Inside the Market’s roundup of some of today’s key analyst actions
Credit Suisse’s Mike Rizvanovic called the second quarter for large Canadian lifecos “decent,” featuring “solid” results that exceeded his expectations, leading to a “modest” share price rally.
In a research note released Tuesday, the equity analyst pointed to a trio of notable trends stemming from earnings season.
* “Another strong quarter” for their Asset Management business, featuring “solid” sequential growth for both Manulife Financial Corp. (MFC-T) and Sun Life Financial Inc. (SLF-T) and a “modest” profit for Great-West Lifeco Inc. (GWO-T)
* “Stable” growth overall for the less volatile state-owned enterprise (SOE) sector.
▪ “Outsized” results from the U.S. segments for Great-West and Sun Life.
“After accounting for those and other nuances in the quarter that drove the outperformance, our 2022 EPS estimates increase by a modest 2 per cent for the group, on average,” said Mr. Rizvanovic.
However, he cut Manulife Financial Corp. (MFC-T) to a “neutral” recommendation from “outperform,” pointing to “the adverse impact” of its IFRS 17 transition and continued underperformance in its Canadian business.
“The changeover [to IFRS 17] will be particularly impactful to MFC given the company’s accelerating new business gains that have been reported in recent years,” he said. “We estimate that the establishment of the contractual service margin under the new accounting standard at the beginning of 2023 will reduce MFCs common equity by as much as 16 per cent, while run-rate core earnings as currently defined by management will decline by as much as 12 per cent.”
“MFCs Canada segment has trailed the peer group materially over the past couple of years in terms of core earnings progression, which we believe tends to fly under radar. Part of MFCs underperformance can be explained by legacy assets that will continue to diminish in importance over time, which speaks to the broader issue around the company’s sizable constant headwind around capital allocation..”
Mr. Rizvanovic maintained a $27 target for Manulife shares. The average target on the Street is $29.90, according to Refinitiv data.
Concurrently, he raised his Sun Life Financial target to $72 from $71, topping the $71.93 average, with an “outperform” rating.
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A group of equity analysts on the Street lowered their recommendations for WPT Industrial Real Estate Investment Trust (WIR.U-T, WIR.UN-T) in response to Monday’s announcement that it has agreed to be acquired by U.S. private equity giant Blackstone Group Inc. (BX-N) for US$3.1-billlion.
Shares of the Toronto-based REIT jumped 16.8 per cent in response to the deal, which sees Blackstone paying WPT unitholders US$22 per unit.
Those downgrade the REIT include:
* Raymond James’ Brad Sturges to “market perform” from “outperform” with a US$22 target, up from US$21. The average target on the Street is $20.19.
“At $21.80, Blackstone’s current takeover offer for WPT of $22.00/unit in cash represents only limited annualized upside for WPT’s units, assuming that the transaction successfully closes in mid-4Q21,” he said. “As a result, we are reducing our recommendation ... while raising our target price $22.00, to match Blackstone’s cash takeover offer price. We assign a low probability that WPT receives a higher takeover price given Blackstone’s ability to match any superior offer.”
* BMO Nesbitt Burns’s Joanne Chen to “market perform” from “outperform” with a $22 target from $18.50.
“Although we are not fully ruling out the possibility for rival bidders, we’d note the current offer on the table is all-cash and already has the unanimous support from the board. As such, we are downgrading WIR.U units,” she said.
* CIBC World Markets’ Dean Wilkinson to “neutral” from “outperformer” with a US$22 target, rising from US$18.50.
* iA Capital Markets’ Frédéric Blondeau to “hold” from “buy” with a US$22 target from US$19.50.
Elsewhere, National Bank Financial’s Matt Kornack raised his target to US$22 from US$20 with an “outperform” rating.
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InterRent Real Estate Investment Trust (IIP.UN-T) has reached a “turning point,” according to Desjardins Securities analyst Michael Markidis, who sees it “moving off the pandemic bottom.”
On Monday, the REIT reported second-quarter financial results that fell largely in line with expectations, including funds from operations per unit of 12 cents, matching the projections of both the analyst and the Street. Same property net operating income growth flipped positive at 2.6 per cent following three consecutive quarters of decline, while occupancy increased 20 basis points from the previous quarter.
“It seems that IIP’s decision to not ‘buy occupancy’ is starting to pay off,” said Mr. Markidis. “Revenue from the repositioned portfolio (which is not impacted by acquisitions) increased 1.4 per cent quarter-over-quarter and exceeded our forecast by $0.5-million. This result was primarily due to AMR growth (up 1.4 per cent), as economic vacancy (average throughout the quarter) slipped 30 basis points (to 9.4 per cent). Traffic is trending in the right direction. Leads generated in 2Q21 were up 34 per cent vs 1Q21 and were 3 per cent higher than in 2Q19. Leads generated in July were 40 per cent higher vs June.
“Notwithstanding the potential risk of the Delta variant on population mobility and household formation, we are highly confident that sequential revenue growth will continue to accelerate in 2H21.”
After raising his FFO per unit estimates for 2022 and 2023, Mr. Markidis increased his target for InterRent units to $20 from $18 with a “buy” rating. The average on the Street is $18.53.
“The move reflects (1) increased confidence in our FFO outlook, and (2) continued evidence of robust demand for hard assets from private/institutional players. Occupancy reversion provides significant organic growth potential. Our outlook calls for mid-teens annual FFOPU growth in 2022 and 2023,” he said
Other analysts making target adjustments include:
* Raymond James’ Brad Sturges to $20.25 from $18 with an “outperform” rating.
“As greater lead generation translates into more signed leases, InterRent could be well positioned to generate a recovery in its total portfolio occupancy rate back up to its historical 95-per-cent range, up 350 basis points from 91.5 per cent at June 30,” said Mr. Sturges. “This combined with InterRent’s ability to capture higher market AMRs upon suite turnover may translate into meaningful 2022 organic growth year-over-year.”
* RBC Dominion Securities’ Matt Logan to $19.50 from $17.50 with an “outperform” rating.
“The macro backdrop for InterRent REIT is increasingly positive — a tone that was reflected on the Q2 call,” he said. “Thematically, the recovery is tracking in line with our expectations, while the “wall of capital” chasing apartments continues to drive cap rates lower. At the same time, IIP continues to garner its fair share of acquisitions as the REIT leverages its balance sheet strength.”
* Canaccord Genuity’s Mark Rothschild to $18.50 from $15.75 with a “hold” rating.
* CIBC World Markets’ Dean Wilkinson to $18.50 from $16.50 with a “neutral” rating.
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Raymond James analyst Rahul Sarugaser sees Auxly Cannabis Group Inc. (XLY-T) “finally coming into its own.”
Citing its improved cash position, “ramping” Canadian adult-use cannabis market share and a recent dip in its share price, he raised his rating for the Toronto-based company to “outperform” from “market perform” ahead of the release of its second-quarter results next week.
Our channel check data illustrates that, for 2Q21, XLY was in the #7 spot for Canadian adult-use market share, with 4.8 per cent (escalating to 5.4 per cent in July ‘21) — regaining its #1 position in vapes, and capturing #4 in concentrates, and #4 in edibles —so we have revised our cannabis revenue estimate upward,” he said.
“We have further updated our model to account for XLY’s improved cash position of $41.3-million (estimated) from the divestiture of KGK for $16.5-million, plus its recent $178-million equity raise, and $8-million private placement, as well as amendments to IMB’s $1238-million convertible debenture (extending the maturity date by 24 months to Sept. 25, 2024). We are also estimating SG&A settling in the $108-million per quarter range for the foreseeable future.”
Mr. Sarugaser maintained a 40-cent target. The average on the Street is 52 cents.
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Though he sees Hudbay Minerals Inc. (HBM-T) as “undervalued,” iA Capital Markets analyst George Topping warned its key holdings in Peru face notable political obstacles.
“The political situation in Peru remains an overhang for the stock,” he said. “While President Castillo has made moderate speeches, his cabinet appointments show a harder left-wing agenda. The populace and Congress are divided 50:50 and this non-reconciliatory approach increases the chances of unrest. Peru could be plunged back into a constitutional crisis. The base case remains increasing taxes (in spite of a tax agreement to 2031) but there is significant tail risk.”
After the bell on Monday, the Toronto-based miner reported second-quarter earnings per share of a 1-US-cent loss, falling below both the forecasts of both Mr. Topping (12 US cents) and the Street (11 US cents) due largely to higher taxes and depreciation expenses. Cash flow per share of 51 US cents met the Street’s projection while falling below Mr. Topping’s 57-US-cent estimate.
“With production growth, unhedged commodity price exposure and the NB mill commissioned, the Company has navigated the difficult pending closure of 777,” the analyst said. “The Copper World Deposit (Arizona) will have a resource by year-end and PEA in H1/22. HBM has a cash balance of $300-million with debt of $1.2-billion.”
Citing higher taxes and lower 2021 cash flow, Mr. Topping lowered his target for Hudbay shares to $12.90 from $14.75, maintaining a “buy” rating. The average on the Street is $13.44.
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Hardwoods Distribution Inc.’s (HDI-T) record second-quarter financial results “demonstrate a step change” in its business, said Acumen Capital analyst Nick Corcoran.
Shares of the Langley, B.C.-based company jumped 7.5 per cent on Monday following the premarket release of better-than-expected results.
Paced by an acceleration in its Canadian business, sales jumped 58.5 per cent year-over-year to $338.0-million, well above both Mr. Corcoran’s $299.7-million and the consensus of $294.6-million. Fully diluted earnings pers share soared 225.4 per cent to $1.13, also topping forecasts (64 cents and 60 cents, respectively).
“The organic growth in both the US and Canadian operations was from higher product prices and volumes. The Company’s ability to source product in tight supply conditions helped win new business,” the analyst said.
“Management attributed the strong results to a strong construction environment, higher demand that drove higher product prices, and robust supply lines that allowed the Company to win market share. HDI’s price pass through model provides an advantage in an inflationary environment.”
Emphasizing its organic growth and positive price trends for the second half of 2021, Mr. Corcoran expects its momentum to continue.
“The market outlook in residential construction and remodel remains strong with a multi-year runway. Commercial is more mixed due to it being a large and diverse market. The acquisition of Novo increases HDI’s exposure to two-thirds residential construction and remodel and one-third commercial (was half and half prior to the acquisition),” he said.
Keeping a “buy” rating, Mr. Corcoran raised his target to $60 from $55. The average is $55.70.
Elsewhere, Canaccord Genuity analyst Yuri Lynk hiked his target to $62 from $57 with a “buy” rating, while National Bank Financial’s Zachary Evershed raised his target to $60.50 from $57 with an “outperform” rating.
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In other analyst actions:
* In a second-quarter earnings preview, Scotia Capital analyst Mario Saric hiked his target for Brookfield Asset Management Inc. (BAM-N, BAM.A-T) to US$62.50 to US$54.25, maintaining a “sector outperform” recommendation. The average on the Street is US$59.04.
“Our main message today is that despite a 39-per-cent year-to-date share price move (vs. 54-per-cent average for peers), we still see attractive upside from NTM [next 12-month] growth and a reasonable in-place valuation which looks better today than last Friday,” he said.
* CIBC’ World Markets analyst Hamir Patel lowered his Interfor Corp. (IFP-T) target to $35 from $40, keeping an “outperformer” rating. The average is $45.67.
* Mr. Patel raised his CCL Industries Inc. (CCL.B-T) target to $82 from $81 with an “outperformer” rating. The average is $79.67.
* Barclays analyst Brian Johnson cut his Magna International Inc. (MGA-N, MG-T) to US$110 from US$115 with an “overweight” rating. The average is currently $106.67.
* National Bank’s Maxim Sytchev raised his Ritchie Bros Auctioneers Inc. (RBA-N, RBA-T) target to US$65 from US$62 with a “sector perform” rating. The average is US$63.17.
* Scotia Capital analyst Phil Hardie increased his Power Corporation of Canada (POW-T) target by $1 to $48, keeping a “sector perform” rating, while Desjardins Securities’ Doug Young raised his target to $45 from $43 with a “buy” recommendation and BMO Nesbitt Burns’ Tom MacKinnon bumped up his target to $43 from $41 with a “market perform” rating. The average is $45.25.
“We are encouraged by POW’s actions to simplify its corporate structure and improve communication, and we view the valuation as attractive.,” said Mr. Young.
* Stifel analyst Maggie MacDougall raised her GDI Integrated Facility Services Inc. (GDI-T) target to $80 from $75 with a “buy” rating, while National Bank’s Zachary Evershed increased his target to $67 from $65 with an “outperform” recommendation. The average is $66.14.
“GDI has experienced margin expansion resulting from the change in mix in Janitorial to more profitable sanitization services,” Ms. MacDougall said. “It remains our view that as long as COVID-19 is circulating as a public health issue, demand for high-margin Janitorial Services will be prevalent. The recovery in Technical Services will add to GDI’s consolidated profitability, as this division was depressed by COVID lockdowns, which resulted in a building backlog of maintenance and break fix work that will have to be done at some point. As revenue in this division recovers we expect margins, which were down 200 basis points last year, to also recover.”
* Craig Hallum analyst Eric Des Laurier raised his Village Farms International Inc. (VFF-Q, VFF-T) to US$17 from US$16 with a “buy” rating. The average is $23.56.
* MKM Partners analyst William Kirk lowered his Cronos Group Inc. (CRON-T) target to $11 from $12, maintaining a “buy” rating. The average is $9.15.
* BMO Nesbitt Burns analyst Jackie Przybylowski lowered her Osisko Gold Royalties Ltd. (OR-T) target by $1 to $20, below the $23.04 average, with a “market perform” rating.
David Leeder