Inside the Market’s roundup of some of today’s key analyst actions
The pullback in Canada Goose Holdings Inc. (GOOS-N, GOOS-T) created by the trade dispute between the United States and China is “overdone,” according to DA Davidson analyst John Morris, who now sees a buying opportunity for investors.
“While China’s move to let its currency drift lower in response to the U.S. administration move to impose additional tariffs could begin to dampen overall Chinese consumption through currency impact, we estimate that GOOS derives less than 10 per cent of revenues directly from the Chinese consumer, compared to 30-40 per cent for most luxury goods brands,” he said. “GOOS just opened its first store in China just about a year ago and should have about five stores in the country this year. Note that, as a Canadian based company, GOOS has minimal exposure to U.S. tariffs on its sourcing from China. Additionally, our Davidson Proprietary Data mining Dashboard shows good reads for GOOS, and we call-out a positive read-through from Moncler’s recently reported better-than-expected June quarter. All told, we remain comfortable with our high-end June quarter a 15-cent loss EPS forecast, which should be reported in the next week or so.”
Mr. Morris said he sees “positive read-throughs” for the luxury apparel maker in competitor Moncler S.p.A’s first-half 2019 results results, which he said he uses “as a proxy, exhibiting better-than-expected top-line and margin performance with a favorable backdrop going into 2H19."
“The company’s close competitor, Moncler, reported better-than-expected sales with management indicating momentum continuing into August,” the analyst said. “Note Moncler’s Data mining Dashboard (located at the end of the report), which shows an improved trend in the pricing architecture of all SKUs, indicating firmer pricing improving over last year-serving as a lead indicator of stock and margin performance. Furthermore, we are able to note markdown depth improving, though not to the same extent as last year; however,we continue to see progress in the company’s pricing architecture as Moncler expands their Spring/Summer categories.”
Mr. Morris maintained a “buy” rating and US$42 target for Canada Goose shares. The average is currently US$51.07.
“We believe the Street is not fully recognizing that the company is likely buying into demand by ramping up in-house production,” he said. “GOOS is a vertically integrated company with more than one-third of production occurring in-house. During the company’s 4Q earnings call held this past May, investors voiced concerns over GOOS’s inventory growth, which was up 62.0 per cent over last year (and, ahead of 25.0-per-cent revenue growth). As a reminder, we expect GOOS’s inventory to continue to be elevated in the upcoming 1Q report, since we are still well-ahead of the peak selling season. Management stated their plan is to build inventory ahead of their peak selling season and more extensively given their growing status as a manufacturer, wholesaler, and retailer, coupled with the planned global expansion. We would point out that GOOS still delivered a better-than-expected gross margin last quarter without threatening to accelerate markdowns. While inventory is higher, we believe management is buying into demand for the Fall/Winter seasons-their peak selling periods.”
After raising his financial expectations for the remainder of 2019 following better-than-anticipated quarterly results, CIBC World Markets analyst Robert Bek upgraded TVA Group Inc. (TVA-B-T) to “neutral” from “underperformer,” noting “the downside thesis we have carried for some time has played out.”
“We still expect headwinds for the shares, however further declines are much less likely at this point,” he said.
Mr. Bek maintained a $2.25 target. The average on the Street is $2.95.
Telus Corp.'s (T-T) new unlimited plans are generating “encouraging" initial customer reaction, said Desjardins Securities analyst Maher Yaghi following the release of in-line second-quarter financial results.
“Following the first few weeks after the launch of unlimited plans and financing features, the company indicated that more than 50 per cent of customers on unlimited plans generated higher monthly recurring revenue than their previous plans,” said Mr. Yaghi. "We believe this is more than the market previously anticipated. This provides us with confidence on the future profitability trends of the company and the industry, but the new offerings still bring risk and the potential for a short-term negative impact on ARPU [average revenue per user]. Management anticipates the new offerings will be EBITDA accretive as early as 2020, mostly due to cost savings generated in call centres and to overall simplicity of the plan structure.
“Management also disclosed more data points for TELUS International — the company’s IT division. We believe the segment’s growth and profitability are impressive, and we estimate the asset is currently undervalued by the market by $1.00–1.50 per TELUS share.”
With the results, Mr. Yaghi lowered his 2019 earnings per share estimate to $2.82 from $2.87. His 2020 projection rose to $2.97 from $2.92.
“In the near term, the company expects a neutral to positive impact on EBITDA [from its new plans],” he said. "The first driver is lower subsidies paid to clients ... Moreover, all incumbents indicated they expected a material decline in call centre activity as the new plan structures are simpler and more transparent. Management also expects the simplicity of the offering to reduce operational costs as the number of plans offered will be cut dramatically. Moreover, new financing options will diminish the company’s exposure to device price, which is currently exhibiting high inflation. It will take a few quarters before COA and COR savings flow through the results due to IFRS 15, but management sees the new plan structure as EBITDA accretive as early as 2020.
“Following the 2Q19 results, we have adjusted our model. We have slightly increased our wireless net additions forecast to reflect the strength exhibited in the quarter. We also adjusted our capex assumption after management indicated it expected a capex outlay of about $2.85-billion plus or minus $100-million in ‘the next couple of years.’ The company also indicated it would have a $30-million expense in 3Q19 related to the refinancing of outstanding debt. We now forecast EBITDA growth of 8.0 per cent in 2019 (not adjusted for IFRS 16) and 4.5 per cent in 2020.”
He maintained a “buy” rating for Telus shares with a 12-month target of $55.50, down from $56.50. The average on the Street is $52.58.
“TELUS operates industry-leading quality wireline and wireless networks, allowing the company to enjoy decent subscriber and profitability growth," he said. "This enables TELUS to fund its dividend, which is growing at the fastest rate among Canadian large-cap telcos, supported by EBITDA and FCF growth. We continue to like the shares at these levels.”
Meanwhile, Echelon Wealth Partners analyst Rob Goff increased his target to $54 from $53 with a “buy” rating (unchanged).
Mr. Goff said: “We continue to see TELUS as an exceptionally well managed provider leveraged to our longer-term bullish wireless and wired outlooks. We see continued delivery of its 7-10% annual dividend growth and implied FCF growth over the longer term as strong value. On a near- and mid-term basis Shaw (SJR.B-T, “Buy”, PT $31.00) remains our top pick across the four largest providers where Shaw and TELUS benefit from their wired discipline; however, we see greater near-term leverage from Freedom given current wireless dynamics. This view considers financial momentum along with current valuations.”
Tervita Corp.'s (TEV-T) “strong” second-quarter results show the resiliency of its business model despite lower drilling activity, said Industrial Alliance Securities analyst Elias Foscolos.
Last Thursday, the Calgary-based energy and environmental waste services company reported quarterly EBITDA of $53-million, exceeding the projections of both Mr. Foscolos and the Street ($47-million and $45-million).
“The beat in quarterly results as a result of early synergy realization was positive amidst a difficult macro environment,” said the analyst. “TEV states that it is on track to achieve double-digit EBITDA growth in 2020 and our 2020 EBITDA estimate of $249-million reaffirms this projection.”
He added: "These results highlight why we consider TEV a ‘Diversified Energy’ company not simply an ‘Energy Services’ company.”
Mr. Foscolos maintained a “buy” rating and $9.75 target, which represents a potential 50-per-cent one-year upside. The average on the Street is $9.07.
Shares of the Toronto-based miner dropped almost 25 per cent in price last week after a U.S. federal judge ordered it to cancel plans to build a massive copper mine in Arizona.
“The final record of decision for the project was issued by the U.S. Forest Service back in June 2017,” said Mr. Llanes. "While the project has been the subject of several lawsuits pertaining specifically with the decision – the unprecedented decision by the Court is much more impactful given the explicit order to halt construction activities. Miners are generally allowed to move forward with construction upon receipt of all permits (which was the case when the final water permit was granted in March 2019).
“Previously, Rosemont accounted for 30 per cent of our NAV and Aug. 1st’s price decline essentially removed a good portion of the project from HBM’s valuation (as the market is likely now pricing in 40-per-cent probability of a project no-go). While we believe that a successful appeal will likely not reverse the entirety of the stock’s loss – given that investors would not be as forgiving and may want to wait until construction activities are well underway – it is in our view that the ruling will eventually be overturned and the project will proceed as planned. We now model a delay of the Rosemont project to 2025 (from late 2022).”
Keeping an “outperform” rating for the stock, Mr. Llanes lowered his target to $8.75 from $11.50 to reflect the delay in Rosemont. The average is $8.85.
Elsewhere, CIBC World Markets’ Oscar Cabrera reduced his target to $7 from $9 with a “neutral” rating.
Mr. Cabrera said: “Our incorporation of a two-year start-up delay to 2025 and increased discount rate on Rosemont from 12 per cent to 14 per cent lowered our project NAV from $512-million to $276-million. In addition, we delayed in our model a 30-per-cent sell down (was $350-million) from Q4/19 to Q4/22. These changes lowered our HBM NAV 16% to C$14.89/share, eliminating the company’s main near-term catalyst, in our view. We believe HBM’s potential copper production growth in Rosemont and Constancia’s satellite deposits (Peru) are well balanced with permitting risks.”
Despite lower-than-anticipated box office growth, Canaccord Genuity analyst Aravinda Galappatthige expects Cineplex Inc. (CGX-T) to report “solid” second-quarter results on Wednesday before the bell.
“We expect the company to report 2.7-per-cent Q2 box office growth, which reflects the 3.2-per-cent industry growth, down from our initial estimate of 8 per cent,” he said. "It is worth noting that Q2/18 was a very strong quarter, which creates a challenging year-over-year comparison. Moreover, the final weeks of Q2/19 saw some loss of momentum as the late slate failed to keep pace with a stellar closing to Q2/18.
“We expect that the growth in the box office should help propel 5-per-cent consolidated revenue growth and 12-per-cent EBITDAal growth. We expect box office momentum to continue into H2 and are already seeing strength in Q3, which is up 10 per cent quarter-to-date.”
Mr. Galappatthige is forecasting revenue of $428-million for the quarter, up 4.7 per cent year-over-year. His EBITDA estimate is $72.6-million, up 12 per cent .
Maintaining a “buy” rating, his target fell by a loonie to $31 due to “slightly” lower box office estimates. The average is $30.95.
After the Ministry of Energy and Mines in Peru placed seven of its 32 concessions under administrative review due to a fee dispute, Echelon Wealth Partners analyst Gabriel Gonzalez lowered Plateau Energy Metals Inc. (PLU-X) to “under review” from “speculative buy.”
“We believe that even without the Ocacasa-4 concession, Plateau still has a potentially compelling – albeit smaller – project on its hands,” he said. “In applying potential valuation scenarios to the current situation, from only increasing the country risk premium, to removing up to 50 per cent of our assumed mineable Falchani resource and reducing the Macusani in-situ value, we can derive a range of valuations between $1.50 per share and 70 cents per sharer. However, the MEM-CM’s thinly argued position leaves us without enough confidence about how this situation will unfold - unusual, for an ostensibly mining friendly country like Peru - to justify a reasonably grounded rating and target price to investors. We remain hopeful that the situation will be rationally decided in Plateau’s favour, improving along with it the risk perception of Peru, and look forward to re-instating a rating and price target with commensurate potential upside in the near future on resolution of the issue.”
He removed his target for the Toronto-based company’s stock. It was previously $2.
In other analyst actions:
TD Securities analyst Derek Lessard upgraded Dorel Industries Inc. (DII-B-T) to “buy” from “hold” with a $13 target, exceeding the average on the Street of $12.67.
GMP analyst Ian Gillies downgraded Horizon North Logistics Inc. (HNL-T) to “reduce” from “hold” with a $1 target, down from $2 and under the consensus of $2.58.
Scotiabank analyst Ben Isaacson initiated coverage of MediPharm Labs Corp. (LABS-T) with a “sector outperform” rating and $7 target. The average is $7.35.