Inside the Market’s roundup of some of today’s key analyst actions
BTIG analyst Camilo Lyon thinks the headwinds facing Canada Goose Holdings Inc. (GOOS-T, GOOS-N) intensified in December to a level that more than offset a “modest” 3-per-cent increase in digital traffic.
Pointing to the impact of retail lockdowns in multiple key urban markets stemming from the COVID-19 pandemic and “constrained” retail traffic globally, Mr. Lyon said he has increased his “conviction” on his “negative stance” toward the luxury apparel maker.
“With weak low single-digit digital traffic, our math suggests consensus estimates imply FQ3 retail sales were roughly flat year-over-year, a highly unlikely outcome given significant retail closures,” he said. “As such, we suspect FQ3 estimates will be revised lower over the coming weeks.
“While we continue to value the GOOS’ heritage and strength in technical outerwear, we believe broader questions around the brand’s relevance and waning overall consumer interest will continue to weigh on the shares, particularly when compared to rising interest in Moncler (MONC, Not Rated) which had digital traffic increase 32 per cent during the same period. The lingering question around brand value coupled with our expectations for a weak FQ3 report will likely put added pressure on GOOS’ multiple until proof to the contrary is had, which likely does not materialize until greater visibility into fall/winter ’21 demand emerges. What’s more, a second consecutive weak holiday season will likely keep inventory bloated and pressure fall ’21 wholesale orders.”
Mr. Lyon now projects digital traffic to the Toronto-based company’s site finished the key third quarter up just 2 per cent, an improvement from a 17-per-cent drop earlier in the quarter.
He said it was “too little too late to save the quarter given the added (and unexpected) lockdowns in Toronto for nearly the entire month of December and a second round of lockdowns in London and Berlin. Toronto represents 11 per cent of the store base and arguably mid-teens in revenues given the Yorkdale Mall location is one of the most productive stores in NA. Similarly, the London location was forced to shut down again in December and as was announced today, is entering a third wave of lockdowns until mid-February.”
Maintaining his “sell” rating for Canada Goose shares, Mr. Lyon trimmed his target to $31 from $35. The average on the Street is $41.94.
“We believe the risk/reward has become disproportionately skewed to the downside,” he said. “With macro pressures likely persisting through year-end, we would expect multiple compression to ensue on the expectation of weak earnings. We continue to hold the brand in high regard, but we believe the near-term demand concerns will weigh on the stock well into next year until more tangible catalysts emerge that reflect the earnings recapture potential.”
In a research report released Tuesday titled The buffet is open and there is something for everybody, RBC Dominion Securities analyst Robert Kwan said he expects the market to “position more offensively in the coming year, both within the Canadian Infrastructure sector and more broadly with respect to the overall market.”
Accordingly, he sees regulated utilities stocks to be a source of funds within portfolios, prompting him to lower his rating for Fortis Inc. (FTS-T) to “sector perform” from “outperform.”
“We believe that Fortis has been a ‘go to’ stock for Canadian investors with multi-sector mandates seeking a defensive utility and we expect that FTS will continue to be viewed that way for the foreseeable future,” said Mr. Kwan. “As such, we believe that the shares will be a source of funds for investors looking to rotate more offensively within the market. However, for investors with a more defensive posture, we believe that Fortis remains well positioned as a solid defensive choice within the Canadian regulated utility sector.”
The analyst also warned of potential earnings for 2021, namely forex, noting: “For most of the last three years, the foreign exchange rate has been in a range of $1.29–1.35 Canadian dollars per U.S. dollar, which spiked into the $1.40 range during the depths of the COVID-related downturn. Since September 2020, the U.S. dollar has weakened from about $1.34 to roughly $1.28 today. We calculate that a $0.05 change in the USD/CAD exchange rate results in an approximately $0.06 per share impact on 2021E EPS (about 2 per cent). Combined with potential negative EPS revisions driven by a weaker U.S. dollar, we see potential for additional downside in consensus EPS for 2021 due to the recent Tucson Electric Power rate decision.”
Conversely, Mr. Kwan did say positive longer-term fundamentals remain intact.
“We believe there are a number of positive secular tailwinds for the sector that ultimately should result in regulated utilities being able to sustain mid- to high-single-digit rate base growth profiles,” he said. “Specifically, decarbonization of electricity generation and overall electrification are trends that we expect to result in attractive long-term growth for regulated utility stocks.”
With his downgrade, he maintained a $60 target for Fortis shares. The average on the Street is $59.50.
“In the near term, general stock market weakness, whether that be due to vaccine ineffectiveness and/or material delays relating to the rollout of vaccines, a third wave or some other shock to the system, would lead us back to favouring defensively positioned regulated utility stocks,” said Mr. Kwan. “Over the longer term, the positive fundamentals for regulated utilities naturally lead us to favour utility stocks, which could come back into focus as the market rally matures.”
Converge Technology Solutions Corp.’s (CTS-X) $32-million acquisition of Vicom Computer Services highlights its “copy/paste/accrete/repeat formula,” according to Echelon Capital Markets analyst Rob Goff, who sees “strong prospects” for revenue and cost synergies as well as working capital gains.
“The acquisition reestablishes the momentum of larger acquisitions clearly addressing any questions around use of proceeds for CTS’s cash balances of $90-million-plus or $58-million allowing for Vicom,” he said.
Mr. Goff expects a “lasting, positive response” to the deal, which he projects will generate $9-million in 2021 EBITDA. He also sees its acquisition pipeline remaining “robust.”
“Converge’s track record of successfully completing now 15 accretive acquisitions since October 2017 speaks to the existing market opportunities and management’s capabilities,” he said. “We see many companies with profiles like its latest acquisition, Unique Digital (Oct.1/20), where they are challenged to properly service client demands for cloud services and where they lack the scale to realize full vendor savings. We believe the Company stands to build further shareholder value given the positive momentum of cross-selling its product suite for organic growth while key vendor relationships bring efficiencies, referrals, and acquisition candidates. We are bullish towards the Company’s ability to maintain its acquisition and organic growth momentum.”
In response to the deal, Mr. Goff raised his 2021 revenue and EBITDA estimates to $1.2945-billion and $98.8-million, respectively, from $1.1665-billion and $89.8-million, which was already above the consensus projections on the Street.
Keeping a “speculative buy” recommendation for its stock, he hiked his target to $6.25 from $4.90, exceeding the $4.94 average.
After included Converge on the firm’s “Q420 Top Pick Portfolio,” Mr. Goff also said he’s including the stock in the “Q121 Portfolio.”
“We view Converge as a formidable Hybrid IT Services competitor with scale and key vendor relationships empowering a services portfolio focused on higher growth, superior margin IT services,” he said.
“We see the potential for sustained double-digit organic growth from its multi-vendor focus on higher-value growth services such as cloud applications and remote work applications to small- and medium-sized enterprises in key verticals. Scale advantages provide Converge with pro forma cost synergies while its service suite generates incremental revenues by cross-selling across its acquired businesses and prospective acquisitions.”
Meanwhile, Raymond James analyst Steven Li raised his target by a loonie to $5.75 with an “outperform” rating.
Mr. Li said: “With balance sheet concerns all but gone and ROIC starting to break-out, we believe Converge is just getting started and its current discounted valuation spells opportunity. We only factor a baseline level of smaller M&A in our forecasts, so with this larger acquisition of Vicom, we have updated our A-EBITDA forecasts and our target price accordingly. CTS is a 2021 Best Picks.”
Brookfield Asset Management Inc.’s (BAM-N, BAM.A-T) plan to purchase the 38-per-cent stake of Brookfield Property Partners L.P. (BPY-Q, BPY-UN-T) that it does not own for US$16.50 a unit is “attractive for both BPY unitholders (i.e., non-BAM controlled units) and BAM alike (short-term liquidity for BPY, long-term value for BAM),” according to CIBC World Markets analyst Dean Wilkinson.
In a research note released Tuesday, he lowered his rating for Brookfield Property Partners to “neutral” from “outperformer.”
“It goes without saying that we believe that there is a deep disconnect between the inherent value of BPY’s assets and the implied value that the market has been willing to ascribe to said assets over the past few years,” said Mr. Wilkinson. “However, despite management’s valiant efforts to close this valuation gap, we believe that the market’s sentiment towards certain asset classes (i.e., U.S. malls specifically) has been a fundamental roadblock towards the realization of a higher (and more appropriate) valuation.
“Put simply, we see no clear catalyst that would suggest that market participants will prioritize fundamentals/valuation over negative sentiment, and this amounts to somewhat of a perpetual headwind for units. Further, the privatization of BPY makes operational sense (at least in some ways) for BAM; as long-term value-add investors, BAM will have increased flexibility to operate the assets in a manner that allows management to realize the intrinsic value of the underlying assets.”
Seeing “some room for modest negotiation,” he raised his target for Brookfield Property units to US$17.50 from US$17. The average is US$17.17.
Elsewhere, Canaccord Genuity analyst Mark Rothschild raised his target to US$17 from US$12, keeping a “hold” rating.
Meanwhile, Credit Suisse analyst Andrew Kuske raised his target for shares of Brookfield Asset Management shares to US$48.50 from US$47, keeping an “outperform” recommendation, , while Scotia Capital’s Mario Saric raised his target to US$45.75 from US$45 with a “sector outperform” rating. The average is US$48.40.
“Brookfield Asset Management proposed an offer to buy all of the Brookfield Property Partners LP units not already owned for US$16.50 per unit for a total deal value of about US$5.9-billion,” said Mr. Kuske. “We don’t find this approach surprising in light of the Group’s value oriented and contrarian approach. On the math, the gives and takes really highlight a longer-term view on the underlying value, total cash flow control, positive re-valuation on individual assets versus, subject to some assumptions, the near-term degradation fee related earnings. In our view, accelerated efforts to promote a more capital reality for the Group’s Real Estate holdings at marks closer to realistic NAVs should drive value in multiple ways. In this context, we find the US$2.9-billion decline in BAM’s market value (a 4.4-per-cent decline) in an admittedly ugly US tape (not so in Canada) a bit odd.”
Though he called its financing announcement for its Las Chispas project in Mexico a “significant derisking event,” Desjardins Securities analyst David Stewart downgraded SilverCrest Metals Inc. (SIL-T) to “hold” from “buy.”
On Monday, the Vancouver-based company revealed a US$120-million project finance facility and concurrent US$76.5-million Engineering, Procurement and Construction (EPC) contract for the plant.
“Given the fixed-price nature of the process plant contract, the capex estimation risk has been substantially reduced,” he said. “With US$225-million in available liquidity, we see SIL as fully financed to production around mid-2022.”
“We are updating our rating ... as the shares have already re-rated to a healthy premium compared with peers, and because there remains some uncertainty surrounding the upcoming feasibility study. The study is expected to be released in late January, after which we will have the opportunity to re-evaluate our estimates and rating.”
Mr. Newman raised his target to $16 from $14.50. The average on the Street is $15.43.
“We are increasing our target ... as a result of increasing our target NAVPS [net asset value per share] multiple to 1.2 times from 1.1 times,” he said.” The shares have re-rated [Monday] on the back of a strong silver tape and the financing news, and are trading at 1.2 times NAV (1.1 times at spot). This is at the high end of development-stage peers in our coverage universe, which is partially explained by the fact that silver-weighted companies generally trade at premiums to their gold-weighted peers.”
After the US$91.5-million sale of its Pipeline Performance Products (PPP) business, Shawcor Ltd. (SCL-T) sits “better positioned long-term within its more differentiated offerings in the offshore markets,” according the ATB Capital Markets analyst Tim Monachello.
He thinks the divestiture, announced Dec. 23, will allow the Calgary-based company to focus both its internal focus and capital on its Pipeline Performance Solutions (PPS) platform.
“The PPP business was one of the longest standing business lines in Shawcor’s portfolio, with Canusa-CPS – which offered field joint connection solutions – likely being the largest constituent,” said Mr. Monachello. “We believe it was also one of the more consistent performers within SCL’s Pipeline Performance Solutions platform which we understand contributed EBITDA growth in 2020 year-over-year despite very challenging market conditions – likely a primary factor in the strong transaction multiple. That said, the business was not highly differentiated and is also heavily leveraged to onshore pipeline developments.”
“The PPP business generated roughly $113-million revenue, and roughly $9-million EBITDA in 2019. We understand that revenue fell in 2020 along with the broader downtrend in global energy markets, but ongoing cost-out initiatives drove EBITDAS slightly higher year-over-year. We believe a recovery in global energy markets in 2021 and 2022 would have driven PPP results higher from 2020 levels.”
Though he trimmed his revenue and EBITDA expectations with the sale, he raised his target for Shawcor shares to $4.25 from $4, keeping a “sector perform” rating. The average is $4.96.
“Our price target is based on 10.0 times 2022 EV/EBITDAS which we then discount by 65 per cent,” said Mr. Monachello. “This discount is the highest amongst our coverage given the high degree of forecast risk we perceive for SCL given the combination of low long-term visibility, and the high degree of operating and financial leverage in SCL’s business.”
Calian Group Ltd. (CGY-T) is “starting 2021 on a strong note” with the $22-million acquisition of Quebec-based antenna solutions provider InterTronic, said Desjardins Securities’ Benoit Poirier, who expects more deals to come.
“With its large, full-motion antenna technology, InterTronic brings synergies to CGY: (1) capability to bid on bigger opportunities; (2) strengthens CGY’s relationship in Europe with the European Space Agency (ESA) and SatService; and (3) complements CGY’s new carbon fibre antenna offering,” the analyst said. “CGY paid an attractive 4 times EV/EBITDA multiple for this strategic transaction.”
Mr. Poirier called it “another attractive M&A transaction that demonstrates management’s disciplined approach” and sees the company will “lots of dry powder for seizing additional attractive M&A opportunities.”
Reiterating his bullish stance on Calian and maintaining a “buy” recommendation, he increased his target to $70 from $68. The average is $72.50.
“This transaction is a testament to CGY’s disciplined and strategic M&A playbook—a key pillar of our investment thesis on the name,” he said.
Elsewhere, Echelon Capital analyst Amr Ezzat raised his target to $77 from $75 with a “buy” rating (unchanged).
Mr. Ezzat said: “Calian is a quality diversified operation with a deep bench, an underleveraged balance sheet, and a solid track record of value creation through acquisition and innovation. CGY has all the bells and whistles an investor would seek out in a quality company. The stock has tripled in the last three years, as management transitioned its philosophy and growth strategy from what was a “steady Eddie” operator with stable revenues/earnings, to one seeking to capitalize on growth in a more aggressive fashion. We argue that the Street has consistently underestimated valuation by failing to recognize the accretion potential of M&A on Calian’s earnings and more importantly on its valuation. We believe using an EBITDA/earnings multiple on short-term earnings estimates significantly (and incorrectly) undervalues Calian’s shares as it gives no recognition to the Company’s inorganic growth activity (and indeed, its underleveraged balance sheet). Admittedly, we recognize the difficulty in modelling M&A contribution in forecasts (predicting size and timing is throwing darts in the dark), but we still believe it sensible to reflect M&A in our valuation. As such, our DCF derived target price incorporates capital deployment into M&A. We are comfortable enough with the Company’s track record of executing accretive transactions to give CGY some future inorganic growth benefit.”
Calling it “a multi-million gold-equivalent resource growth story, Echelon Capital analyst Gabriel Gonzalez initiated coverage of GoGold Resources Inc. (GGD-T) with a “speculative buy” recommendation.
“GoGold is developing the Los Ricos South and Los Ricos North projects in east central Mexico, which we believe could grow into a multi-million-ounce gold equivalent resource, potentially putting GoGold among the largest primary silver explorer-developers in our primary silver comparables universe,” he said.
Mr. Gonzalez set a $3.50 target, which exceeds the $2.20 average.
“With 60 per cent of the world’s silver coming from primary base metal and primary gold companies, and a small number of primary silver companies, we believe GoGold should trade at a substantial premium to its peers,” he said. “Assuming the addition of our conceptual 140Moz AgEq [silver equivalent] resource, GoGold trades at $1.99 per ounce AgEq, a slight premium with an adjusted peer group average of $1.76 per ounce AgEq. Considering its potential overall resource size and the addition of further high-grade ounces from Los Ricos North, we see a $2.69 per ounce AgEq value implied by our price target to be justified.”
In a separate report, Echelon Capital’s Ryan Walker initiated coverage of Roscan Gold Corp. (ROS-X) with a “speculative buy” rating and 60-cent target, matching the consensus.
“An investment in Roscan affords investors exposure to what we believe represents a large emerging gold camp along major structures in an active exploration and mining region in productive Birimian Greenstone Belt rocks in Mali,” he said. “Indeed, Roscan’s 100-per-cent-owned 288.8km2 Kandiole gold project is proximal to seven operating mines within 80km, including B2Gold’s 600Koz per year Fekola gold mine, 25km to the west. We believe such a situation provides ample potential for ROS to become a real M&A consolidation candidate upon establishing a critical mass and provides a degree of justification for our application of an in situ valuation on yet unrealized ounces in our target derivation. We expect the precious few meaningful development assets to demand a premium in the maturing gold bull market going forward.”
In other analyst actions:
* BMO Nesbitt Burns analyst Jackie Przybylowski initiated coverage of Turquoise Hill Resources Ltd. (TRQ-T) with an “outperform” rating and $20 target. The average is $17.77.
“Oyu Tolgoi is a world-class copper-gold deposit, and we expect it will be a great investment. But who will realize the benefits of this investment?,” she said. “Turquoise Hill’s unique structure means that majority owner Rio Tinto makes many financing and operating decisions; ensuring that the value created is shared fairly with other Oyu Tolgoi stakeholders is central to our TRQ investment thesis and to Oyu Tolgoi’s license to operate in the country.”
“We believe that now is a good time to invest in TRQ ahead of meaningful risk-reducing events in 2021.”
* National Bank Financial analyst Adam Shine increased his target for Rogers Communications Inc. (RCI.B-T) to $70 from $68 with an “outperform” rating. The current average is $67.23.
* TD Securities analyst Craig Hutchison lowered Denison Mines Corp. (DML-T) to “hold” from “speculative buy” with a $1 target, up from 85 cents. The average is $1.15.
* TD’s Greg Barnes raised his target for First Quantum Minerals Ltd. (FM-T) to $31 from $26 with a “buy” rating. The average is $21.50.
* TD’s Arun Lamba increased his target for Marathon Gold Corp. (MOZ-T) to $4 from $3.25, exceeding the $3.33 average. He kept a “speculative buy” recommendation.
* Mr. Lamba also hiked his Sabina Gold & Silver Corp. (SBB-T) target to $4.75 from $4.25 with a “speculative buy” recommendation. The average is $3.87.
* JP Morgan analyst Ricardo Rezende cut its target for Canacol Energy Ltd. (CNE-T) to $6 from $7 with an “overweight” rating. The average is $6.19.