Inside the Market’s roundup of some of today’s key analyst actions
Desjardins Securities sees the “perfect storm gathering” for oil prices given both supply outages and increasing geopolitical uncertainty.
Suggesting WTI prices could exceed US$80 per barrel, the firm called it “an extremely supportive level for Canadian producer netbacks given the continued weakness in the loonie.”
“All things considered, we believe we are at one of the most attractive entry points in the Canadian energy space in years, with many producer stocks currently trading at or near five-year lows based on forward consensus cash flow,” said analysts Justin Bouchard, Kristopher Zack and Chris MacCulloch in a research note released Tuesday. “We have also been encouraged by the start of some much-needed consolidation in the producer space following the Vermilion–Spartan and Baytex–Raging River transactions, which we view as the beginning of a trend that should eventually bolster valuations.”
The analysts believe oil stocks current offer both more enticing valuation support and torque to the upside, noting:
“Although we still see some attractive opportunities in the natural gas space, we would generally remain overweight on oil exposure in the current market. The large caps still offer significant downside protection; we highlight CNQ and SU as our two favourite large-cap names. We also like ECA for its meaningful U.S. and Montney condensate exposure, which we believe differentiates the story vs Canadian peers. Among the mid-caps, we continue to favour the light oil producers including TOG, TVE and WCP, noting the potential for renewed market interest as investors begin looking at mid-cap opportunities following relative outperformance in the large-cap space. We also continue to highlight ERF’s growing light oil production and significant diversification away from the challenges facing Canadian commodity benchmarks. We recently upgraded BTE as the company’s fundamentals appear more attractive post the pending combination with RRX, noting that the current noise stemming from arbitrage provides a compelling entry point.”
In the wake of last month’s OPEC meeting in Vienna, the firm raised their 2018-2019 oil price deck, saying “we believe the Saudis successfully maintained a fairly delicate geopolitical balance within OPEC while still managing to begin returning barrels to the market.”
Their WTI forecast rose to US$62.50 a barrel for the second half of 2018 (from US$60). Their 2019 projection rose to US$60.00 a barrel from US$57.50.
“While the bulk of our forward estimate revisions reflect our updated commodity price forecast, we are also providing our preliminary 2Q18 estimates, with minor adjustments for some producers, ahead of a more detailed update in late July,” the analysts said. “The key takeaway is that oil prices were significantly better than expected, resulting in positive estimate revisions for most of the oil and condensate-focused names. From that perspective, we also expect that the light oil names will continue screening relatively well on a year-over-year basis. Conversely, with AECO natural gas prices remaining depressed vs other North American markets, we continue to expect a market preference for Canadian natural gas producers offering diversified pricing exposure through a combination of liquids production, physical transportation contracts and active hedge books. Although we have maintained our current ratings, with the exception of the risk parameter for MEG, we have made a few minor target price adjustments to reflect the impact of the updated commodity price deck.”
The analysts raised their target prices for the following stocks:
Husky Energy Inc. (HSE-T, “hold”) to $23 from $19. Consensus: $21.24.
Imperial Oil Ltd. (IMO-T, “hold”) to $42 from $41. Consensus: $43.10.
Suncor Energy Inc. (SU-T, “buy”) to $57 from $53. Consensus: $57.84.
MEG Energy Corp. (MEG-T, “hold”) to $10 from $8. Consensus: $10.63.
Enerplus Corp. (ERF-T, “buy”) to $20 from $17.50. Consensus: $19.76.
Torc Oil and Gas Ltd. (TOG-T, “buy”) to $10.50 from $10. Consensus: $10.03.
Tourmaline Oil Corp. (TOU-T, “buy”) to $30 from $28. Consensus: $28.33.
Whitecap Resources Inc. (WCP-T, “buy”) to $12.50 from $12. Consensus: $13.38.
Nuvista Energy Ltd. (NVA-T, “buy”) to $12.50 from $11.50. Consensus: $11.69.
Obsidian Energy Ltd. (OBE-T, “hold”) to $1.90 from $1.75. Consensus: $1.86.
Paramount Resources Ltd. (POU-T, “hold”) to $19 from $18. Consensus: $21.17.
Tamarack Valley Energy Ltd. (TVE-T, “buy”) to $6 from $5. Consensus: $5.34.
Desjardins lowered its target price for the following stocks:
Bonavista Energy Corp. (BNP-T, “hold”) to $1.75 from $2.50. Consensus: $1.81.
Freehold Royalties Ltd. (FRU-T, “buy”) to $17 from $18. Consensus: $17.30.
Peyto Exploration and Development Corp. (PEY-T, “hold”) to $13 from $17.50. Consensus: $13.92.
Advantage Oil & Gas Ltd. (AAV-T, “buy”) to $5.75 from $6. Consensus: $5.38.
Crew Energy Inc. (CR-T, “buy”) to $3 from $3.25. Consensus: $3.39.
Raging River Exploration Inc. (RRX-T, “buy”) to $7.70 from $11. Consensus: $8.08.
Canaccord Genuity analyst Brendon Abrams initiated coverage of six Canadian real estate investment trusts and assumed coverage of three others in a research note on Tuesday.
He gave Chartwell a target price of $17.50 per unit. The current average on the Street is $16.44.
“Canaccord Genuity believes that Chartwell presents an attractive opportunity to invest in the seniors’ housing industry through Canada’s largest retirement home owner/operator,” he said. “The REIT’s size, high-quality assets, and market position make Chartwell a compelling investment for investors looking to capitalize on the long-term demographic trends driving demand growth in the sector.
“We favour Chartwell’s exposure to Ontario and Canada’s other large provinces, as well as its weighting toward the higher-margin and higher-growth private pay segment. The REIT has shown a demonstrated ability to grow through acquisitions and development by leveraging its industry-leading platform to successfully integrate new residences.”
He gave Sienna a target of $18.75, which is below the consensus of $19.18.
Analyst: “Canaccord Genuity believes Sienna presents an attractive opportunity for investors to gain exposure to Canada’s seniors’ housing industry, which we expect to experience strong growth given the favourable long-term demographic trends driving demand. Through Sienna, investors gain access to a platform with scale, which is particularly important in this operationally intensive sector.”
Mr. Abrams gave “hold” ratings to the following REITS:
Plaza Retail REIT (PLZ.UN-T) with a $4.50 target. The average is $4.56.
Analyst: “Plaza owns a high-quality portfolio tenanted by necessity-based national retailers. We like Plaza’s differentiated value-add approach to growing its portfolio. However, we believe the units are fairly valued and will trade in line with NAV as investors remain cautious on retail due to industry headwinds.”
Northview Apartment REIT (NVU.UN-T) with a $25 target. The average is $28.64.
Analyst: “Northview is Canada’s third-largest apartment REIT, with a portfolio of approximately 26,000 rental units across the country. We like the REIT’s increased geographic diversification and value-add strategy. However, we believe the units are fairly valued and will trade in line with NAV as investors look for greater visibility from its Western Canadian resource markets.”
SmartCentres REIT (SRU.UN-T) with a $30 target. The average is $32.94.
Analyst: “SmartCentres owns a high-quality, defensive portfolio of predominantly Walmart-anchored unenclosed shopping centres with upside potential embedded in the land of its existing sites. However, we believe SmartCentres units are fully valued and will trade in line with NAV as investors remain cautious regarding the secular challenges facing the REIT’s core business.”
StorageVault Canada Inc. (SVI-X) with a target of $2.50. The average is $3.07.
Analyst: “StorageVault provides investors with exposure to a high-growth, fragmented, and “under-managed” industry with healthy supply/demand fundamentals and attractive cash flow characteristics. However, we believe the shares are currently fairly valued trading at close to a 65-per-cent premium to NAV.“
Mr. Abrams assumed coverage of a trio of “buy” rated REITS from colleague Mark Rothschild. They are:
Dream Industrial REIT (DIR.UN-T) with a $11.50 target. The average is $11.02.
Analyst: “Dream Industrial owns a portfolio of geographically diverse industrial properties. We believe the units should trade in line with NAV to reflect the strong demand growth and U.S. expansion opportunity.”
PRO REIT (PRV.UN-T) with a $2.50 target. The average is $2.40.
Analyst: “PRO offers the opportunity to invest in a growing Canadian diversified commercial REIT. We believe the units should trade at a premium to NAV to reflect the REIT’s growth potential as it sources accretive acquisitions.”
Slate Office REIT (SOT.UN-T) with an $8 target. The average is $8.20.
Analyst: “Slate offers investors the opportunity to invest in a pure-play North American office REIT with an opportunistic and hands-on approach to value creation. We believe units should trade in line with NAV to reflect Slate’s significant GTA office exposure and recent value-add improvements.”
Citing both headline risk and a lack of near-term catalysts, Deutsche Bank analyst Michael Linenberg downgraded American Airlines Group Inc. (AAL-Q), Delta Air Lines Inc. (DAL-N) and United Continental Holdings Inc. (UAL-N) to “hold” from “buy.”
Mr. Linenberg said economically sensitive, high-beta stocks, like airlines, are likely to underperform the broader market in a world of “heightened” macroeconomic/geopolitical risk.
“The possibility that the current trade dispute between the US and its global partners could become something bigger is problematic for the industry’s top-line given how closely correlated it is to imports and exports of goods and services,” said the analyst, who thinks trade issues could cause U.S. companies to cut corporate travel.
Mr. Linenberg did not specify a target price for the stocks.
BMO Nesbitt Burns analyst Nikolaus Priebe upgraded Sprott Inc. (SII-T) to “market perform” from “underperform.”
“In early March we downgraded Sprott to Underperform, reflecting concerns about valuation following a strong run-up in the share price,” he said. “Since then, Sprott has lagged Canadian equities by approximately 18 per cent. Although the stock continues to trade at a premium to peers, the gap has narrowed.”
“While our target price continues to suggest modest downside (6 per cent), we believe it no longer justifies an Underperform rating. As a result, we are upgrading the shares of Sprott.”
He maintained a $2.75 target, which sits below the average target on the Street of $2.90.
Diamond Estates Wines & Spirits Inc. (DWS-X) is “ripe for the pick,” according to Echelon Wealth Partners analyst Amr Ezzat, who believes its recent “lacklustre” sales growth is a short-term issue that has no bearing on his more bullish long-term thesis.
Seeing multiple avenues toward “significant” top-line growth, Mr. Ezzat initiated coverage of the Niagara-on-the-Lake, Ont.-based wine maker with a “speculative buy” rating.
“While top line performance in F2018 was negatively impacted by the restructuring of the agency business and the implementation of a short‐crop strategy to deal with the significantly reduced 2014 and 2015 harvests, we expect growth to pick up as early as the second half of fiscal 2019,” he said. “Notably, the 2017 autumn harvest was at record levels and the Company is in the midst of an aggressive expansion strategy. DWS recently added 600,000 litres of capacity in 2017, bringing total capacity to 5.3 million litres, with expansion plans to 5.8 million litres in 2018 and 6.4 million in 2019-2020. The Company’s recently announced Backyard Vineyards acquisition and its greenfield development plans at Naramata Bench will supplement growth in the medium and long-term. Overall, we see sales growth accelerating from fiscal 2018 and 2019’s flat levels to 8-9 per cent in fiscal 2020 and 2021 as a result of these initiatives.”
Mr. Ezzat said he expects “explosive” earnings growth to drive both margin expansion and “considerably” deleverage Diamond’s balance sheet.
“Our implied EBITDA margin grows from 7.3 per cent in F2018 to 15.4 per cent in F2021, benefiting from operating leverage,” he said. “EBITDA grows at a CAGR [compound annual growth rate] of 35.7 per cent from F2018 to F2021 versus a revenue CAGR of 5.6 per cent during the same period. Despite ambitious spending plans (agency consolidation and winery expansion) and several operational issues in F2018 (loss of major customer in Agency division, and a fallout from poor grape harvest brought on by the extremely cold weather in the Niagara region in 2014 and 2015, which impacted 2017 sales and consequently profitability), the Company continues to recover from an extremely high leverage position to a more robust balance sheet. We estimate the Company’s current interest coverage to go from 2 times to 5 times in F2020. We believe successfully deleveraging the balance sheet will provide for a significant multiple rerating.”
Mr. Ezzat set a target price of 45 cents per share, which exceeds the current consensus by 2 cents.
“In short, we believe the company’s fundamentals are not reflected in current valuation levels,” he said. “DWS trades in line to its peer group on an NTM [next 12-month] EBITDA basis. While we recognize DWS’s lower relative margin profile, we believe the company’s high earnings growth profile warrants a much higher multiple (24.1 per cent over the next 2 years vs. 9.9 per cent for peers). Our 45 cents per share target price implies a 16.5x F2020 EBITDA multiple, a discount to the Company’s peers. We expect the evolving regulatory environment to provide DWS with substantial running ground to grow its sales and margins. Namely, over a three-year period, we call for a $1.00 per share valuation (approximately tripling from current levels) should the company be able to deliver on its margin expansion strategy.”
With the feasibility study under way for its proposed restart of the Madsen underground gold mine in the Red Lake mining district of northern Ontario, there’s “plenty of upside to be had” with Pure Gold Mining Inc. (PGM-X), said Mackie Research analyst Stuart McDougall.
He initiated coverage of the Vancouver-based junior exploration and development company with a “speculative buy” rating.
“PGM is a few months away from completing a definitive feasibility study on a proposed restart of the historic Madsen underground gold mine,” said Mr. McDougall. “This, combined with the deposit’s relatively high grades and what we view as solid exploration success, ranks the Company as one the better exploration and development stories we have looked at.”
He set a target price of $1.25, which is 15 cents higher than the consensus.
In other analyst actions:
GMP analyst Ian Parkinson initiated coverage of Bluestone Resources Inc. (BSR-X) with a “buy” rating and $2.55 target. The average is $2.71.
With files from Bloomberg News