Inside the Market’s roundup of some of today’s key analyst actions
Artis Real Estate Investment Trust’s (AX.UN-T) move toward “meaningfully” reducing its exposure to the Calgary office sector while building a “substantial” development pipeline in the United States is likely to result in a higher-quality REIT possessing more stable cash flow growth, according to Canaccord Genuity analyst Mark Rothschild.
Despite reporting results for the second quarter that fell short of expectations, Mr. Rothschild upgraded his rating for the Winnipeg-based REIT to “buy” from “hold.”
On Aug. 2, Artis reported funds from operations per diluted unit of 32 cents, a drop of 4 cents cent year over year and 2 cents below the consensus projection from the Street. Mr. Rothschild attributed the miss to the dilutive impact of almost $160-million in dispositions during the quarter as well as higher interest expenses and negative same-property net operating income growth of 0.4 per cent.
“Artis has grown its development pipeline considerably to grow cash flow and offset the dilutive impact of asset sales,” he said. “In the quarter, the REIT added 380,000 square feet to its development pipeline, acquiring two land parcels in the U.S.. Currently, the pipeline totals eight active projects comprising 2.2 million sf with an additional 10 projects totaling 4.9 million sf planned for future development. The REIT is focused on ground up development of US industrial properties which account for 40 per cent of the REIT’s development pipeline. Year-to-date, the REIT has invested approximately $29-million on development with an additional $30-$40 million planned through the rest of 2018.”
After lowering his net asset value estimate to $14.11 from $14.25, Mr. Rothschild lowered his target price for Artis units to $14 from $14.25. The average target on the Street is currently $13.52, according to Bloomberg data.
“Currently, 26 per cent of the REIT’s NOI is derived from its industrial portfolio, and this will grow as development projects are completed,” he said. “At the same time, the REIT’s units have underperformed of late, and trade well below NAV. While the elevated payout ratio is a concern, we do not believe it is at risk and expect it to decline over the next few years. Therefore, we believe that at current levels the REIT’s units offer attractive value and we are upgrading Artis REIT to a BUY. Our target price is … essentially in line with our NAV estimate. Combined with an 8.4-per-cent distribution yield, our target price implies a one-year total return of 17.9 per cent.”
Conversely, Echelon Wealth Partners analyst Frederic Blondeau lowered his target by a loonie to $12.50, calling the results a “significant” miss. He kept a “hold” rating.
“With such an ambitious business plan, the obvious focus for us would not only be the execution but also the present and the evolution of the cost structure of individual projects,” said Mr. Blondeau. “In our opinion, it remains to be seen whether the execution of the overall business plan will eventually translate into value creation for investors and meaningful potential catalysts for the REIT.”
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Despite Advantage Oil & Gas Ltd. (AAV-T) exceeding expectations with its second-quarter financial results, Raymond James analyst Kurt Molnar downgraded his rating for its stock based on its current valuation.
On Aug. 2, the Calgary-based company reported quarterly production of 35,352 barrels of oil equivalent per day, beating Mr. Molnar’s estimate of 34,550 barrels. Cash flow of $23.2-million also topped his projection ($18-million).
“Back in April Advantage reduced their full-year guidance with the bulk of the change guided to occur in 2Q,” said Mr. Molnar. “In this regard, they guided to lower production and higher cash costs with these effects expected to be transitory. The results reported [Thursday] were modestly better than we had assumed in our forecast but not to the extent to have a material impact on our full-year outlook for Advantage. Not surprisingly, the company continues to focus on the premise of transitioning to a higher liquids ratio but that will continue to be a longer-term process."
Moving Advantage to “market perform” from “outperform,” Mr. Molnar maintained a target price of $5 per share. The current consensus target is $5.57.
“Given the recovery in the stock valuation in recent weeks, and a forecast that is not really changing, we are downgrading our rating to Market Perform while we reiterate our $5.00 target price,” he said. “We agree with Advantage’s strategic direction, we consider them a very good operator and we expect that they (among a relatively long list of ways to play an expected constructive western Canadian gas price recovery) will do well as an equity performer this coming fall and winter. With all that said, we think other lean gas stocks may have a better performance set up visa-vis either more mature transition to liquids and/or higher debt leverage (which is a positive for an expected bounce in AECO). Advantage’s cash netback in 2Q was among the lowest of the lean gas peers, while their PDP capital cost is not differentiated enough to overcome this lower netback.”
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Allied Properties Real Estate Investment Trust (AP.UN-T) displayed “acceleration across all key fundamental areas” in its second-quarter financial results, said Raymond James analyst Ken Avalos.
On Aug. 2, Toronto-based Allied reported funds from operations of 55 cents per unit, up 2 per cent year over year and 1 cent ahead of Mr. Avalos’s projection. Rental same-apartment net operating income jumped 10.4 per cent.
“Allied is enjoying one of the strongest markets for its property type in its history,” he said. “Year-to-date, renewals and new leasing has come in 23 per cent higher than expiring rents. Occupancy jumped 250 basis points year over year to 94.9 per cent, with committed leasing at 95.4 per cent.”
Claiming Allied possesses “the best balance sheet in Canada,” Mr. Avalos raised his target price for its units to $48 from $45. The average target is $45.50.
He kept an “outperform” rating.
“We think that was one of Allied’s best quarters in recent memory, with all parts of their business seeing consequential accelerations,” the analyst said. “Up to this point in the year, the stock hasn’t reflected the strong environment the REIT finds itself in. We think this could change in the second half of the year.”
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After hearing further details on its Telus International offshore call centre business with the release of its in-line second-quarter financial results, Desjardins Securities analyst Maher Yaghi thinks further monetization of the endeavor could be a catalyst for Telus Corp. (T-T) stock.
“The company indicated that TI would likely generate revenue in excess of $1.0-billion in 2018,” said Mr. Yaghi. “We believe the Street is generally valuing these operations at the same multiple as wireline at the moment. However, a multiple that is closer to valuations given to the IT service industry could eventually be warranted with additional disclosure on the unit from the company. We believe that eventually, another strategic sale of a stake in TI or an IPO of the segment could be considered by management in order to unlock higher value for the asset. We estimate an IPO of the segment could add $3–4 per share to T.”
On Friday, Telus reported revenue and consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) of $3.45-billion and $1.29-billion, respectively, meeting the expectations of the Street ($3.45-billion and $1.28-billion). Wireless postpaid net additions of 87,000 topped the consensus estimate (80,300), but failed to keep pace with rivals BCE Inc. (BCE-T) and Rogers Communications Inc. (RCI.B-T) .
With the results, Mr. Yaghi raised his 2018 and 2019 earnings per share projections to $2.92 and $3.28, respectively, from $2.86 and $3.17.
Keeping a “buy” rating for Telus shares, his target rose to $53 from $52. The average is $51.
“T operates industry-leading wireline and wireless networks in terms of quality, allowing the company to enjoy decent subscriber performance, which should support future profitability,” he said. “This enables the company to fund its dividend growth, which is the highest among Canadian large-cap telcos.”
Elsewhere, citing "visibility on the wireline growth businesses," Canaccord Genuity's Aravinda Galappatthige raised his target by a loonie to $49 with a "buy" rating (unchanged).
“With greater clarity around the contributions from TI and Telus Health, we now separate these two segments in our valuation of the wireline business,” he said. “We value these two businesses at 10 times enterprise value-to-2019 EBITDA while maintaining our 6.25 times EV/2019 estimated EBITDA multiple on the remainder of the business. The net result is a blended wireline multiple of 6.85 times and a consolidated multiple of 7.9 times.”
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Minto Apartment Real Estate Investment Trust (MI.UN-T) provides “strong” growth potential through several “strategic avenues,” said Industrial Alliance Securities analyst Brad Sturges.
He initiated coverage of the Toronto-based REIT, which began trading on the TSX in early July, with a “buy” rating.
“MI is well positioned to capture above-average NAV [net asset value] per unit and AFFO [adjusted funds from operations] per unit growth from internal and external growth avenues,” said Mr. Sturges. “The REIT also may believe from its strong sponsorship from the Minto Group of Companies (Minto) that provides significant operating, acquisition and development expertise and an extensive network of industry relationships. MI’s initial portfolio is weighted towards Ontario’s large urban apartment property markets of Toronto and Ottawa that may continue to experience strong underlying property fundamentals and accelerating market AMR growth prospects over the next few years.”
Mr. Sturges set a target of $19. The average on the Street is $18.90.
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In other analyst actions:
TD Securities analyst Sean Steuart upgraded Interfor Corp. (IFP-T) to “action list buy” from “buy” with a $31 target, which is 8 cents less than the average on the Street.
CIBC World Markets analyst Robert Catellier resumed coverage of Enbridge Income Fund Holdings Inc. (ENF-T) with a “neutral” rating and $33 target. The average is $33.10.
TD Securities analyst Graham Ryding upgraded Power Corp. of Canada (POW-T) to “buy” from “hold” with a target of $34, up from $32 and ahead of the consensus of $33.56.
Mr. Ryding also raised his rating for Power Financial Corp. (PWF-T) to “buy” from “hold” with a $37 target, rising by a loonie and exceeding the $35.69 average.
David Leeder