Inside the Market’s roundup of some of today’s key analyst actions
A path to further upside for Cenovus Energy Inc. (CVE-T) “could be close,” according to Citi analyst Prashant Rao, who opened a “catalyst watch” for the Calgary-based company ahead of Wednesday’s release of its first-quarter results.
“Stronger price realizations in the Upstream, driven by a combination of the year-to-date crude rally (which Citi expects to continue near-term) and narrowed Canadian crude discounts (due to Alberta government intervention in the market), imply 1Q AFFO/sh [adjusted funds from operations per share] that could beat Citi and consensus expectations, and result in upward 2Q revisions,” said Mr. Rao. “Potential for positive company commentary on capital allocation (i.e. progress on deleveraging, probability of a share repurchase program ahead) could drive further share upside. Longer-term, structural upside likely requires specifics from the newly-elected UCP party as to how maintaining currently favorable Canadian oil price levels while balancing for production growth will be managed.”
Mr. Rao noted that recent forecast changes on the Street has led to a jump in the consensus AFFO per share projection to 70 cents for the quarter, just a penny below his projection but a noticeable jump from 60 cents and 49 cents, respectively, just three weeks ago.
“The same consensus for 2Q sits at 75 cents versus Citi’s 83 cents,” he said. “Given expectations for stronger near-term CFs [cash flows], any update on CVE’s goal for lowering net debt below $5-billion (from $7.7-billion at end-2018), and/or the potential for a buyback program could drive further upside to shares. On M&A, sentiment checks indicate specific acquisitions (i.e. DVN’s Jackfish) would be well received, if they do not impede net debt reduction.”
Maintaining a “neutral” rating for Cenovus shares, Mr. Rao hiked his target to $15 from $13. The average on the Street is $14.90, according to Bloomberg data.
“Our previous target price handicapped terminal value for the Upstream in our DCF [discounted cash flow], reflecting our view for structurally wider WCS differentials relative to the historical average US$15 per barrel,” he said. “Our terminal value assumptions are now up US$1.50/bbl from US$22/bbl, but still imply a meaningful U.S.$20.50/bbl discount. That said, government intervention year-to-date (production curtailments) caused a contraction to the ~$10.50/bbl level in 1Q19. Outside of capital discipline/allocation, visibility towards sustainably narrow Canadian diffs should drive the next leg-up for CVE shares.”
Raymond James analyst David Quezada is “taking a more cautious stance” on regulated utilities, leading him to downgrade his rating for a trio of stocks.
“With stocks having appreciated 16 per cent and 9 per cent respectively year-to-date (compared to the TSX up 16 per cent) each of Emera and Fortis are now either approaching or have surpassed the mid-point of historical valuation ranges as well as our target prices,” said Mr. Quezada. “Of course, we acknowledge the performance of each of these equities will be closely tied to the trajectory of bond rates. However, we now believe that these large diversified utilities are discounting a relatively benign bond rate outlook - something we would argue is generally consistent with current consensus rate expectation. Accordingly, while we acknowledge another leg down in bond rates could support further upside in the stocks, we note Canadian and U.S. 10-year rates are close to the bottom of historical ranges. This view supports our move to Market Perform from Outperform in each case.”
Mr. Quezada maintained his $50 target price for both Emera (versus a $52.07 consensus) and Fortis (versus $51.04.).
At the same time, he lowered Boralex Inc. (BLX-T) to “outperform” from “strong buy” with a $25 target, which exceeds the average on the Street of $23.04.
“With volatility in the wind resource pressuring the stock, Boralex has continued to lag the peer group year-to-date and represents among the best value in our coverage universe, in our view,” he said. “Meanwhile, we maintain our expectation of the wind resource in France moving back in line with long term averages over time (Mar-19's wind speed reading was the strongest in several years). That said, we believe the relatively lengthy permitting process in France, where the bulk of the company's development portfolio is located, could result in projects moving forward at a slower pace than we had previously assumed. At the end of the day, we believe these projects sport attractive IRRs of 10-15 per cent and longer PPAs (15 years) than are common in North America which we ultimately expect to drive meaningful value. However, earnings volatility and the slow permitting process in France lead us to believe an Outperform rating more accurately reflects the opportunities and challenges facing the company.”
Conversely, Mr. Quezada raised his rating for Hydro One Ltd. (H-T) to “market perform” from “underperform” with a $20 target. The average is 66 cents higher.
“We believe much of the uncertainty surrounding Hydro One has been addressed with the company having found a strong CEO in Mark Poweska and having much of the management turnover in the rear-view,” he said. “While the issue of governance and interference by the Ontario government remains a challenge, we believe the depressed valuation of Hydro One shares, coupled with what appears to be a relatively constructive outcome on the company’s distribution segment rate filing, suggests downside in the name is modest at this point.”
After reducing his first-quarter earnings expectations, CIBC World Markets’ Paul Holden moved TMX Group Ltd. (X-T) to “neutral” from “outperformer.”
“Both listing and trading activity on the Venture Exchange have really slowed to start the year,” he said. "This puts a small dent in the near-term earnings outlook and may also temporarily crimp perception around the long-term strategy to grow the Venture listings business.
“Derivatives volumes were up 11 per cent year-over-year, but that is less than we had expected given the benefit of extended trading hours. TMX was generating 6 per cent of its derivatives revenue by licensing its SOLA trading engine to BOX. That ended last year. We now expect 4-per-cent Derivatives revenue growth versus 14 per cent previously.”
Mr. Holden lowered his operating earnings per share estimate for the quarter by 5 per cent to account for that drop in listings and trading activity as well as the expiration of a software licensing agreement. His EPS projection is now $1.23, down 10 per cent from the same period a year ago and below the consensus on the Street by 3 cents.
His target for TMX shares dipped to $97 from $101. The average is $96.83.
“Our downgrade is a result of lower earnings estimates and a lower price target of $97.00 (prior $101.00) versus a stock that is closing in on its prior all-time highs,” he said. “The implied return to our price target is only 10 per cent. There might be a little room left for further multiple expansion, but we think more upside would have to come from positive EPS revisions, which we do not see on the horizon given soft Q1 volumes.”
In response to its recent restructuring moves to address its outstanding indebtedness, reduce its interest and certain other payment obligation, and build its balance sheet, Canaccord Genuity analyst Dewey Steadman cut Prometic Life Sciences Inc. (PLI-T) to “hold” from “buy,” saying it’s taken “a mulligan.”
“In hindsight, we should have seen this coming – and should have pushed harder to get the company to get a handle on its addiction to spending – but here we are,” he said. “Prometic promised some sort of financing for several months, but we didn’t expect a debt restructuring and equity raise with terms that in our view are second only to bankruptcy and essentially restart the clock on current Prometic equity holders. That said, we’re positive on the value current holders could realize with the rights offering, for those shareholders with the appropriate risk appetite and a long-time horizon. That, of course, assumes yet another new management team at Prometic can control the company’s legendary penchant for R&D spend as we await clarity on the Ryplazim BLA filing. With a lack of near-term catalysts for the story and what we think could be range-bound share performance ahead of the Ryplazim refile, we’re moving to HOLD and a new 5-cent DCF-driven price target reflecting the massive dilution that’s about to come.”
Believing Prometic shareholders "are left out in the cold" with the moves, which were announced on April 15, Mr. Steadman said: "Investors have been expecting some sort of financing for some time, as management made its intentions clear but continued to spend shareholder capital on R&D activities that many view as non-core to the Ryplazim-driven Prometic story. In a deal we see as only slightly better than bankruptcy or receivership, Prometic will be able to convert substantially all of its existing debt into equity and that debt investor, along with a new U.S.-based healthcare fund, will provide another $75-million of equity capital at less than 2 cents CAD per share; representing around 25 billion (with a “b”) new shares issued on top of Prometic’s 720 million-plus basic shares outstanding as of 4Q/18. To attempt to appease its massively diluted base, existing PLI shareholders will be granted rights to purchase up to $75-million in additional equity at the raise price.
"While new investors get a screaming deal on PLI equity. At around 1.521 cents CAD per share, we think the new investors are getting a great deal on PLI shares that we now value at around 5c CAD assuming full dilution from the recap, equity offering and rights offering. As such, we’d recommend PLI holders with a long-time horizon and strong appetite for risk participate in the rights offering on the hopes that Prometic will: 1) refile Ryplazim by its new 2H/19 timeline; 2) secure a top-tier commercial partner for Ryplazim and the PBI-4050 small molecule asset; and 3) eventually reverse-split its stock and list on Nasdaq to provide ample liquidity for holders."
Mr. Stedman's target fell to 5 cents from $1. The average is $1.10.
Shares of Celestica Inc. (CLS-N, CLS-T) are likely to remain range-bound through 2019, said RBC Dominion Securities analyst Paul Treiber in a research note previewing Thursday’s release of its first-quarter results.
Mr. Treiber is projecting the Toronto-based electronics manufacturing services company's revenue will remain flat year-over-year at US$1.5-billion, which falls in line with the consensus on the Street and at the midpoint of guidance (US$1.45-$1.55-billion).
However, he’s expecting organic growth to fall 3 per cent year-over-year and accelerate to a 9-per-cent drop in the second quarter.
"Organic growth is likely to deteriorate over the next several quarters as Celestica sheds revenue due to its CCS portfolio review and experiences headwinds from soft capital equipment spending," he said. "Other than share repurchases, we do not foresee any material near-term catalysts for the stock, pending stronger organic growth or improved profitability."
Saying he's "waiting" for 2020, he maintained a "sector perform" rating and US$10 target.
“The SOXX has rallied 35 per cent year-to-date (vs. S&P500 16 per cent, CLS down 1 per cent) on investor enthusiasm that the semiconductor cycle may rebound 2H/CY19,” said the analyst. “While improved capital equipment spending would be positive for Celestica, the segment accounts for only 5–10 per cent of Celestica’s total revenue. Overshadowing capital equipment is the expected shedding of $500-million of low-margin revenue related to Celestica’s ongoing CCS portfolio review. Our outlook calls for organic growth to drop to negative 10 per cent Q3, before improving to negative 6 per cent Q4 and returning positive Q2/FY20.”
"Celestica is trading at 9.4 times FTM P/E [forward 12-month price-to-earnings], below peers at 12.3 times and at the midpoint of its 5-year historical range of 7.4–12.6 times. In the near term, we believe Celestica may not break out of its trading range, pending stronger organic growth or improved profitability. Its ongoing share purchases provide support for the stock."
Argonaut Gold Inc. (AR-T) is an “excellent way for gold-bullish investors to play a rising gold price environment,” said Canaccord Genuity analyst Tom Gallo upon resuming coverage of the stock.
“The company offers leverage to the commodity price, for which we have a positive outlook (Canaccord Genuity long-term gold price US$1,433/oz),” he said. "Argonaut Gold is a stable operator of the El Castillo Complex (El Castillo and San Agustin) as well as the La Colorada project. Risk presents itself in the form of lower grade, which makes for tight margins due to higher per-ounce costs accentuated by a low commodity price environment. In our view, risk is mitigated by a solid operating track record and predictable operation conditions (i.e. tonnes, grades, recoveries, etc.), with optimization programs in place.
“Argonaut Gold has several development projects to which the market gives little value, in our view. Over the coming years, we believe Argonaut Gold could demonstrate each asset’s value through further de-risking, which could contribute to future development. San Antonio and Cerro de Gallo are in the midst of permitting, a process which presents risk as the San Antonio permit was previously denied. The permitting decision at San Antonio is expected by YE19 and could be a major catalyst should it be approved as, in our view, the company gets no value for this project currently. We see Cerro as the more likely project to receive its permits near-term, and we expect a Preliminary Feasibility Study toward the end of the year.”
Mr. Gallo has a “buy” rating and $3 target for Argonaut shares. The average target is $3.22.
“In our view, Argonaut offers investors strong leverage to the gold price, a stable production profile through 2021, and a noteworthy development pipeline which could bolster future production,” he said. “We believe Argonaut Gold will perform well in a rising gold price environment and see potential for future organic growth.”
In other analyst actions:
Citing its recent “strong” share price performance, CIBC World Markets analyst Jon Morrison cut Calfrac Well Services Ltd. (CFW-T) to “neutral” from “outperformer” with a target of $4, rising from $3.75. The average on the Street is $5.19.
TD Securities analyst Graham Ryding downgraded Power Corp. of Canada (POW-T) to “hold” from “buy” with a target of $33, down from $34 but above the current consensus of $32.07.
Mr. Ryding also lowered Power Financial Corp. (PWF-T) to “hold” from “buy” with a $35 target (unchanged), exceeding the consensus of $33.29.
Macquarie analyst Michael Siperco downgraded Kinross Gold Corp. (K-T) to “neutral” from “outperform” and dropped his target by a loonie to $5. The average is $5.29.
GMP analyst Steven Butler downgraded Wheaton Precious Metals Corp. (WPM-T) to “hold” from “buy” with a $32.75 target, falling from $33.25 and below the average on the Street of $38.32.
Mr. Butler upgraded Agnico Eagle Mines Ltd. (AEM-T) to “buy” from “hold” with a target of $67, up from $59.25. The average is $66.28.
GMP’s Michael Dunn upgraded MEG Energy Corp. (MEG-T) to “buy” from “hold” with a target price of $9.25, rising from $5.75 and above the consensus of $8.34.
BMO Nesbitt Burns initiated coverage of Probe Metals Inc. (PRB-X) with a “speculative outperform” rating and $2 target, which falls 18 cents lower than the consensus.