Inside the Market’s roundup of some of today’s key analyst actions
Raymond James analyst Daryl Swetlishoff feels below-cost commodity pricing in the building materials sector is “unsustainable,” pointing to “encouraging” U.S. home-building data and commentary as well as “material” curtailment-related shipment declines.
Accordingly, expecting pricing to trend higher in the coming quarters, Mr. Swetlishoff said it’s “time to buy the trees again.”
“What’s more, this favourable supply/demand dynamic is coinciding with seasonally advantageous timing,” he said in a research note released Tuesday. “Building materials stocks are 80-per-cent correlated with commodity prices; essentially treading water since we downgraded select names on July 16, 2019. Share prices continue to discount below-cash-cost commodity pricing, which we view as unsustainable.”
That led Mr. Swetlishoff to raise his rating for a trio of stocks and encourage investors to build positions in the sector.
He upgraded Interfor Corp. (IFP-T) to “strong buy” from “outperform” with a target price of $19 per share (unchanged). The average target on the Street is $17.50, according to Bloomberg data.
The analyst also upgraded West Fraser Timber Co. Ltd. (WFT-T) to “strong buy” from “outperform” with an $80 target (unchanged). The average is $66.50.
Mr. Swetlishoff moved Western Forest Products Inc. (WEF-T) to “outperform” from “market perform” with a $2.10 target, which exceeds the current consensus of 1.61.
“Building materials stocks are trading in value territory, discounting below cash cost pricing,” the analyst said. “We have an encouraging near- term outlook given improving demand/supply fundamentals along with the favourable seasonal timing. We expect lumber prices to rally heading into year end, rising to at least B.C. cash cost levels (US$420 per thousand board feet) bringing highly correlated lumber share values along for the ride. As such we are upgrading West Fraser and Interfor to Strong Buy from Outperform, given their high earnings exposure to building materials commodity prices. We are also upgrading Western Forest to Outperform from Market Perform, as the company’s crucial cedar segment benefits from Interfor and Teal Jones recent B.C. coast curtailment announcements. Although the company returned to the bargaining table with the United Steelworkers (USW), in a bid to resume production from idled mills, negotiations have hit an impasse. We expect Western and the USW to eventually work to a resolution.”
Raymond James analyst Brian MacArthur trimmed his financial expectations for Osisko Gold Royalties Ltd. (OR-T, OR-N) in reaction to Monday’s announcement that it’s selling its interest in the Brucejack gold offtake contract for US$41.3-million in cash to Pretium Resources Inc. (PVG-T).
“Since the acquisition of the Orion portfolio in 2017, OR has received US$164.3-million from Pretium," he said. “This compares favourably to the book value of OR’s investment in Pretium of US$147.3-million. In addition, the transaction allows OR to eliminate a low margin offtake contract, better utilize working capital and provides capital to fund additional growth opportunities.”
Mr. MacArthur lowered his 2020 cash flow per share and earnings per share estimates to 73 cents and 23 cents, respectively, from 74 cents and 26 cents.
He maintained an “outperform” rating and $18 target for Osisko shares. The average is $18.75.
“We believe OR offers investors a high-margin business with growth, a flexible balance sheet, as well as a diversified portfolio of exploration companies with low jurisdictional risk,” he said. “We continue to rate the shares Outperform.”
Credit Suisse analyst Andrew Kuske sees TransAlta Corp. (TA-T) “approaching an anticipated inflection” following the release of its Clean Energy Investment Plan ahead of its Investor Day on Monday, which he calls an “ambitious and transformative approach to pivoting the portfolio."
“In our view, the scale and timing of the plan execution should not be viewed as much of surprise, but the details help enable a better handicapping of TA’s future success,” he said. “The Investor Day gave more details on timing and numbers – all helpful and generally reasonable without any major sore spots. On balance, the plan should be viewed positively in our view given the delineation of the $2-billion of costs that includes approximately $800-million of renewable projects that are already under construction. Notably, a clear approach was adopted on TA’s deconsolidated cash flows with a debt/EBITDA target of 3.0 times or less and a dividend policy of between 10-15 per cent of the deconsolidated cash flow from operations to common shareholders. We believe these metrics will help the focus on TA’s holdco value versus the underlying position in TransAlta Renewables (RNW).”
Mr. Kuske maintained a “neutral" rating and $10 target for TransAlta shares. The average on the Street is $10.55.
“TransAlta is substantially de-risked and now moves into the execution phase of the investment plan in a market with less regulatory uncertainty,” he said.
Elsewhere, Industrial Alliance Securities analyst Jeremy Rosenfield kept a “speculative buy” rating and $12 target, believing the company’s coal-to-gas conversion plans remain on track and growth projects are progressing “as expected.”
Mr. Rosenfield said: “TA offers investors (1) a balanced mix of contracted and merchant power exposure, (2) improving balance sheet and cash flow fundamentals, and (3) long-term upside to rising Alberta power prices. With Brookfield’s strategic investment agreement in place, CTG conversions on tap, and additional cash for growth and/or buybacks, we believe that TA will be able to surface additional value for shareholders over the medium term.”
Seeing a difficult path to earnings growth given a rise in investment spending stemming from its strategic plan laid out in 2017 and associated D&A “drag,” Guggenheim Securities analyst Steven Forbes downgraded Home Depot Inc. (HD-N) to “neutral” from “buy.”
“When combined with broader concerns around underlying demand for goods (vs. services), we see a more balanced risk/reward scenario as we exit 2019," he said.
Mr. Forbes said the downgrade was due largely to the home improvement retailer’s current relative valuation, which he said is now “at a level not seen since the early post-recession recovery years." He also emphasized the potential risk to current 2020 consensus EBIT margin outlook due to anticipated pressures from its strategic investment plans.
He removed his previous US$230 target for the stock. The average on the Street is US$224.04.
RBC Dominion Securities analyst Greg Pardy said he continues to “look favourably” upon the strategic direction of Cenovus Energy Inc. (CVE-T), despite lowering his financial expectations for the Calgary-based company due to Alberta’s mandated production cuts.
“In our eyes, the company’s operating momentum and velocity of change from a balance sheet deleveraging perspective are unmistakable,” he said.
Mr. Pardy reduced his 2020 production outlook by 10 per cent to 469,100 barrels of oil equivalent per day from 518,800 boe/d previously. That led to a cash flow and earnings per share decrease to $2.53 and 52 cents, respectively, from $2.70 and 56 cents.
“In the context of $3.1-billion of operating cash flow and a 2020 capital program of $1.4-billion (towards the higher end of its stated range), we expect Cenovus to generate circa $1.7-billion in free cash flow, before dividends of about $246-million," he said. "This would equate to a 2020 estimated FCF yield of 9.8 per cent (vs. our global integrated peer group average of 8.3 per cent).”
He kept an “outperform” rating and $14 target. The average on the Street is $14.90.
CIBC World Markets analyst Sumayya Syed lowered Dream Global Real Estate Investment Trust (DRG.UN-T) to “neutral” from “outperformer,” calling Blackstone’s takeover offer a “testament to portfolio quality and scale.”
“The offer price represents a 5-per-cent premium to our NAV [net asset value], and an 18.5-per-cent premium to the last closing price prior to the announcement,” she said. “We believe this is an attractive offer for unitholders, and do not foresee a superior offer from additional bidders. We anticipate the offer to close as presented.”
Ms. Syed lowered her target to $16.80 from $16 to reflect the sale price. The average on the Street is $16.57.
Mr. Alexander said the move reflected soft demand trends, slightly better price prospects in Q4 and 2020 and an 8-per-cent increase in production volumes next year.
He raised his 2019 and 2020 earnings per share estimates to US$1.40 and US$3.20, respectively, from US$1.05 and US$2.40.
“Favorable operating leverage to higher oil prices, however, will likely not prevent FCF from turning negative during the upcoming investment cycle,” the analyst said.
With a “hold” rating, Mr. Alexander’s target rose to US$38 from US$34. The average on the Street is US$43.80.
In other analyst actions:
With files from Reuters