Inside the Market’s roundup of some of today’s key analyst actions
The sale of its Specialty Chemical division provides visibility on an intrinsic share price of over $15 for Superior Plus Corp. (SPB-T), according to Canaccord Genuity analyst Raveel Afzaal.
On Monday before the bell, the Toronto-based company announced it is considering a sale of the segment, which operates under the trade name ERCO Worldwide. It plans to use the proceeds to primarily reduce debt and invest in U.S. propane distribution acquisitions.
Mr. Afzaal estimates the sale could generate cash proceeds of $1.1-billion and reduce net debt to EBITDA to 1.8 times from 3.7 times.
"We estimate the Specialty Chemicals division is currently being valued using 6.0 times EV/2020 EBITDA multiple, in line with the peer group average," he said. "However, we estimate this business can be sold for up to 9.0x. This is based on precedent transactions such as Canwest's acquisition of Canexus, the sale of AkzoNobel's specialty chemicals business to Carlyle group, and ProxyChem to Evonik Industries."
Expecting a positive valuation multiple re-rating, Mr. Afzaal raised his target for its stock to $14.50 from $13.75, keeping a "buy" rating. The average on the Street is $14.58, according to Bloomberg data.
"We believe the high leverage is a concern for investors looking for a 'defensive' name despite the relatively resilient cash flows of the two divisions," he said. "Further, the removal of the conglomerate discount and capital availability to grow its Energy division well above peer group average should positively impact its valuation multiple. We believe this should result in SPB trading at a premium multiple relative to its debt-laden U.S. peers with MLP structure."
"We believe the Energy division is currently being valued at 8.5 times. Following the potential sale of the Specialty Chemicals division, we estimate this business will be valued at 10.0 times versus peer group average of 9.0 times. Assuming Specialty Chemicals division is sold for $1.1-billion, this implies the Energy division is worth $16.75 per share. This is based on our legacy Energy division's EBITDA forecast for 2020 and does not assume re-investment of the cash proceeds to grow the propane business."
Meanwhile, Raymond James analyst Steve Hansen raised his target to $15 from $14.50 with an “outperform” rating.
Mr. Hansen said: “Given the internal and macro variables described, we believe a successful sale process could generate between $900-million and $1.15-billion — equivalent to 7.0-9.0 times our 2020 EBITDA (FY+2) estimate (pre-IFRS) — a healthy inflow that would facilitate substantial debt reduction, help re-accelerate the company’s U.S. propane consolidation strategy (upside to analysis), and leave the company as a pure-play energy distribution story with a more consistent earnings profile — all outcomes that we view as positive for SPB’s trading multiple. We have adjusted our target accordingly, but have made no changes to our financial estimates at this time.”
Ahead of the release of Dollarama Inc.'s (DOL-T) first-quarter fiscal 2020 financial results on Thursday, Desjardins Securities analyst Keith Howlett sees “ample antidotes to the impact of slowing growth in Canada.”
“Our view is that the company has multiple levers to accelerate growth over 6–24 months, including new store concepts in Canada and additional international markets,” he said.
For the quarter, Mr. Howlett is projecting earnings per share of 34 cents, matching the consensus estimate on the Street. He estimates same-store sales growth of 2.5 per cent, down 0.1 per cent year-over-year during a period in which he projects 14 new stores were up (versus 10 a year ago).
"On the 1Q FY19 conference call, management attributed the deceleration of same-store sales growth a year ago to sales of spring seasonal products and very poor April weather. The performance excluding seasonal products would apparently have been 4–5-per-cent growth, a more modest deceleration from 5.5-per-cent same-store sales growth in 4Q FY18. Qualitatively, April 2019 weather was also poor for sales of spring seasonal products in eastern Canada.
"Management has also indicated that passing through discretionary price increases stalled in FY19 due to lack of retail pricing movement by competitors. This situation could change at any time, but in the absence of data, we are assuming it has not yet changed. Dollarama increases prices (from one price tier to the next higher one) on a relatively small percentage of products within its assortment each year. It replaces another 30 per cent of its assortment each year with new or redesigned products, priced to provide compelling relative value and to meet company gross margin targets."
If the retailer continues to suffer from a lack of same-store sales growth acceleration in Canada in the near term, Mr. Howlett said management has a "range" of options, including: "(1) accelerate store openings, which continue to pay back in approximately two years; (2) introduce trafficdriving strategies such as media advertising, weekly or seasonal flyers, promotional events, bundled product discounts and limited time offers; (3) improve product performance analytics and in-store product placements; and (4) introduce additional store concepts, such as Five Below."
He also said the top-line results achieved by its Dollar City locations in El Salvador, Guatemala and Columbia “appear to support establishing the Dollarama concept in additional markets.”
Mr. Howlett maintained a "buy" rating and $43 target for Dollarama shares. The average on the Street is $44.42.
"Dollarama has achieved consumer attachment, and financial success, by focused and meticulous implementation of a relatively straightforward consumer proposition," the analyst said. "As no peer has been able to generate equivalent financial results, it is clearly 'harder than it looks.' In our view, Dollarama can now increase its use of available retail operating tools to squeeze even higher returns from its business model."
In the wake of a 600-per-cent jump in price from its initial public offering, JPMorgan analyst Ken Goldman downgraded Beyond Meat Inc. (BYND-Q), saying its stock is now “beyond our price target.”
“This downgrade is purely a valuation call,” he said. “As we wrote last week, ‘At some point, the extraordinary revenue and profit potential embedded in BYND… will be priced in’ – we think this day has arrived.”
Moving the vegan burger maker's stock to "neutral" from "overweight," Mr. Goldman kept a US$120 target, which US$93.73.
“We believe the company’s growth opportunity, strong management, and near-term ability to post financials that exceed Street expectations are balanced by elevated valuation metrics,” he said.
Believing its “improving underlying fundamentals” and new growth opportunities would offset “the risk of greater regulatory scrutiny,” MoffettNathanson analyst Michael Nathanson raised his rating for Facebook Inc. (FB-Q) to “buy” from “neutral.”
Mr. Nathanson said the social media giant's move into commerce and messaging "are both shaping up to be growth drivers longer-term," adding neither "appear to be captured in the stock at this point."
He maintained a US$210 target, which falls short of the consensus of US$219.64.
JetBlue Airways Corp. (JBLU-Q) now possesses “positive catalysts to support incremental buyers with a range of time horizons and investment styles,” according to Citi analyst Kevin Crissey.
He raised his rating for the U.S. airline company to "buy" from "neutral."
In the short term, Mr. Crissey said JetBlue has “the strongest near-term price outlook,” pointing to “sharply” lower fuel prices and “healthy” unit revenue. He expects earnings estimates to move “importantly higher.”
Similarly, he feels "medium-term" earnings expectations set a "low bar," adding: "Okay, so maybe 2020 isn’t really medium term but for some airline investors it is. The market is skeptical JetBlue can achieve management’s $2.50-$3.00 EPS guidance for 2020. Consensus EPS currently stands at $2.29, which suggests relatively low expectations. We think the company is progressing well with its Structural Cost programs so unit costs excluding fuel should be negative (as guided). With fuel prices now well below levels when guidance was provided, RASM can be weak or even negative, and JetBlue can still exceed consensus."
Mr. Crissey also feels the company now has "a different cost trajectory with a better fleet" that will benefit in the long term.
"Historically, JetBlue has been below average at controlling unit costs but usually excels on the top line. The huge opportunity is for JetBlue to have flat to down costs over a number of years (as Alaska did)<" the analyst said. "That would likely lead to strong stock appreciation (as it did for ALK). However, flat to down unit costs is neither typical nor required for JBLU shares to move nicely higher, in our view. Our analysis suggests if JetBlue can become average at controlling its unit costs, shares could be worth $26 a year from now. And that largely ignores EPS accretion from a new fleet of A220s. JBLU could be THE stock to own for a number of years – IF mgmt. executes well."
He hiked his target for its stock to US$26 from US$19.50. The average is currently US$20.22.
Citing a “more challenged environment,” Barclays analyst John Aiken made a series of rating changes for Canadian bank stocks on Tuesday.
Mr. Aiken upgraded Toronto-Dominion Bank (TD-T) to “overweight” from “equal-weight” with an $84 target, rising from $79. The average is $83.54.
He lowered his ratings for the following stocks:
Laurentian Bank of Canada (LB-T) to “equal-weight” from “overweight” with a $46 target, up from $45. The average is $42.64.
Canadian Imperial Bank of Commerce (CM-T) to “equal-weight” from “overweight” with a $113 target, down from $120. The average is $115.63.
National Bank of Canada (NA-T) to “underweight” from “equal-weight” with a $64 target (unchanged). The average is $65.46.
Champion Iron Ltd. (CIA-T) is a “pure-play iron story in a strong price environment,” said Laurentian Bank Securities analyst Jacques Wortman.
In a research report released Tuesday, Mr. Wortman initiated coverage of the company, which is engaged in the exploration and development of iron ore properties in Quebec, with a “buy” rating.
“In our view, Champion represents the best pure-play option in the Canadian market for investors to participate in the robust iron ore price environment,” he said. “While Labrador Iron Ore Royalty (LIF-T) offers an attractive option via its 15-per-cent equity interest in the Iron Ore Company of Canada (IOC) Carol Lake operations plus a 7-per-cent revenue royalty, we believe that CIA offers more direct leverage to iron ore price changes. In FQ3/19 (ended 31 Dec18), Bloom Lake concentrate generated a high operating margin of $36.80/tonne and we believe that with the higher prevailing concentrate price this margin has expanded significantly to approximately $65/tonne. Champion also provides valuation upside potential from the Bloom Lake Phase II expansion, which is expected to double concentrate production to 15 mm tonnes annually. Feasibility study results and financing terms are expected to be announced in the coming weeks. Despite the strong price performance of CIA shares year-to-date (up 150 per cent) on the back of the tightening iron ore market fundamentals and increased ownership in the Bloom Lake mine, we expect further upside in the share price driven by added value from the Phase II expansion.”
Mr. Wortman emphasized recent developments on both the demand and supply side have had a “meaningful” impact on iron ore pricing and realized pricing.
"The Vale tailings dam breach tragedy in Brazil and damaging cyclones in Australia, both occurring in Q1/19, combined with strong demand for high-quality iron ore product from Chinese steel mills has driven up iron ore prices,” he said. “This higher price environment, although potentially peaking, is expected to be sustainable for the next 12–24 months. CIA is well positioned to benefit from this scenario.”
Pointing to its strong performance thus far in 2019 and adding the stock is “not expensive,” he set a $4 target. The average is $4.19.
“Champion trades at 0.8 times NAV and 3.2/3.5 times EV/EBITDA (adjusted) for 2019/20 versus its larger iron ore peers that trade at average multiples of 1.3 times NAV and 6.2/6.5 times EV/EBITDA,” he said. “While some of the CIA discount is attributable to its smaller production profile and relatively new producer status, we also believe that the market is awaiting the results of the Bloom Lake Phase II Feasibility Study and financing plans.”
With files from Bloomberg News