Inside the Market’s roundup of some of today’s key analyst actions
Pointing to an “upgraded overall growth outlook” and valuation discount following the $977-million acquisition of the 875 MW Goreway Power Station, Raymond James analyst David Quezada raised his rating for Capital Power Corp. (CPX-T) to “outperform” from “market perform.”
Mr. Quezada called the Goreway deal, which was announced April 29, the “latest in a string of attractively valued gas power plant acquisitions.”
“We like this acquisition for several reasons, including: 1) it is nicely accretive to EBITDA and AFFO; 2) it is consistent with CPX’s strategy of acquiring attractively valued gas power plants towards the mid-point of their PPA terms; 3) it is complementary to the company’s other assets in the region providing strategic benefits (i.e. gas procurement, operational synergies, and the potential to take a portfolio approach to power marketing); and 4) it comes at an attractive valuation with a 7.9-times EBITDA run-rate,” he said. “While the ultimate value in an acquisition of this nature rests to a degree on the post PPA economics, we believe this transaction is priced to reflect this risk and nevertheles ssee a strong likelihood of re-contracting. The facility is expected to generate $124-million in adjusted EBITDA and $50-million of AFFO [adjusted funds from operations] in 2020, increasing to $127-million EBITDA and $56-million AFFO over 2020-2023. Factoring in the related financing, the acquisition is expected to be 27 cents per share accretive to FFO, or 6 per cent. With 10 years remaining on the PPA, this asset is also additive to CPX’s average contract term.”
In reaction to the deal and the release of in-line quarterly results, the Edmonton-based company raised its adjusted funds from operations guidance to $485-$535-million from $460-$510-million. Its adjusted EBITDA forecast rose to $870-$920-million from $800-$850-million.
To reflect those changes as well as the Goreway acquisition accretion, Mr. Quezada hiked his target for Capital Power shares to $35.50 from $31. The average on the Street is $33.04, according to Bloomberg data.
“Our upgrade of CPX is a function of several attractive attributes including a discounted valuation, attractive dividend yield, solid growth runway, and potential Alberta power market tailwinds,” he said. “We believe this, coupled with the accretive Goreway acquisition and pullback in the share price, represents a compelling combination. We feel strongly that moves the company has made to bolster its growth outlook via M&A, as well as a pipeline of renewable power projects, are not yet reflected in the current share price. In fact, at current levels we estimate CPX trades at 8.1-times 2019 estimated EBITDA, a sizable discount to the peer group average at 11.2 times.”
“Shopify is trading at approximately 12.6 times EV/Sales on FY20 revenue, relatively in-line with the median of our high-growth (over 30 per cent year-over-year) U.S. SaaS coverage universe,” he said. “However, SHOP (up 81 per cent year-to-date) has outperformed its high-growth SaaS peers (up 47 per cent YTD) as all have rallied, although we believe that level of outperformance is unwarranted. Specifically, most of Shopify’s revenue is transaction-based, as opposed to SaaS, with its mix shifting increasingly toward transaction-based revenue. Our SoTP analysis implies that, at current valuation levels, investors are overpaying for Shopify’s Merchant Solutions (Transaction) business. In addition to a model that is increasingly becoming transaction-based over time, we see a number of risks that could limit the company’s ability to bring unit economics, and therefore terminal valuation, in-line with that of large enterprise-focused peers. These include a growing reliance on an SMB installed base, elevated customer churn, and low gross margins.”
He dropped the stock to “underweight” from “equal-weight” while raising his target to US$209 from US$173. The average is US$256.76.
“A review of merchants on SHOP’s platform illustrates that Shopify and Basic SMB merchants likely account for at least 88 per cent of the company’s installed base," said Mr. Essex. “While Shopify has made some progress expanding its large enterprise platform, we believe Shopify Basic merchants may actually have increased as a percentage of total merchants over the past three years. As a result, we estimate that annual merchant churn on the platform averages approximately 37 per cent. Considering sales and marketing spend required to maintain the company’s installed base, as well as gross margin pressure from lower margin, transactionbased Merchant Solutions business, we do not think SHOP has the potential to reach the terminal operating margin potential of its enterprise SaaS peers. With most of the company’s valuation reliant on its terminal value, we believe a lower-than-peer terminal operating profile points to a lower-than-peer multiple as a result.”
With Canadian banks are currently trading below historical averages, Desjardins Securities analyst Doug Young sees several near-term tailwinds for the sector heading into second-quarter earnings season.
“Canadian bank stock prices increased 4.1 per cent on average during 2Q FY19, underperforming the Canadian lifeco average, the U.S. bank index, the U.S. lifeco average and the S&P/TSX,” said Mr. Young in a research report released Tuesday. “BMO was the best performing Canadian bank (10.0 per cent) while LB underperformed (down 3.9 per cent).
“On average, the Big 6 Canadian banks are trading below their 20-year historical average P/4QF EPS multiples. There are some tailwinds for the Canadian banks over the near term: (1) a constructive economic backdrop, with low unemployment; (2) a benign credit environment for now; (3) comfortable CET1 ratios; and (4) a focus on managing expenses—important as loan growth slows. In addition, the banks have been able to effectively manage a number of headwinds over the past few years, such as the decline in oil prices and new regulatory capital rules. However, we also acknowledge that there are a number of risks on the horizon, such as the banks operating in the late stages of the economic cycle, volatility in equity markets, and the potential for increased volatility in provisions for credit losses (PCLs) under IFRS 9. That said, relative to other investment alternatives in Canada, we believe bank valuations are still reasonable.”
For the quarter, Mr. Young is projecting cash earnings per share growth of 4 per cent year-over-year on average for the Big Six.
“The main drivers include decent loan growth, a slight increase in Canadian P&C banking NIMs, stable NIX ratios and stock buybacks, offset by an increase (normalization) in PCL rates,” he said. “Of note, we expect capital markets earnings to be weaker vs last year (albeit improved from 1Q FY19). If we remove capital markets and corporate, ie the areas where there’s typically noise, we are forecasting a 6-per-cent year-over-year increase on average in cash EPS for the Big 6. Another question to ponder: if we’re right in our growth estimate, can the group hit medium-term targets in FY19?”
Though he said credit remains the “topic du jour,” Mr. Young is not expecting big surprises, projecting an average provision for credit losses (PCL) rate of 31 basis points, up 3 bps year-over-tear.
He’s also expecting dividend increases from Bank of Montreal (4 per cent), National Bank of Canada (5 per cent) and Laurentian Bank of Canada (2 per cent).
Raising his target for BMO (BMO-T) to $111 from $108, which exceeds the consensus on the Street of $107.61, Mr. Young said: “BMO is the name to watch for a few reasons: (1) the stock has outperformed year-to-date (17 per cent vs 10 per cent on average for peers); (2) 1Q FY19 results were bolstered by abnormally low PCLs, which should normalize in 2Q FY19; (3) we believe it will be challenged to hit its operating leverage target of 2 per cent this quarter and in FY19; and (4) it is more exposed vs peers to the commercial loan market, where competition has increased and where we are starting to see more credit bumps.”
He kept a “hold” rating for BMO shares.
Mr. Young also raised his target price for shares of the following banks:
Toronto-Dominion Bank (TD-T, “buy”) to $83 from $82. Average: $81.54.
Royal Bank of Canada (RY-T, “buy”) to $111 from $108. Average: $109.47.
National Bank of Canada (NA-T, “hold”) to $64 from $62. Average: $66.18.
Coca-Cola Co. (KO-N) has ""morphed into a structurally higher top-line growth company" in comparison to its consumer packaged goods (CPG) peers, said Morgan Stanley analyst Dara Mohsenian, who raised his rating for its stock to “overweight” from “equal-weight” under the belief it’s currently trading at an attractive historic valuation.
“Coke is now our top mega-cap staples pick,” said Mr. Mohsenian. “We believe KO offers a clearly superior growth outlook vs. CPG (consumer packaged goods) peers, with stronger pricing power, favorable strategy tweaks, solid volume growth, and rebounding emerging market trends, which are not reflected in relative valuation below historical long-term (LT) averages.”
After increased his earnings per share projections for 2020 and 2021 (by 0.4 per cent and 1.7 per cent, respectively) based on the expectation of robust top-line growth and a decline in forex pressure, the analyst increased his target for Coke shares to US$55 from US$52. The average on the Street is US$51.95.
“KO’s stock offers investors a compelling entry point with a recent pullback on an absolute and relative basis, driven by two key overblown reasons in our minds: (1) Disappointing initial FY19 guidance, with KO’s down 1 per cent to up 1-per-cent EPS guidance a large 7 per cent below the prior consensus estimate, which is a large degree of magnitude for a mega-cap staples company; (2) Coke’s mega-cap peers’ topline growth has rebounded more so than Coke sequentially in the last few quarters,” he said.
CIBC World Markets analyst Cosmos Chiu downgraded his rating for Hecla Mining Co. (HL-N) in response to its decision to suspended guidance on its Nevada assets due to ongoing operational issues.
“The company expects to complete a comprehensive review by the end of Q2/2019 to determine the best path forward,” said Mr. Chiu, moving the stock to “underperformer” from “neutral.” "However, this review may not add much near-term value, as we believe the issues cannot be fully resolved without a better understanding of the deposit, which will take time and additional capital to complete spirals (declines) and new drill platforms. Since the initial acquisition of Klondex, reserve ounces at Fire Creek have decreased by 70 per cent, with grade decreasing by 15 per cent.
“The Nevada unit produced only 10,000 ounces at AISC of $3,056/oz in Q1/2019, below expectations. Given the ongoing operational issues, and the decision to suspend guidance, we believe there could be some negative financial implications: 1) Bond ratings agency reviews; 2) Potential trigger event requiring a need to test for accounting impairment; 3) Negative impact on HL’s ability to refinance the $500 million unsecured debt (due in 2021) at acceptable terms; and 4) its ability to access the line of credit, despite the easing of some covenants for Q2 and Q3/2019.”
Mr. Chiu lowered his target to US$1.25 from US$3.25. The average is currently US$2.03.
It’s “not too late to put some meat in your portfolio,” said Credit Suisse analyst Robert Moskow, who raised his rating for Tyson Foods Inc. (TSN-N) to “outperform” from “neutral.”
“We are raising our FY 20 EPS estimate to $6.80 compared to consensus of $6.62, upgrading to Outperform, and raising our target price to $96/share,” he said. “Consensus estimates already factor in stronger Chicken margins based on a rebound in the U.S. supply-demand cycle domestically. However, we do not think they fully account for the upside to chicken, beef, and pork prices from the outbreak of African Swine Fever.
“We believe the ASF crisis will have a profound impact on global meat supplies for at least two years. The Chinese pig herd, which is 4.5 times the size of the U.S. herd, has contracted by 30 per cent, and reduced the supply of global meat by 5 per cent. No supply-shock event in recent history can compare to this one in terms of magnitude. But just using the much smaller outbreak of PED virus in 2014 as a benchmark, pork and chicken margins can easily return to the high end of Tyson’s historical ranges if not exceed them. In order to keep domestic meat prices from getting out of control, China will need to import more meat from around the world. Even if the U.S. trade dispute with China continues to restrict U.S. access directly, other countries exporting to China will need to import more U.S. meat to back fill their supplies.”
Mr. Moskow’s target for the stock rose to US$96 from US$74. The average on the Street is US$84.50.
Elsewhere, Argus Research Corp analyst John Staszak raised the stock to “buy” from “hold” with a US$92 target.
Edison analyst Sanjeev Bahl initiated coverage of Canacol Energy Ltd. (CNE-T) with a “corporate” rating and $6.28 target. The average is $6.06.
“Canacol offers investors a pure-play on the Colombian, Caribbean coast gas market, a market expected to move into gas deficit over the course of the next decade in the absence of LNG imports, incremental piped gas or the development of recent deepwater discoveries," he said. "Canacol is a key component of regional demand with an estimated 50-per-cent market share. This is expected to increase materially in 2019 and 2020.”
In other analyst actions:
Veritas Investment Research analyst Dan Fong downgraded WestJet Airlines Ltd. (WJA-T) to “sell” from “buy” with a $31 target, rising from $22 and above the consensus of $24.13.
Eight Capital analyst Ammar Shah initiated coverage of Savaria Corp. (SIS-T) with a “buy” rating and $15 target. The average is $17.46.