Inside the Market’s roundup of some of today’s key analyst actions
Canadian utilities have enjoyed a strong start to the year, supported by low interest rates and concerns about a slowing global economy. While it could be tempting to take some profits given high valuations in the economically defensive sector, David Quezada, an analyst at Raymond James, recommends staying put.
He raised his 12-month target prices on a number of stocks in the sector.
“While we believe valuations in some cases have ventured into fair-value territory, we acknowledge the expectation of a low interest rate environment has, and will likely continue to, provide a lift to the IPPs and utilities. Accordingly, we have increased our target prices across the board,” Mr. Quezada said in a note.
Among his changes: He raised his target price on Algonquin Power & Utilities Corp. to US$17 from US$16.50.
He said in a report: “We continue to highlight Algonquin as our top pick, and the only buy-rated name among the regulated utilities we cover. While the stock is up 7 per cent so far this year (vs. the TSX up 2 per cent) and an impressive 43 per cent since the beginning of 2019 (vs. the TSX up 21 per cent) shares of AQN now trade at 20.7-times 2020 estimated earnings which remains a discount to the U.S. mid-cap utility peer group at an average of 23-times (and some higher growth peers at up to 25-times). From a broader perspective, we continue to highlight AQN’s sector-leading rate base growth (14 per cent CAGR out to 2023E including recently announced M&A), earnings per share (9-11 per cent CAGR) and dividend growth (+10 per cent out to 2021E) as setting AQN apart from peers.”
Other highlights: He raised his 12-month target on AltaGas Ltd. to $21 from $19; Capital Power Corp. to $39 from $36; Emera Inc. to $60 from $56; Fortis Inc. to $58 from $55; Hydro One Ltd. to $27 from $25; TransAlta Renewables Inc. to $16.50 from $14.40.
He also reiterated a “strong buy” recommendation on Xebec Absorption Inc. and raised his target price to $4 from $3.
“We consider Xebec to be our best money making idea. A unique play on the emergence of renewable natural gas, we believe Xebec represents a rare opportunity as a company with a superior product in the early stages of a high growth industry. Not only has the company recently hit an inflection point in revenues and EBITDA, XBC has also been awarded large reference orders in key regions as its order and quote book have expanded,” Mr. Quezada said.
As for his reasoning behind staying bullish on a sector that has already posted strong gains and has seen valuations rise toward record territory, the analyst provides four key reasons.
“While the natural tendency would be to adopt a more neutral stance on the sector, we see several reasons for these names to reach new highs in terms of valuation -- namely: 1) increasing traction in ESG-related stocks resulting in fund flows into the sector (data from Morningstar shows ESG fund inflows at $20.6-billion in 2019, close to 4-times the level seen in 2018); 2) another leg down in expectations for bond rates which are now poised to move lower for 2020; 3) ongoing demand from pension and infrastructure investors for contracted power assets; and 4) some encouraging developments in wind power that we believe could support improved returns and project economics.”
With Hudbay Minerals Inc.’s share price down by nearly 50 per cent over the last year, the stock is too cheap to ignore, said Scotia Capital analyst Orest Wowkodaw.
“While we anticipate relatively weak Q4/19 results and modest 2020 operating guidance to be released shortly, we believe the risk-reward proposition for Hudbay shares makes sense now.”
Hudbay is scheduled to report fourth-quarter earnings later in February, and the company is expected to disclose weaker performance at its flagship Constancia mine in Peru.
“With the recent appointment of a permanent CEO, we anticipate the company's growth strategy, which includes securing Pampacancha surface rights and the start of new greenfield exploration in Peru, to make forward progress this year,” Mr. Wowkodaw said.
He upgraded Hudbay’s stock to “sector outperform” from “sector perform” and lowered his target price to $5.50 from $5.75.
RBC Dominion Securities initiated coverage on Slack Technologies Inc. with an “outperform” rating and US$25 price target.
“We see WORK as having a leading brand, differentiated technology, and strong tailwinds from a growing workplace collaboration market, which combined create an opportunity for the company to have durable, multi-year 30%+ growth,” said analyst Alex Zukin.
Bausch Health Companies Inc. has a good chance of beating the Street’s estimates when the company reports fourth-quarter earnings in a couple of weeks, said RBC Dominion Securities analyst Douglas Miehm.
Positive trends in scripts for the Bausch’s top seller Xifaxan, as well as slightly higher revenue in the company’s Bausch + Lomb division, contributed to an increase in revenue and earnings estimates for the quarter, the analyst said.
“Although we remain on the sidelines with Bausch shares, this is the most optimistic – albeit still cautious – we have been on the name since 2015.”
The ongoing turnaround of the company from the scandal of its Valeant days is still in its early stages, and Bausch is still heavily indebted, with net debt of $23-billion at the end of the fiscal third quarter, equating a debt-to-EBITDA ratio of 6.6 times.
But there is a “clear path” to reducing that ratio below 5 times by 2022, Mr. Miehm said.
The key challenge for the company in the years ahead is the development of new products to offset the expiry of its patent on Xifaxan in 2028.
“With follow-on indications and new launches in the early days, we look for more clarity on these fronts prior to changing our stance on the shares,” Mr. Miehm said.
He raised his target price on the stock to US$33 from US$31, and maintained a “sector perform” rating.
Automotive Properties REIT will need to demonstrate that it can find opportunities to maintain the pace of the growth the company has established in recent years, said Desjardins Securities analyst Kyle Stanley.
Since going public in 2015, APR has more than doubled the size of its portfolio of Canadian car dealerships through acquisitions to a value of roughly $900-million.
“We continue to believe APR has an opportunity to consolidate the fragmented automotive dealership space in Canada,” Mr. Stanley wrote.
“However, absent a sign that acquisition volume will pick up, it is difficult to foresee a material acceleration of the REIT’s cash flow growth profile.”
APR has been a strong performer over the last year, with unit price gains of more than 20 per cent, largely driven by multiple expansion as investors flocked to the REIT sector.
“The recent unit price strength, multiple expansion and the lack of visibility into its external growth prospects given a somewhat illiquid market have moved us to the sidelines,” Mr. Stanley said.
He downgraded APR to “hold” from “buy” and raised his target price to $12.75 from $11.50.
The recent decline of long-term Canadian bond yields, combined with the prospect for Bank of Canada interest rate cuts in the months ahead, makes the dividends paid by the energy infrastructure sector all the more attractive, said Altacorp Capital analyst Nate Heywood.
The average dividend yield offered by the Canadian midstream segment is about 5 per cent, while the 10-year Government of Canada bond current offers about 1.6 per cent.
“Maintaining a strong dividend yield has been a result of improvements in the quality of cash flows through projects underpinned by long-term agreements," the analyst said.
With most Canadian refiners and fuel distributors set to report fourth-quarter earnings later this month, one key theme will be the recent widening of the price differential between Western Canadian Select and West Texas Intermediate.
A bigger price gap helps companies operating refineries, like Parkland Fuel Corp. Mr. Heywood raised his target price on Parkland to $53 from $49 while maintaining an “outperform” rating.
The sector still faces some significant challenges, however.
“With continued capital discipline from upstream producers the midstream companies continue to be creative in their hunt for growth,” Mr. Heywood said. “We anticipate tuck-in acquisitions and optimization projects will remain prevalent themes in 2020.”
On that note, Superior Plus Corp. shares took a big hit last week when the company said it was cancelling the planned sale of its specialty chemicals business. Mr. Heywood reduced his target price on Superior to $13 from $14.50 and maintained an “outperform” rating.
The analyst also reduced his target on Secure Energy Services Inc. to $8 from $9 to better reflect the seasonality around the industry’s spring breakup.
In other analyst actions:
Several analysts raised their price targets on Absolute Software Corp.: BMO raised its price target to C$10 from C$8.5; Canaccord Genuity to C$10.5 from C$10; National Bank of Canada to C$9.50 from C$8.50; and TD Securities to C$9.50 from C$9.
Citigroup raised its price target on Enbridge Inc. to C$55 from C$51.
At least two analysts changed their price targets on Kirkland Lake Gold Ltd.: BMO cuts its price target to C$61 from C$71; and Canaccord Genuity raised its price target to C$55 from C$53.
JP Morgan raised its price target on Vermilion Energy Inc. to C$24 from C$23.