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Inside the Market’s roundup of some of today’s key analyst actions

In the wake of its first dropdown from Pattern Energy Group 2 LP, Desjardins Securities analyst Bill Cabel lowered his rating for Pattern Energy Group Inc. (PEGI-Q, PEGI-T) based on recent price appreciation.

On Monday, San Francisco-based Pattern announced the acquisition of a 35-MegaWatt-owned interest in the Stillwater Wind facility in Montana from PD2.0 for US$23-million.

Mr. Cabel said Pattern’s recent investment in PD2.0, which holds a 29-per-cent interest, were “proven out” with the dropdown.

“While PEGI bought the asset at sub-10x CAFD [cash available for distribution], it also received 29 per cent of the sale price or US$4-millionheld in PD2.0,” he said. “After adjusting for the gain on its equity contributed to the development of the Stillwater project, we estimate that the company paid closer to 8.0–8.5 times CAFD, or 1.5–2.0 turns lower than the 10 times CAFD at which PEGI normally drops down. While we believe this development interest could continue to add value on dropdowns, we do not expect another dropdown until 2H19."

Mr. Cabel moved shares of Pattern to “hold” from “buy” with a US$22 target (unchanged). The average on the Street is US$22.65.

“Given the recent share price appreciation, our expectation of no dropdowns until 2H19, flat year-over-year CAFD and an elevated payout ratio, we have downgraded our rating,” he said.

“We believe hitting LTA [long-term agreement] generation on its wind assets and a self-funding distribution paying PD2.0 (late 2020) could significantly improve CAFD and the payout ratio.”


Citing production growth in the Permian Basin and seeing pipeline relief on the way, National Bank Financial analyst Greg Colman upgraded his rating for shares of both Calfrac Well Services Ltd. (CFW-T) and CES Energy Solutions Corp. (CEU-T) to “outperform” from “sector perform.”

Mr. Colman said the firm is becoming more positive on Permian-focused stocks with addition of multiple years of offtake capability in the coming quarters.

His target for Calfrac shares remains $4.85, which falls short of the average on the Street of $6.90.

His target for CES is $6, which is 21 cents short of the average.


RBC Dominion Securities analyst Amit Daryanani lowered his financial estimates for Apple Inc. (AAPL-Q) based on recent evidence of a decline in iPhone demand.

“Given sustained datapoints around soft iPhone demand from supply-chain and others, we think its prudent to adjust estimates lower, especially as it relates to March quarter and beyond,” he said. “While AAPL stock has substantially corrected (down 21 per cent since the company reported versus S&P500 down 2 per cent), we think investors will wait for datapoints/noise level to stabilize before getting more positive on the name (dynamic we think should occur in early 2019).

“For investors willing to look past the noise, we note: a) high probability that some of the negative datapoints are embedded into AAPL’s Dec-qtr guide; b) historically, supply-chain cuts have been more severe vs. trends at AAPL (inventory dynamic); and c) we haven’t gone through a single iPhone cycle where there hasn’t been “noise” around supply-chain cuts (though we concede this is earlier). Contingent on how the holiday season plays out, the risk is more toward March quarter estimates that need to be adjusted vs. Dec. quarter, especially if demand trends remain tepid.”

Mr. Daryanani maintained his revenue and earnings per share projections for the December quarter of US$91.7-billion and US$4.66. His expectations for the March quarter dropped to US$64.5-billion and US$2.98 from US$65.5-billion and $3.03.

For fiscal 2019, his estimates are now US$277.9-billion and US$13.20, dipping from US$280.7-billion and US$13.32. The consensus on the Street is US$279.5-billion and US$13.42.

Maintaining an “outperform” rating for Apple shares, his target fell to US$235 from US$240. The average is now US$228.47.

“We believe AAPL’s current stock price creates an attractive entry point for investors to benefit from its ability to generate revenue and EPS growth in FY18,” he said. “We believe multiple catalysts remain as the company benefits from: 1) iPhone ramps; 2) Mac/iPad refresh cycle; 3) potential iTV launch or other major product lines; and 4) improvements in capital allocation policy. We believe the fundamental reality remains that AAPL’s valuation is materially sub-par to what we anticipate is its long-term revenue and EPS potential.”


Canaccord Genuity analyst Derek Dley raised his target price for shares of Maple Leaf Foods Inc. (MFI-T) following the announcement of its poultry processing consolidation initiative.

On Monday after market close, the company announced its intention to build a new 640,000 square foot, value-added fresh poultry facility in London, Ont. for $660-million. It received an investment of $55-million from the provincial and federal governments.

“The company expects the resulting consolidation to generate EBITDA margin expansion of approximately 270 basis points, with the improvements in profitability beginning in late 2022,” said Mr. Dley. “Additionally, the poultry consolidation is expected to add approximately $105 million in annual run-rate EBITDA by the end of 2023, which we believe will grow to be in excess of $150 million by 2029. We estimate that the expected EBITDA benefit from the project implies an annual return of 14-20 per cent while the initiative creates approximately $2/share in near-term shareholder value.

“While the capital cost of Maple Leaf’s poultry consolidation was higher than the $350-400-million capital outlay we had previously been anticipating, the return expectation of 270 bps to the EBITDA margin was also more than double our previous expectation. Given the company’s healthy balance sheet, we are comfortable with the incremental capital spend. Importantly, Maple Leaf will be increasing its poultry capacity by 33 per cent, which should further enhance the company’s margin mix. While there will likely be a near-term impact on free cash flow during the heavy transition period in 2020 and 2021, we believe the project represents a strategically important use of capital. Furthermore, with an expected IRR of 14 per cent run-rate by 2023, moving towards 20% by 2029, Maple Leaf appears to be once again positioning the company for longterm, sustainable margin growth.”

Maintaining a “buy” rating for its stock, Mr. Dley increased his target to $38 from $36, which exceeds the average of $36.50.

“Given the near-term timing differential in-terms of cash flow benefit/outlay, we are increasing our target multiple to reflect the longer-tail nature of the poultry consolidation benefit,” he said. “Following the commissioning of the London plant, Maple Leaf will be an industry leader in sustainable poultry production, similar to its current position in RWA pork. As a result, margins should trend upwards from today’s levels, and we believe the multiple will follow suit.”


Gibson Energy Inc. (GEI-T) has been “successful” in the execution of its disposition program thus far, according to Desjardins Securities analyst Justin Bouchard, who sees it “well positioned to fund its EBITDA high-grading process.”

“Management indicated that it intends to reinvest the proceeds into the Infrastructure division (ie tanks and pipelines),” he said. “All in all, the ‘new’ GEI is shaping up and the transition should be complete by mid-2019.”

On Monday, the Calgary-based midstream oilfield service company announced it’s set to exit its non-core Environmental Services North and Wholesale Propane businesses for aggregate proceeds of approximately $100-million prior to closing adjustments.

“GEI expects to achieve or exceed the high end of its $275–375-million disposition target; the $100-million sales price announced [Monday] puts the company at $225-million in overall dispositions, with visibility toward the $375-million-plus range,” said Mr. Bouchard. “As it stands, Canadian Trucking remains the final business segment subject to disposition; we note that the Street’s sales proceeds expectation for the segment is well above the $100-million mark. Per the release, this final leg of the disposition process is proceeding ahead of schedule relative to the initial mid-2019 expectation, so we expect an update in fairly short order.”

Mr. Bouchard lowered his adjusted EBITDA projections for both 2018 and 2019 to $449-million and $434-million, respectively, from $458-million and $443-million.

He kept a “buy” rating and $25 target for Gibson shares. The average is $24.46.

“We maintain that GEI is well-positioned in the prevailing wide and volatile differentials environment, first because it is able to leverage producer demand for storage optionality to grow its long-term, fee-for-service storage business, and second because the outlook with respect to WCSB pricing creates enhanced opportunity to realize greater Crude Wholesale margins (which in turn can be reinvested into the core infrastructure business),” he said.


In other analyst actions:

Eight Capital analyst Craig Stanley initiated coverage of Superior Gold Inc. (SGI-X) with a “buy” rating and $1.65 target. The average is $1.78.

Mr. Stanley also gave a “buy” rating to Argonaut Gold Inc. (AR-T) with a $2.65 target. The average is $3.38.

JPMorgan initiated coverage of AltaGas Canada Inc. (ACI-T) with a “neutral” rating and $15 target. The average is $16.57.

With files from Bloomberg News

Follow David Leeder on Twitter: @daveleederOpens in a new window

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