Inside the Market’s roundup of some of today’s key analyst actions
In a research report released Tuesday, he initiated coverage of Toronto-based corporation, which owns and operates utilities, transport, energy and communications infrastructure businesses in North and South America, Europe and Asia Pacific, with a “buy” rating.
Calling Brookfield a global infrastructure leader which offers investors “unparalleled” access to a highly diversified portfolio, Mr. Rosenfield emphasized that global economic growth is driving a need for infrastructure investment.
"We view the current macro-economic context as highly favourable for infrastructure investing, driven by (1) synchronized global economic growth, which is driving increased demand for new critical infrastructure assets (and higher usage of existing assets), and margin expansion opportunities (higher priced on existing assets via inflation indexation, (2) an historically low global interest rate environment (low cost of capital), which continues to stimulate capital-intensive investment in infrastructure assets, (3) stretched government balance sheets and an infrastructure investment gap, which creates opportunities for private third-party capital investment in infrastructure assets (a pool of asset sellers), and finally, (4) the persistent evolution of new technologies, which is driving new forms of infrastructure investing (infra-tech)," he said.
Mr. Rosenfield said Brookfield is able to generate "relatively stable and predictable" operating cash flows, and he expects it to be able to achieve its average annual funds from operations per share growth target of 6-9 per cent annually through price and volume increases as well as organic asset expansion and large-scale M&A.
He set a price target of US$46. The average target on the Street is US$48.25, according to Thomson Reuters Eikon data.
“We view BIP as the most diversified way for investors to play the broader long-term infrastructure investment theme, with (1) access to a global diversified infrastructure investment platform (ownership interests in more than US$29-billion of assets), (2) defensive regulated/contracted cash flows (95 per cent of FFO), (3) visible cash flow growth (6-9 per cent per year, compound annual growth rate 2017-22), and (4) attractive income characteristics (5-per-cent yield, 60-70-per-cent FFO payout, and a 5-9 per cent/year dividend growth target).”
“Tahoe’s largest operation, the high grade Escobal Silver Mine, has been suspended from operations since an initial court ruling issued in July 2017. Over the past 14 months, several rulings have been made, the most recent from the Supreme Court reinstating the mining license,” said Mr. Curran.
“[Tuesday] morning, the company was made aware of a ruling by the Constitutional Court reversing the prior decision, which will have the effect of maintaining the suspension of the mining license until such a time as the Ministry of Energy and Mines’ (MEM) ILO 169 consultation with the local Xinca communities in the region of the Escobal mine is completed. Tahoe expects to receive a formal documentation of the Constitutional Court’s ruling in the next few days and will provide further updates. A similar case regarding the MEM’s ILO 169 consultation process was completed within 6 months.”
Based on that delay and the accompanying uncertainty surrounding the facility’s restart, Mr. Curran removed Escobal from his financial projections for 2019, leading him to downgrade the stock and drop his target price to $5.75 from $10. The average is $7.88.
“As we view limited catalysts for the company until the Escobal mine resumes operations, we are downgrading our rating,” he said.
Citing a recent recovery in caustic soda prices in Northeast Asia, Desjardins Securities analyst David Newman raised his rating for Chemtrade Logistics Income Fund (CHE.UN-T) to “buy” from “hold.”
"Caustic soda spot prices in Northeast Asia have rebounded to US$409/ton, bouncing off a 12-month low of US$380/ton in July, aided by renewed buying interest in the region," he said. "We estimate caustic prices should recover to US$450/ton by the end of 2018 (pre-buying related to the Chinese curtailment and turnarounds reducing caustic availability) and US$500/ton in 2019 as global prices rebalance with arbitrage (producers in Asia regain Australia from U.S. Gulf exports). We would note that actual realized prices are more muted on a lagged basis. We believe long-term caustic fundamentals remain favourable due to stable global demand and supply-related factors (eg supply constraints in China and Europe, limited capacity expansion)."
Mr. Newman expects Chemtrade's base businesses to recover in the second half of 2018 as it takes advantage of a strong chemicals market.
He added: "Our prior downgrade was premised on four months of substantial price declines in caustic soda (down 45 per cent in 2Q18 vs peak levels in November 2017) and the Street’s overly optimistic view for 2H18, which has been dialled back to more realistic levels. Despite transitory price weakness, we remain constructive on the long-term fundamentals for caustic soda."
After a slight increase to his 2019 earnings projections, Mr. Newman hiked his target for Chemtrade by a loonie to $17. The average is currently $19.19.
“Our positive outlook on CHE is premised on: (1) strength in the chemicals markets; (2) an expected operational recovery; (3) a focus on the core business; and (4) an attractive distribution yield of 7 per cent,” the analyst said.
Theratechnologies Inc.'s (TH-T) new Trogarzo medication appears to be a “unique” addition to the treatment options of HIV physicians in the wake of a “promising” initial commercial launch, said RBC Capital Markets analyst Brian Abrahams.
"The March U.S. approval of Trogarzo for multi-drug resistant (MDR) HIV provides favorable diversification for TH’s HIV product offerings and synergizes with its expanded Egrifta salesforce, providing near-immediate accretion," he said. "In our view and based on KOL [Key Opinion Leaders] feedback, the drug's novel MOA, clean safety profile, lack of drug-drug interactions, and clear efficacy in this high unmet need population are all favorable attributes that should be well received. Initial launch dynamics look promising, with 100 new patients (in addition to 62 transitioning from the EAP) coming onto treatment in the first several months."
Initiating coverage of the Montreal-based company with a "sector perform" rating, Mr. Abrahams said he sees many "push and pulls" that will affect Trogarzo's revenue potential.
"We view Trogarzo's novel MOA, clean safety profile, clear efficacy, and unmet need as all favorable attributes that bolster the armamentarium of physicians treating HIV; however, we see key uncertainties surrounding MDR epidemiology, compliance and logistical hurdles with IV and the target population, and competition that could potentially limit the peak opportunity, which is reduced by economics with partner TaiMed," he said. "Therefore, we believe shares fairly value the potential Trogarzo opportunity and additional Egrifta sales."
He set a price target for Theratechnologies shares of $11, which falls below the current consensus of $15.85.
Desjardins Securities analyst Josh Wolfson said he sees low remaining equity value for New Gold Inc. (NGD-T) and forecasts “elevated” financial stress in 2019 following the latest technical report for its Rainy River mine.
"Compared with prior management disclosure, overall life-of-mine results are similar, but costs are weighted higher in earlier years and various risks have been identified," said Mr. Wolfson on the report, which was released on Aug. 7.
“Although NGD elected to exclude an economic summary within Rainy River’s 43-101, we have reconstructed mine plan forecasts on page 2. After accounting for RR’s stream, the report outlines a pre-tax NPV [net present value] of US$370-million, assuming C$1.30/US$1 and US$1,200/oz gold. Assessing the overall acquisition of RR, including the purchase price of US$0.3-billion in 2013 and total initial capital spending of US$1.3-billion, we calculate NGD will generate an IRR [internal rate of return] of negative 8 per cent at US $1,200/oz, or negative 4 per cent at US$1,300/oz.”
Maintaining a "sell" rating for its stock and continuing to "emphasize investor caution," Mr. Wolfson lowered his target to 75 cents from $1.25. The average target is $1.96.
“Gold prices could help liquidity, but [our] investment thesis [is] unchanged,” he said. “Should NGD successfully execute upon its updated mine plan and defer New Afton’s C-Zone project, and gold prices remain higher than US$1,350/oz, we calculate that NGD will be capable of remaining compliant with its financial covenants in 2019. At spot gold prices, we calculate debt covenant relief or asset sales will be required by mid-2019 and no material FCF will be generated until 2021. In either outcome, we calculate NGD’s current equity value is lower than today’s price.”
Valeura Energy Inc. (VLE-T) now possesses the ability to begin unlocking the potential of an extensive unconventional gas play in the Thrace Basin in Turkey, said RBC Dominion Securities analyst Nathan Piper.
Recommending investors on the Calgary-based company’s stock ahead of the release of drilling and testing news from its Basin Centre Gas Condensate Accumulation starting in the third quarter, Mr. Piper initiated coverage with an “outperform” rating.
"The country imports 99 per cent of its gas needs leading to strong local gas pricing ($5.6/mcf in Q2/18) broadly in line with the EU import price,” he said. “Industry endorsement of the opportunity came in 2016/17 when Statoil (now Equinor) signed a farm-in agreement to fund 3D seismic and two deep appraisal wells. Following the Yamalik-1 well result, the 2018 Competent Persons Report (CPR) underlined the materiality with 18.6 tcf gas and 378 mmbbls condensate gross best estimate\ prospective resources (7.7t cf and 155 mmbbls working interest).
“In our view, the evolution of the play is moving from conceptual to appraisal. There back-to-back tested wells are planned from Q3/18, starting with Inanli-1 with near-term work underway to put the Yamalik-1 well on long-term test. This will utilize existing infrastructure (up to 50mmcfd capacity, owned by Valeura) to critically demonstrate commercial deliverability . We believe this emphasizes the ability of the company to relatively rapidly derisk and extend the play (producing while exploring/appraising) to convert prospective into contingent resources and reserves. In our view, on further positive drilling/test results the strategic location and scale of the opportunity should attract further industry interest.”
Mr. Piper set a target price of $7 for Valeura shares. The average is $9.50.
“The Valeura share price increased exponentially through late 2017 (following the Yamalik-1 drilling and test results); however, we believe the appraisal programme has the potential for meaningful upside,” he said. “High risk/reward exploration plays surprise the market with sharp share price reactions but subsequent appraisal phase can provide material upside with lower geological risk.”
Possessing an industry-leading platform and “sizable” net asset value upside, Minto Apartment REIT (MI.UN-T) is Canada’s “highest-quality” apartment REIT, according to Raymond James analyst Johann Rodrigues, who initiated coverage with an “outperform” rating.
“The Canadian multiresidential sector has produced the best risk-adjusted investment return (11.5-per-cent annualized) of the big four asset classes since 2002,” said Mr. Rodrigues. “Given the stock’s performance since its IPO (July 3, 2018), it’s clear to us that investors were clamoring for additional investment opportunities in the space. Minto has the highest-quality portfolio, in our opinion, with 19 Class A properties and 3 Class AAA assets: The Carlisle and Minto one80five in Ottawa, and Minto Yorkville in Toronto. After touring the latter, we believe it to be the highest-quality apartment building in the country. To us, what really sets Minto’s assets apart are their locations, usually in core urban nodes where most of the surrounding housing alternatives are condos, not rental apartments. The portfolio is also the second newest, at 37 years (behind Killam’s 33 years). In the Canadian multi-family space, the demand side of the equation remains at a fervent level. Immigration-led population growth, an urbanization push, increasing housing unaffordability and a lack of alternatives are all (largely) at peak levels. Double-digit rent growth on turnover seems to be the new norm in Ontario. Supply has been flat until very recently and new rent control legislation in Ontario, high development costs and exorbitant land prices have kept it relatively constrained further, providing a very friendly macroeconomic backdrop for Minto.”
Calling Minto's management team "among the most seasoned and investor-conscious teams in Canadian real estate," the analyst believes the REIT's focus on value creation should lead to "excess" NAV growth.
”The Canadian apartment sector has a strong track record of value creation, and any REIT wishing to pull investor capital will need to deliver outsized NAV growth in order to succeed,” he said. “In this regard, Minto is well-positioned. First off, management feels rents are 8 per cent below market (meaning a $5-million mark-to-market possibility) and the team has been able to push rents 4 per cent over the last three years. Additionally, $55-million in value-enhancing capital has been put into the assets over the last three years, including $29-million in 2017. According to the Property Condition Assessment (PCA) report, no further capital is required. Another 1,000 suites are being evaluated for repositioning. In our opinion, all this should help the portfolio generate 3–5-per-cent SPNOI growth per year (a conservative estimate to us considering SPNOI growth has averaged 8 per cent over the last three years), which equates to $1.00 per unit in annual NAV growth (6 per cent). Furthermore, one property (Richgrove-Martin Grove in Toronto) is in pre-development for a new 225-suite tower, with 40- acres of excess land over the balance of the portfolio. We believe 7–10 per cent in annual organic NAV growth is a fairly achievable target.”
Mr. Rodrigues set a target of $19 per unit, which is 10 cents higher than the consensus.
“Minto trades 5 per cent below NAV, well below the 10-per-cent premium that the Canadian multi-family group trades at, though we expect that, over time, it too will gain a premium valuation," he said. "We ... recommend investors accumulate units at these levels.”
IPhones sales remain “resilient,” according to Canaccord Genuity analyst T. Michael Walkley, who raised his financial estimates and target price for shares of Apple Inc. (AAPL-Q) ahead of the much-anticipated Sept. 12 event in which it’s expected to launch the latest iPhone versions.
“Based on our North America survey work, iPhone maintained its leading market share at all 4 major U.S. carriers and overall iPhone sales remained resilient with likely over 50-per-cent share at these carriers,” he said. “Given the strong consumer satisfaction with iPhones, we anticipate Apple will continue to grow its global share of the premium smartphone market. Further, we believe Apple’s ecosystem will contribute to strong ongoing growth for services revenue, and we expect the higher-margin services revenue growth to continue outpacing total company growth. We believe Apple is likely to launch three new iPhones in September with possible lower price points, and greater segmentation could lead to year-over-year unit growth in calendar 2019. We believe Apple continues to grow its leading market share of the premium-tier smartphone market and believe the iPhone installed base will exceed 700 million in 2018. This impressive installed base should drive strong iPhone replacement sales and earnings, as well as cash flow generation to fund strong long-term capital return.”
Mr. Walkley raised his 2018 and 2019 earnings per share projections to US$11.77 and US$13.61, respectively, from US$11.71 and US$13.59. He also introduced his 2020 expectation of US$15.30.
Maintaining a “buy” rating for Apple shares, his target jumped to US$250 from US$220. The average is US$219.33.
Expecting Facebook Inc. (FB-Q) to miss earnings expectations this year, MoffettNathanson analyst Michael Nathanson downgraded his rating for the social media giant to “neutral” from “buy.”
“We believe that revenue growth deceleration coupled with the company’s long-term margin guidance does not provide a meaningful near-term path for outperformance,” he said. “Facebook is increasingly under the eye of global politicians and regulators, which will force the company to become more aggressive on spending to show contrition.”
“The deceleration in growth, coupled with continued regulatory scrutiny, is a toxic brew for any stock.”
Mr. Nathanson lowered his target to US$175 from US$200. The average is US$211.03.
In other analyst actions:
TD Securities analyst Vince Valentini upgraded Corus Entertainment Inc. (CJR.B-T) to “buy” from “hold” with a $6.50 target (unchanged). The average is $6.03.
Cowen and Company raised its target for Canopy Growth Corp. (WEED-T) to a Street-high $74 from $56, maintaining an “outperform” rating. The average is currently $49.94.