fremont capacity increase; (c) More detail on the expected FSD rollout, specifically with respect to the level of automation (L2 or higher), usage domains (intersections, weather etc.) and go-to-market strategy (including subscriptions).”
Keeping a “sell/high risk” rating for Tesla shares, Mr. Michaeli raised his target to US$117 from US$110. The average on the Street is US$309.55.
“To take a more bullish fundamental stance, we’d like to see: (1) Evidence that our bull case volume assumption has material upside—metrics we’re watching there include volume/pricing/utilization/gross margin as well as Tesla’s share vs. comparable vehicles (both ICE and EV) in markets where LT extrapolations make the most sense; (2) A better-than-expected FSD/AV outcome (i.e. L4) vs. our thesis, though we’d note that rolling out additional L2 features could drive higher demand and/or FSD take-rates,” he said. “Though we remain skeptical on Tesla’s L4 RoboTaxi position for a number of reasons that we’ve previously written about, we also continue to see other L4 business models (in easier domains) in which we think Tesla could be successful, including AV Subscription models. To the extent we were to see a pursuit of such models, we’d look more favorably at the story.”
“Tesla shares have pulled back but we still view risk/reward to be skewed to the downside. Relative to other automakers we think Tesla faces somewhat greater uncertainty both on the supply-side (dependence on a single plant that’s currently under a shelter-in-place order) and demand (EV regional concentration in impacted regions). To that point, we note that some of the most impacted U.S. regions are significant EV sales contributors (California, NY/NJ). This too calls into question the pace of demand even if Fremont were to restart production. Lastly, given that start-of-production at Fremont appears dependent on government approval or a lifting of shelter-in-place orders, it’s unclear under what conditions Fremont can return to full production.”
=====
Seeing it “undervalued” against its current portfolio and “deeply undervalued” given the prospects of consolidation, Echelon Capital Markets analyst Rob Goff initiated coverage of PopReach Corp. (POPR-X), a Toronto-based mobile game publisher, with a “speculative buy” rating.
“We forecast aggressive shareholder returns as a proven management team deploys a clearly defined operating and acquisition game plan,” he said. “We believe, market growth together with the competitive landscape present a sustainable opportunity to add value as a consolidator of mature titles where PopReach has demonstrated its ability to shape-shift long-tail assets. As it gains scale and demonstrates access to capital, the company’s ability to acquire and realize efficiencies are empowered as buyer synergies and economics strengthen. Across the current portfolio of 12 franchises (24 games), the company has delivered a return on cash from the acquired assets of more than 40 per cent with payback at 2.3 years.”
Mr. Goff said he’s looking for “significant” returns as PopReach’s organic and inorganic growth profile “gains traction.”
“We look for acquisitions as positive catalysts demonstrating the company’s ability to add value as a consolidator while further access to capital markets would be expected to raise its profile,” he said.
“The impressive growth of mobile games has created a top tier of marquee providers focused on maintaining market leadership with prioritization on early stage, hyper-growth titles. Consequently, many second tier or lower games are undermanaged and underperform against potential long-tail revenue trend lines. At the other end of the spectrum, smaller publishers often fail to focus on either ongoing content development for maturing titles or on the adoption of cost optimization strategies afforded by cloud-based strategies. We look for PopReach to create significant shareholder returns executing on its consolidation strategy where the Company has demonstrated success realizing accretive acquisitions on upfront economics then adding value through implementing revenue-enhancing and cost-efficiency strategies.”
The analyst set a target of $1.70 per share, exceeding the consensus by 2 cents.
“Our aggressive PT reflects the view that management will successfully deploy a disciplined copy/paste/accrete/repeat consolidation strategy,” said Mr. Goff. “We believe managements history supports confidence that they will successfully create shareholder value through an on-strategy acquisition plan leveraging a deep and replenishing pool of targets backed by the double-digit secular growth of mobile games. Our baseline and aggressive scenarios yield one-year DCF valuations at $1.96 and $2.47 respectively reflecting cumulative acquisition outlays of $49.5-million and $82.5-million across 2021-2024.”
=====
RBC Dominion Securities analyst Keith Mackey sees Trican Well Service Ltd.'s (TCW-T) “position as the largest pressure pumper in Canada and strong balance sheet as ingredients in successfully executing its longer-term plans.”
However, following a recent meeting with new Chief Executive Officer Brad Fedora, Mr. Mackey said he’s maintaining a “neutral” stance given the near-term challenges faced by pressure pumpers.
“Under Mr. Fedora’s executive leadership, we expect Trican to stay true to its near-term strategic priorities,” he said. “The company aims to generate top quartile ROIC [return on invested capital] through growing existing business lines, focusing in costs and efficiency, and maintaining its strong market position. In the longer term, the company is considering options to consolidate its market position or differentiate its service offerings, which we expect could be through enhanced dual fuel offerings or investment in electric fracturing equipment.”
“Opportunistic bite-sized equipment purchases could offset attrition in Trican’s existing fleet. Broader consolidation is risky, in our view, as reducing the number of competitors may not yield significant pricing improvement. There are currently five competitors in the Canadian market controlling 86 per cent of the high-intensity horsepower and pricing remains challenged.”
Maintaining a “sector perform” rating, Mr. Mackey increased his target to $1.25 from $1, exceeding the average on the Street by a penny.
“Differentiation is an opportunity to build a competitive advantage,” he said. “Successful differentiation likely hinges on Trican’s ability to negotiate suitable contract terms with customers, (rate and duration) and secure capital for new fleet(s) on terms that allow for an acceptable return on invested capital. Increasing scrutiny on environmental factors (i.e., emissions) may also be a catalyst for the industry to migrate to electric fracturing versus diesel pumps.”
=====
Several equity analysts on the Street raised their target prices for shares of MTY Food Group Inc. (MTY-T) in response to the release of better-than-anticipated third-quarter results.
On Friday, the Montreal-based restaurant company reported revenue and adjusted EBITDA of $135.4-million and $43.4-million, respectively, exceeding the consensus projections on the Street of $125.7-million and $26.3-million.
“While we continue to read and hear about the restaurant industry facing substantial amounts of pressure in various media reports, we would be hard pressed to conclude that MTY’s 3Q financial results were illustrative of any such situation,” said Raymond James' Michael Glen. “With the 3Q results, the company recorded record EBITDA of $43.4-million (which was way ahead of our $24.6-million forecast) with free-cash generation (2nd best performance in the company’s history on free-cash) at $34.1-million (also well ahead of our $6.6-million forecast). From that perspective, while system sales were down 16.6 per cent year-over-year overall and point to some stress points in the network, MTY has clearly taken the actions necessary to maximize profits and free-cash. Additionally, while historicallythe Canadian business was the more significant driver of profits for the business, COVID-19 has substantially shifted this weighting to the U.S., with management discussing continue strength at Papa Murphy’s and Cold Stone Creamery.”
Keeping a “market perform” rating for MTY shares, Mr. Glen hiked his target to $44 from $30. The average is $41.50.
“While we are opting to increase our forecast quite significantly, we would note that there continue to be a number of variables to consider," he said. "The most significant pertain to the level of benefits to be realized from Canadian franchisees from ongoing extensions / variations to the Canada Emergency Wage Subsidy (CEWS) and Canada Emergency Commercial Rent Assistance(CECRA) programs. In particular, with CEWS seeing an extension into 2021 and the renewed CECRA program appearing to have terms that make it less onerous for franchisees to apply (LINK),these will continue to serve as important support mechanisms for MTY’s Canadian operations and it would be impossible for us estimate how the network would have performed absent such programs. On the U.S. side, it appears (based on commentary from the 3Q conference call) that the tailwinds for Papa Murphy’s remain constructive as the franchise enters a seasonally stronger period, with indications that Cold Stone continues to see momentum. Additionally, and perhaps somewhat surprisingly, management indicated that ongoing wildfire and hurricane activity has largely spared the U.S. network in the current period.”
Others raising their targets included:
* Acumen Capital’s Nick Corcoran to $54 from $48 with a “buy” rating.
“We view the Q3/FY20 results as positive. MTY generated strong FCF and paid down long-term debt in a challenging operating environment. We expect the positive momentum to continue through Q4/FY20 despite any potential regional lockdowns,” he said.
* National Bank Financial’s Vishal Shreedhar to $49 from $35 with a “sector perform” rating
* TD Securities' Derek Lessard to $45 from $32 with a “hold” rating.
=====
Several equity analysts lowered their target prices for shares of Transat AT Inc. (TRZ-T) in response to Saturday’s announcement that Air Canada (AC-T) has agreed to purchase it at a lower price.
Laurentian Bank Securities' analyst Nauman Satti dropped his target to $5, matching the new offer price from $18 with a “tender” rating. The average target on the Street is $7.13, according to Refinitiv data.
“We are not surprised by the revision in the acquisition price and had highlighted the potential risk in our previous notes given the fundamentals of the aviation industry have changed drastically,” he said. “The revised price should incentivize Air Canada to actively engage with regulators for approval while Transat receives the requisite approval to shore-up its liquidity position. The deal structure provides TRZ shareholders with further upside if they opt for payment via AC shares.”
“Given a dismal industry outlook and an expected weakening of the balance sheet, we believe tendering to the $5.00 offer is the best outcome from a risk-return perspective for the TRZ shareholders. Investors with a higher risk appetite are also better served with a 30% upside from current levels and a potential upside to Air Canada’s stock price. However, a potential government grant should make the deal less desirable for the shareholders; the new structure provides an exit option (via breakeven free) if that is to happen.”
Elsewhere, CIBC World Markets analyst Kevin Chiang lowered his target to $5 from $6 with a “neutral” rating.
“We saw a very low probability of the AC/TRZ deal being consummated at the initial deal price. With these amended terms, this may be the best option for both parties,” said Mr. Chiang.
Scotia Capital’s Konark Gupta cut his target to $5 from $7 with a “sector perform” rating.
=====
In other analyst actions:
* Raymond James analyst Andrew Bradford raised his target for shares of Mullen Group Ltd. (MTL-T) to $11.25 from $9.75, maintaining an “outperform” rating. The average on the Street is $10.59
“The impact of the COIVD shutdowns and the slowdown in the Canadian oilpatch has had a far less severe impact on Mullen than many might have feared, primarily owing to the perseverance of Western Canadian consumers,” he said. "Our updated RJL Prairie Province Activity Index - which is designed to track economic activity across Mullen’s key operating regions - has improved materially over 2Q20 levels.
“We are increasing our estimates for the remainder of 2020 and 2021.”
* BMO Nesbitt Burns analyst Rene Cartier initiated coverage of Nomad Royalty Company Ltd. (NSR-T) with a “market perform” rating and $1.70 target. The average target is $2.25.
“While multiple expansion typically occurs through assets entering production, and through a more de-risked portfolio, in our view, Nomad Royalty is trading in line with peers thereby reflecting these expectations,” he said.
* After the release of “sparkling” third-quarter results on Friday, CIBC World Markets analyst John Zamparo raised his target for Alcanna Inc. (CLIQ-T) to $6.75 from $5.75 with an “outperformer” rating, saying he’s " increasingly confident in Alcanna’s sustained performance amidst the pandemic." The average on the Street is $6.53.
* Scotia Capital’s Mark Neville raised his target for CCL Industries Inc. (CCL.B-T, “sector outperform”) to $63 from $58, while RBC Dominion Securities' Walter Spracklin also raised his target to $63 from $58 with an “outperform” rating. The average is $56.78.
* Citi analyst William Katz raised his target for Brookfield Asset Management Inc. (BAM-N, BAM.A-T) to US$38.50 from US$36. The average is currently US$41.64.
David Leeder