Inside the Market’s roundup of some of today’s key analyst actions
Canaccord Genuity analyst Yuri Lynk expects Finning International Inc. (FTT-T) to outperform Toromont Industries Ltd. (TIH-T), its closest competitor, in the short term, citing an “extreme valuation differential.”
That led Mr. Lynk to downgrade his rating for Toromont to “hold” from “buy” based on its “near-record valuation premium.”
“At a 39-per-cent premium on 2019 estimated price-to-earnings, Toromont shares have seldom been this expensive vis-a-vis Finning looking back to July 2011, immediately following Toromont’s spin-off of Enerflex,” the analyst said. “Our work shows that being overweight Finning shares at or near the current valuation differential has led to outperformance versus Toromont shares as the latter’s premium over the former tends to mean revert to 19 per cent.
“With this in mind, we recommend more risk tolerant investors with a shorter investment horizon overweight Finning versus Toromont. However, long term, fundamentally driven investors should continue to HOLD Toromont given its strong management team, nearly peerless record of EPS and DPS growth, and financial flexibility. We rate Finning a BUY given its compelling relative valuation, its attractive growth outlook, and strong balance sheet.”
Pointing to sector-wide multiple compression, Mr. Lynk dropped his target price for shares of Toromont to $57 from $64. The average target on the Street is currently $64.71, according to Bloomberg data.
“Over the last 18 months, the [next 12-month] forward P/E multiple of the equipment group, as measured by Caterpillar, Finning, Komatsu, and Toromont, has contracted from 20 times to 12 times,” he said. “This has been largely achieved by share prices sharply correcting in 2018 with Caterpillar, the bellwether, falling 18 per cent, Finning falling 23 per cent, and Komatsu dropping 40 per cent. Toromont shares, however, did what they have largely done, on average, for the last 25 years and outperformed by being flat in 2018. Due to this divergence in share price performance, however, we see an opportunity for Finning shares to outperform Toromont in the short term.”
With a “buy” rating, Mr. Lynk maintained a target price of $33 for shares of Finning, which sits 38 cents below the current consensus.
Canaccord Genuity analyst Dalton Baretto sees three macro drivers dictating the performance of both commodity prices and related equities.
In a research note released Tuesday, he pointed to the expiration of the 90-day truce between the United States and China as well as the Brexit vote on March 29; movements in the U.S. dollar, which he refers to as the “The Greenback Boogie”; and global economic performance outside of the United States.
“We note that negative outcomes for commodity prices from deteriorating US-China trade relations or an Asian economic downturn can be mitigated to some extent by further Chinese stimulus efforts; indeed, we have already seen public commitments by the Chinese government to supporting the economy,” he said.
“Given the uncertainty in the current macro environment and the admittedly low probability of our base case scenario playing out as anticipated (with risks to both the upside and the downside), we prefer companies with strong company-specific catalysts that can demonstrate growth into 2020.”
In reaction to changes to the firm’s commodity price deck and operating outlooks, Mr. Baretto upgraded Hecla Mining Co. (HL-N) to “buy” from “hold,” citing implied return to his revised target of US$3.25 (up from US$2.75). The average target on the Street is US$3.67.
“We remain focused on HL’s integration and ramp-up of the Nevada assets over 2019, where we forecast 162,000 ounces of gold production versus just 35koz in 2018 post acquisition mid-year,” he said. “At the other assets, we forecast largely steady-state operations, and we note that we do not expect a resolution of the Lucky Friday labour dispute in 2019. We forecast largely flat production and cost profiles at both Greens Creek and Casa Berardi in 2019, and we look forward to further clarity on longer-term mine plans for Casa Berardi, San Sebastian and the Nevada assets over the course of the year.
“From a financial perspective, we forecast improvements in revenue, EBITDA and FCF in 2019 versus 2018, driven by the expected ramp-up and cash generation (versus consumption) of the Nevada assets. However, we do not forecast a material improvement in HL’s fairly leveraged balance sheet over the year.”
At the same time, Mr. Baretoo downgraded Ivanhoe Mines Ltd. (IVN-T) to “speculative buy” from “buy,” pointing to heightened geopolitical risks in Democratic Republic of Congo due to its ongoing election. His target dipped to $7 from $8.50. The average is $6.82.
“Notwithstanding the 44-per-cent decline in the company’s share price, from a fundamental perspective IVN enjoyed a reasonably successful 2018,” he said. “The company continued to move all three projects forward, released strong exploration results in the DRC, and significantly addressed both its financial commitments and its geopolitical risk profile with the announcement of CITIC metals as a 19.5% partner at a share price of $3.68 per share.
“Looking out into 2019, the primary challenge faced by IVN’s management team remains financing, with project debt financing packages to be negotiated at all three projects and a further $550-million in funding to be identified over the next 5 years. The currently ongoing election in the DRC has significantly raised the geopolitical risk profile of the country, which we believe will further complicate financing efforts.”
RBC Dominion Securities analyst Walter Spracklin thinks shares of Union Pacific Corp. (UNP-N) will “react favourably” to the hiring of Jim Vena as the railway company’s new chief operating officer.
Seeing a “line of sight to major operational change at UNP,” Mr. Spracklin upgraded his rating for its stock to “outperform” from “sector perform.”
“We know Mr. Vena very well from his time at CN, where he had an operations focus over his 40-year career up until his retirement as COO in June 2016,” the analyst said. “Importantly, Mr. Vena was at CN during Hunter Harrison’s entire tenure and was a key player in the implementation of Precision Scheduled Railroading (from scratch) at CN during that time-frame.”
“We were previously skeptical on UNP’s likelihood of successfully implementing PSR and key to that skepticism was the absence of a C-suite manager with PSR experience - which has now been corrected. With a seasoned PSR veteran now in the COO role, we expect dramatic changes will occur at UNP - changes that we believe will embrace the core tenets of PSR.”
Mr. Spracklin hiked his target for Union Pacific shares to US$179 from US$151. The average is now US$165.04.
"The changes we expect as a result of this announcement include: 1) a significant reduction in workforce; 2) a meaningful reduction in locomotives; 3) a meaningful reduction in rail infrastructure (e.g. hump-yards); and 4) a significant realignment in operating philosophy,” he said. “Unfortunately, we expect as a consequence a meaningful degree of customer disruption and possible internal resistance, as we are of the view that PSR can not be truly implemented without these ‘side-effects.’ Fortunately, these tend to be temporary, ultimately resulting in a more efficient service-oriented railroad.”
Desjardins Securities analyst Josh Wolfson says 2019 guidance and corporate updates will take centre stage in the coming fourth-quarter 2018 earnings season for precious metals companies.
“With three quarters complete, we see fewer 4Q surprises relative to annual 2018 targets,” he said in a research report released Tuesday. “We forecast modestly more favourable results than guidance for Agnico Eagle (production/AISC), Torex (production) and Yamana (AISC), although in our view this materiality is low. We see greater focus on future guidance, where we forecast guidance revisions for Agnico Eagle (positive 2019/20 production; guidance/consensus consistent), Goldcorp (negative 2019/20 production/costs; partially consistent with consensus) and Alamos (negative 2019/20 production; partially consistent with consensus). We also anticipate key updates will be provided by Agnico Eagle (Nunavut projects, reserves), Barrick (new guidance), Eldorado (Kişladağ funding, Lamaque ramp-up), IAMGOLD (Côté Gold decision), Kinross (Tasiast/Mauritania update), New Gold (Rainy River ramp-up and C-Zone decision) and Torex (sub-sill ramp-up).
“Relative to consensus estimates, our forecasts reflect greater 2019 surprise risk for Alamos (capital, 2020 production), Franco-Nevada (production), New Gold (production), Kinross (capital) and Yamana (capital). We also see the potential for higher volatility with Barrick (new guidance) and Goldcorp (outlook revisions). While our Torex forecasts are in line with consensus, we view the company’s 2019 outlook favourably.”
“Production is expected to decrease quarter-over-quarter, reflecting a decline in production at Kişladağ, while costs are also expected to decrease following weaker 3Q results at Olympias,” he said. “Thus far, production has exceeded expectations at Kişladağ from leach pad irrigation success that has recovered more gold—a continuation of this success could represent upside to our forecasts.
“A critical update is expected to be Eldorado’s financial outlook, where declining liquidity due to Kişladağ’s US$520m sulphide project advancement and the upcoming maturity of Eldorado’s US$600m bonds due 4Q20 represent items of focus. Potential options include debt refinancing, asset divestitures, streaming and/or offtake agreements, and equity. Our current forecasts outline that leverage ratios will sharply increase to critical levels in 1H19 absent changes to the company’s existing outlook.”
His target for the stock is $5.50, rising from $5 but beneath the consensus of $8.09.
“In a dynamic in which all core fertilizer names are atypically trading at similar multiples, and amid volatile markets, NTR seems relatively safer with its diversified portfolio, stable Canadian investor base, lower commodity price sensitivity vs. fertilizer peers (because of Retail), strong balance sheet, and large amount of capital to redeploy (largely via buybacks),” he said.
Mr. Jackson maintained a US$55 target, which sits below the consensus of US$62.82.
In a preview of earnings season for gold equities, Desjardins’ Raj Ray is optimistic for a strong 2019 in the wake of a gold price rally in late December.
“2018 was a disappointing year for gold equities in general, except for some stocks within our coverage, namely KL Gold, Oceana and Wesdome, which significantly outperformed the sector,” he said. “However, gold equities showed signs of life in late 4Q18, driven by the gold price, which started the quarter on a weaker note but ended 4Q18 up almost 7.7 per cent. It is still too early to say if the current gold price rally is sustainable, but … we have a more constructive short-term view given heightened macro uncertainties.”
“4Q18 results should cap a good year for most of our companies under coverage. Most companies within our coverage are on track to achieve or potentially exceed their 2018 guidance, except for Golden Star (although it should achieve lowered guidance) and TMAC (no guidance provided due to process plant issues at the beginning of the year). After a solid 3Q18, we expect another blockbuster quarter for KL Gold in 4Q18, driven by Fosterville.”
“KL Gold and Oceana were two of the outstanding performers in 2018, up 85 per cent and 54 per cent, respectively, vs the GDX and GDXJ, which fell 9 per cent and 11 per cent, respectively,” he said. “However, we believe both stocks are currently fairly valued based on our assumptions, and we are therefore moving to Hold from Buy. While we maintain that both KL Gold and Oceana are high-quality companies with strong assets, we believe some of the more leveraged gold stocks that have so far underperformed should outperform on a relative basis if the renewed optimism in the gold price continues into 2019.”
His target for Kirkland Lake rose by a loonie to $39. The average on the Street is $38.80.
Mr. Ray’s target for OceanaGold moved to $5.25 from $5, exceeding the consensus of $4.75.
In reaction to Monday’s announcement that its WorldView-4 satellite experienced a failure that prevents it from collecting imagery, BMO Nesbitt Burns analyst Thanos Moschopoulos downgraded Maxar Technologies Inc. (MAXR-T, MAXR-Q) to “market perform” from “outperform.”
“We expect this development will have on Maxar’s EBITDA, leverage ratios, growth prospects, and value to a potential acquirer,” he said.
Mr. Moschopoulos dropped his target to $15 from $35. The average target on the Street is $26.13.
“We think that Maxar might well be worth significantly more than its current share price on a takeout, but in our view there are some mitigating factors that might not be conducive to maximizing value in an M&A scenario,” he said."
Elsewhere, Credit Suisse’s Robert Spingarn lowered the stock to “underperform” from “neutral” with a target of $5.88 from $17.
Mr. Spingarn said: “MAXR announced that WorldView 4, the company’s newest satellite, had malfunctioned and was unlikely to recover. This would result in the loss of~$85-million in annual revenue, of which only around $10-15-million may be migrated to other satellites. We model the loss in annual EBITDA at around $40-million (7 per cent of total). If the satellite is formally deemed unrecoverable, its $155-million in book value will be written off in Q4′18. There is $183-million in insurance, but its recovery and timing is difficult to gauge. Despite the shares cratering 31 per cent, we still see shares as undesirable at this point, and lower our rating ... We lower our 2019/’20 estimates to $2.98/2.70. We were already concerned about a dividend cut, which now seems more likely.”
In other analyst actions:
RBC Dominion Securities analyst Paul Quinn downgraded Conifex Timber Inc. (CFF-T) to “sector perform” from “outperform” with a target of $3, down from $6 and below the consensus of $3.67.
Mr. Paul Quinn upgraded Acadian Timber Corp. (ADN-T) to “outperform” from “sector perform” with a target of $18, falling by a loonie. The average is $19.75.