Inside the Market’s roundup of some of today’s key analyst actions
RBC Dominion Securities analyst Drew McReynolds believes the industrial logic behind Rogers Communications Inc. (RCI.B-T) proposed acquisition of Shaw Communications Inc. (SJR.B-T) is “compelling and the transaction multiple reasonable considering the strategic rationale and synergies.”
In a pair of company-specific research reports released before the bell on Tuesday, Mr. McReynolds said he sees a “high likelihood” of the divestiture of wireless assets to receive regulatory approval, however he emphasized Rogers “has a strong desire to consummate the transaction and would be willing to meet required remedies.”
“While a potential Rogers-Shaw merger has been discussed within the investment community for well over two decades, we believe the industrial logic behind such a merger with the Canadian telecom industry on the cusp of 5G is particularly compelling for Rogers, reflecting: (i) the strong need and desire for additional fiber/fixed telecom infrastructure in Western Canada to ultimately underpin a wholly-owned, national 5G network; (ii) a greater ability to bundle wireless and wireline services across a near-national footprint (particularly within the B2C market) with positive implications for churn; (iii) the opportunity to better compete within the B2B segment (particularly within enterprise) with a near-national presence; and (iv) enhanced scale that will be required to make sustained and substantial 5G investment (including spectrum) over the next decade in order to deliver on more advanced 5G B2C and B2B IoT use cases and to help address the existing digital divide in Canada on an expedited basis,” he said.
In response to the deal, Mr. McReynolds lowered his rating for Shaw shares to “sector perform” from “outperform” with a $40.50 target, rising from $27 previously. The current average is $29.38, according to Refinitiv data.
“We believe Rogers has a strong need and desire for additional fiber/fixed telecom infrastructure in Western Canada to underpin a wholly-owned national 5G network and thus should be willing to accommodate the required wireless remedies to get the necessary regulatory approvals,” he said. “While admittedly the implied total return to the proposed bid price remains compelling for Shaw shareholders, we see slightly better annualized total return potential elsewhere in the Canadian telecom sector and are taking the opportunity to re-balance our relative rankings within the group.”
Keeping an “outperform” rating for Rogers shares, the analyst increased his target to $74 from $70. The average is $68.14.
Elsewhere, Scotia Capital’s Jeff Fan raised his Shaw target to $40.50 from $28.50 with a “sector outperform” rating.
“Based on the share price close of $33.85, we estimate the market has placed the probability of the transaction closing at 56 per cent, which we think is conservative,” said Mr. Fan. “We are not risk-arb experts and cannot opine on the appropriate probability especially on a transaction with a long closing of one year. Our expertise is on the current telecom regulatory environment and the history between SJR and RCI. And based on that, we think the probability of this transaction closing is much higher than 56 per cent and we would peg a range of 75-85 per cent.”
National Bank Financial’s Adam Shine increased his Rogers target to $74 from $70 with an “outperform” recommendation.
A group of equity analysts on the Street raised their target prices for shares of GFL Environmental Inc. (GFL-T, GFL-N) following the announcement late Monday of its plan to acquire Burlington, Ont.-based Terrapure Environmental Ltd. for $927-million.
Calling it an “an accretive deal, with upside opportunity,” Scotia Capital’s Mark Neville increased his target to US$37 from US$35 with a “sector outperform” rating. The average is US$30.14.
“The proposed acquisition looks to be nicely accretive to adjusted EBITDA (8 per cent on our 2021 estimate, on a proforma basis) and FCF (9.5 per cent), as well as value per share (acquiring at an 5-per-cent adj. FCF yield vs. GFL trading at 3.1 per cent on our 2021 estimate, excluding Terrapure) – on, what is, COVID-impacted sales/earnings and conservative synergy assumptions,” said Mr. Neville. “While large, the deal size represents only 4.5 per cent of GFL’s enterprise value and won’t stress the B/ S – management estimates pro forma leverage at the end of 2021 at 4.6 times, up from 4.3 times. The proposed acquisition is expected to close in 2H/21 (subject to clearance under the Competition Act in Canada), while the integration of WM/ADS assets and WCA are now expected to be completed in Q2/21 – reducing the integration risk, in our opinion. We have updated our estimates to account for the proposed transaction.”
Others making changes include:
* CIBC World Markets’ Kevin Chiang to $47 from $42 with an “outperformer” rating.
“We view the acquisition as in line with GFL’s strategy as it strengthens its Canadian franchise while offering significant synergy opportunities,” said Mr. Chiang. “We raise our price target ... to reflect this recent acquisition and to account for GFL’s elevated earnings/FCF optionality (i.e., debt refinancing, incremental M&A, redeployment of capital, etc.).”
* Stifel’s Michael E. Hoffman to $45 from $43 with a “buy” rating.
* Jefferies’ Hamzah Mazari to US$42 from US$40 with a “buy” rating.
* RBC Dominion Securities’ Walter Spracklin to US$38 from US$36 with an “outperform” rating.
* National Bank Financial’s Rupert Merer to US$44 from US$40 with an “outperform” rating.
After raising their oil and natural gas price assumptions for both 2021 and 2022 to “more optimistic” levels, Raymond James analyst Chris Cox and Jeremy McCrea made a series of recommendation changes to stocks in their coverage universe “with a decidedly positive skew to their overall ratings distribution.”
Among mid and small-cap producers, Mr. McCrea moved a trio of stocks to “outperform” from “market perform.” They are;
- Baytex Energy Corp. (BTE-T) with a $1.75 target, up from $1.25. The average on the Street is $1.39.
- Peyto Exploration & Development Corp. (PEY-T) with a $7 target from $5.50. Average: $6.27.
- Surge Energy Inc. (SGY-T) with a $1.25 target from 75 cents. Average: 88 cents.
Mr. McCrea moved Petrus Resources Ltd. (PRQ-T) to “market perform” from “underperform” with a 45-cent target, up from 5 cents and above the 33-cent average.
Among large cap producers, Mr. Cox raised Cenovus Energy Inc. (CVE-T) to “outperform” from “market perform” with a $15 target, rising from $10. The average is $10.42.
“While we remain skeptical of the strategic and financial benefits of the Husky merger, we have to acknowledge the out-sized impact of a higher oil price environment with this story and, in particular, we now see a compelling deleveraging outlook, even in the absence of projected synergies,” he said. “Furthermore, the valuation now screens as the most attractive within the large cap sector on nearly every relevant metric we look at, providing a comfortable cushion for any execution concerns investor may still have with the story. Longer-term, we continue to favour CNQ & SU, but we think CVE is poised to deliver pack-leading returns over the near-term if current oil price strength holds (or improves).”
Mr. Cox’s target price changes for senior oil and gas producers were:
- Canadian Natural Resources Ltd. (CNQ-T, “outperform”) to $53 from $45. Average: $42.61.
- Imperial Oil Ltd. (IMO-T, “market perform”) to $36 from $33. Average: $29.68.
- Ovintiv Inc. (OVV-N/OVV-T, “market perform”) to US$30 from US$21. Average: US$24.34.
- Suncor Energy Inc. (SU-T, “outperform”) to $38 from $33. Average: $31.86.
After its fourth-quarter financial results fell narrowly below his expectations, Desjardins Securities analyst Michael Markidis thinks InterRent Real Estate Investment Trust (IIP.UN-T) is enduring “short-term pain for long-term gain.
“Although we have tempered our near-term outlook, our 2022 FFOPU [funds from operations per unit] estimate is intact,” he said. “IIP’s strategy to hold firm on rate has created significant vacancy loss near-term; however, upside potential to a recovery in demand is significant. Moreover, the balance sheet is in solid shape even after accounting for year-to-date acquisition activity (more than $200-million).”
Before the bell on Monday, the Ottawa-based REIT reported quarterly FFOPU of 11 cents, missing Mr. Markidis’s forecast by a penny. He attributed the variance to lower-than-anticipated net operating income, stemming from a revenue miss, as well as a rise in expenses.
“Approximately 75 per cent of revenue was derived from repositioned properties (acquired prior to 2017) in 4Q,” he said. “Segment average AMR [average monthly rent] increased 0.7 per cent sequentially, to $1,371. This represented a slowdown vs sequential AMR growth registered in the prior two quarters (up 1.3 per cent and up 1.7 per cent). The moderation was more pronounced in Ottawa (up 0.1 per cent) and Montreal (up 0.1 per cent), which has a higher composition of urban properties vs IIP’s other geographic regions. Sequential AMR growth in the GTA (1.0 per cent) and Hamilton/Niagara (1.5 per cent) was relatively consistent with prior quarters.”
“Total portfolio vacancy and incentive loss (percentage of gross rental revenue) averaged 9.9 per cent during 4Q20. This represents meaningful upside potential. Holding AMR constant, a 600 basis points reduction (to 4 per cent) would drive incremental annualized revenue of $10.5-million (7 cents per unit). Our revised outlook assumes this ratio expands marginally over the next two quarters, followed by gradual improvement beginning in 2H21 and continuing through 2022.”
Though he trimmed his 2021 financial projections, Mr. Markidis increased his target for InterRent units by 50 cents to $16 with a “buy” recommendation (unchanged). The average is $15.96.
Elsewhere, National Bank Financial analyst Matt Kornack raised his target to $16 from $15.50 with an “outperform” rating, while Raymond James’ Brad Sturges increased his target to $17 from $16.50, maintaining an “outperform” recommendation.
“Although InterRent may experience some additional near-term volatility in its economic occupancy rate, notably in 1Q21, InterRent indicated that it is experiencing some greater leasing demand quarter-over-quarter. We view InterRent’s 4Q20 results to be temporary in nature, and that the REIT could be well positioned to experience an improvement in 2H21 as Canada’s vaccine rollout continues, Canadian population growth accelerates, and due to a possible ‘double cohort’ effect of both students and young professionals returning to the InterRent’s urban rental locations,” said Mr. Sturges.
In a separate note, Mr. Markidis bumped up his target for Summit Industrial Income REIT (SMU.UN-T) to $15.50 from $15, which is the current consensus, and maintained a “buy” rating, following the announcement of the $183-million acquisition of an industrial and office facility in Montreal.
“We believe the transaction is accretive on a leverage-neutral basis given SMU’s comparatively low cost of capital. Moreover, it achieves management’s stated objective of reducing its geographic weighting to Alberta to 25 per cent,” he said.
Seeing the improving sentiment around American Hotel Income Properties REIT LP (HOT.UN-T) largely reflected in its current price, Canaccord Genuity analyst Mark Rothschild lowered his rating to “hold” from “buy” in the wake of a 44-per-cent increase in its unit price over the past six weeks.
He made the move following Monday’s announcement that Blackstone Group (BX-N) and Starwood Capital Group have agreed to buy Extended Stay America Inc. (STAY-Q) for US$6-billion.
“In our view, this transaction provides further evidence of improving investor sentiment towards the U.S. hotel sector since the beginning of this year, as vaccines are widely distributed and the economy re-opens,” said Mr. Rothschild. “Further, U.S. lodging REITs have generated a total return 23 per cent since the beginning of 2021. While the portfolio owned by Extended Stay is not entirely comparable to American Hotel Income Properties REIT’s (AHIP) portfolio, there is some overlap as 36 per cent of AHIP’s hotels are extended-stay properties.”
The analyst said he continues to expect improved operating performance following a recent US$50-million strategic investment from institutional investors BentallGreenOak Real Estate Advisors and Highgate Capital Investments LP.
However, he lowered his rating and maintained a $4.50 target. The average is US$2.98.
“The REIT currently trades at an 11.8-per-cent premium to our NAV estimate ($4.05) and at an implied cap rate of 9.1 per cent compared to a 21.2-per-cent discount and a 9.7-per-cent implied cap rate on January 28,” said Mr. Rothschild. “Therefore, on the basis of valuation, we are reducing our rating for AHIP from BUY to HOLD, although we acknowledge there is the potential for further upside to the extent investor sentiment continues to strengthen.”
Twitter Inc. (TWTR-N) is “on the right path,” according to Citi analyst Jason Bazinet, seeing it “making prudent investments – in staffing, in technology and via acquisitions - to accelerate its topline growth.”
“While these investments will likely dampen near-term profits, we think they are smart investments,” he added.
In a research note released Tuesday, Mr. Bazinet called the social media giant’s goals “ambitious” but emphasized it has “made a lot of progress of the last year.”
“The firm believes it can continue to innovate resulting in deeper penetration of the small business and direct response (DR) market,” the analyst said. “We like the steps management is taking and have raised our top-line estimates for 2022. And, we are introducing 2023 estimates with robust topline growth.”
“We believe social media firms – including Twitter – have benefitted from the shift in ecommerce since COVID lockdowns were instituted. The main risk we see over the next 24 months (as lockdown restrictions moderate or come to a close) is ecommerce and digital advertising moderate. This macro risk – rather than Twitter’s execution – likely poses the greatest risk to our forecast.”
With the increase to his financial expectations, he raised his target for Twitter shares to US$80 from US$55, maintaining a “neutral” recommendation. The average target on the Street is US$68.34.
In other analyst actions:
* CIBC World Markets analyst Hamir Patel initiated coverage of Loop Energy Inc. (LPEN-T) with an “outperformer” rating and $20 target, while Scotia Capital gave it an “outperform” recommendation and a $20 target.
“We rate LPEN Outperformer as we expect the company to gain share in fuel cells given eFlow’s favorable attributes (superior fuel economy, power density and durability) compared to competing systems.,” said Mr. Patel. “We see fuel cell market share of medium- and heavy-duty motive applications increasing modestly to 1 per cent in 2024, before adoption builds rapidly to 9 per cent in 2027 and 19 per cent in 2030 as hydrogen infrastructure reaches critical mass in China, Europe and North America. We believe Loop can attain market share of 5 per cent, even as incumbent fuel cell competitors scale up, given its unique eFlow technology and ecosystem partnerships.”
* H.C. Wainwright analyst Raghuram Selvaraju raised his target for Bausch Health Companies Inc. (BHC-N, BHC-T) to a Street-high of US$55 from US$50 with a “buy” rating. The average on the Street is US$35.13.
* ATB Capital Markets analyst Tim Monachello doubled his target for Akita Drilling Ltd. (AKT.A-T) to $1.50 from 75 cents with a “sector perform” rating. The average is $1.13.
“While we believe 2021 will mark a recovery year for AKT and we believe its outlook has strengthened over recent months, visibility remains limited past H1/21 for activity and pricing which means investors are subject to elevated forecast risk,” he said. “In addition, AKT remains highly levered at 4.5 times net debt/TTM [trailing 12-month] EBITDAS at December 2021, and our modeling suggests AKT’s leverage ratios should increase through 2021 as trailing EBITDA trails lower even as leading-edge activity and cash flows improve. Moreover, our modeling suggests AKT is still likely to face a covenant renegotiation by early-2022, though we do not view this as a significant risk.”
* RBC Dominion Securities analyst Walter Spracklin raised his Stella-Jones Inc. (SJ-T) target to $56 from $53 with an “outperform” rating. The average on the Street is $56.50.
* CIBC’s Hamir Patel increased his target for Hardwood Distribution Inc. (HDI-T) to $38 from $32, keeping an “outperformer” rating. The average is $36.80.
* Mr. Patel raised his Canwel Building Materials Group Ltd. (CWX-T) target to $9.50 from $8.50 with a “neutral” rating. The average is $10.
* TD Securities analyst Daryl Young raised his Intertape Polymer Group Inc. (ITP-T) target to $35 from $30, maintaining a “buy” rating. The average is $34.06.
* National Bank’s Ryan Li cut his target for Lassonde Industries Inc. (LAS.A-T) to $182 from $183, keeping an “outperform” recommendation. The average is $196.
* National Bank’s Tal Woolley increased his Invesque Inc. (IVQ.U-T) target to $2.75 from $2 with a “sector perform” rating. The average is $2.71.
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