Inside the Market’s roundup of some of today’s key analyst actions
Raymond James analyst Steve Hansen thinks Bombardier Inc.'s (BBD.B-T) US$8.2-billion sale of its rail division to France’s Alstom SA is a “transformative” deal that repositions it as a “nimble, pure-play business jet enterprise.”
Seeing the Montreal-based company receiving “solid value realization" with the pricing ignoring its current “challenges,” Mr. Hansen raised his rating for its stock to “outperform” from “market perform” in a research note released Tuesday before the bell.
“We regard the sale price as solid, representing 12.0 times average EBIT [earnings before interest and taxes] between 2016-2018 — a benchmark window that surprisingly dismisses the acute contract/margin pressure endured in 2019,” the analyst said.
“Combined with the expected proceeds of other recent divestitures (CRJ, Aerostructures, A220), BBD expects to have $6.5-$7.0-billion in proforma cash on-hand, positioning the company to significantly deleverage its current $9.3-billion in debt (MRQ), translating into $2.5-billion in net leverage once settled."
Mr. Hansen raised his target price for Bombardier shares to $2.75 from $1.75. The average target on the Street is $2.17, according to Bloomberg data.
“With a vastly improved balance sheet, industry-leading $14.4-billion backlog, and premium product portfolio, we also view the company as very well positioned to deliver top line growth/margin expansion,” he said.
Conversely, Scotiabank Financial analyst Konark Gupta cut Bombardier to “sector perform” from “sector outperform” with a $1.85 target, falling from $2.
“We expect the remaining bizjet assets to trade at a discount to BBD’s bizjet comps given bizjet is a cyclical industry and BBD’s balance sheet would still be relatively stretched after divestitures,” he said. "We assume 8.0 times EV/EBITDA for the bizjet segment and US$3.35-billion (C$1.86 per share) net proceeds for BT.
“With a limited return implied by our revised target and some risk in the Alstom transaction, we are downgrading BBD to SP from SO while removing our Speculative risk rating as Alstom’s offer removes some uncertainty. We think the stock may react positively to the Alstom news, followed by potential volatility as the market awaits transaction approvals over a period of 12-16 months and assesses bizjet segment’s right valuation. There could be significant downside risk to our valuation if the Alstom deal falls apart while there could be upside potential if BBD also divests the bizjet segment at a premium.”
Pointing to “continued deterioration” in its organic revenue generation, Desjardins Securities analyst Maher Yaghi lowered his rating for Alithya Group Inc. (ALYA-T, ALYA-Q) following the release of weaker-than-anticipated third-quarter results.
“While the resumption of M&A has been a positive in the story recently, the company’s deteriorating organic performance in the U.S. and Canada is becoming a concern,” said Mr. Yaghi. “Another point to consider is ALYA’s valuation, which is already pricing in a good amount of further M&A. We would become more bullish on the stock pending improvement in the underlying growth rates as this would put a floor under the stock price.”
On Feb. 13 before the bell, the Montreal-based management consulting company reported quarterly revenue and EBITDA of $66.2-million and $3.5-million, respectively. Both fell short of the expectations on the Street ($72.7-million and $4.1-million), which he attributed largely to weakness in its business south of the border.
“We could be hasty in drawing conclusions from the results, but the lack of underlying KPIs such as bookings or backlog makes forecasting prone to more uncertainty,” said Mr. Yaghi. “In addition, the string of negative organic growth rates both in Canada and the US makes calling for a turnaround difficult at this point. While we continue to believe in the long-term upside, visibility over the short to medium term has diminished. We look forward to becoming more constructive again on the name when we see material improvement in ALYA’s results. We think this is required to form support under the stock price, as we see the current valuation as being somewhat elevated given recent financial results.”
After lowering his financial expectations for fiscal 2020 and 2021, Mr. Yaghi moved his rating for Alithya shares to “hold” from “buy” with a target of $4.75, down from $5.25. The average on the Street is $4.68.
“We believe ALYA’s business model should enable it to continue to find suitable M&A targets to grow in the longer term," he said. "However, improved organic growth rates are key for the stock to begin to improve, and hence execution will be important in the next few quarters to put a floor under the stock price.”
“We are downgrading AEM ... after the company reported operational challenges at three of its four cornerstone assets (54 per cent of asset-level NAV),” she said. "This has significantly reduced our outlook for FCF (from $2.27 per share to $1.42 per share in 2020) and the potential for further enhanced shareholder returns. While we believe these operational issues will eventually be overcome, we think the next two to three quarters could be challenging and it will take some time to demonstrate to the market that the assets are back on track.
"We think investors will need to see the three assets meeting the revised guidance in the reported operating results in order for sentiment on the stock to begin to improve again. We remain constructive on the stock in the long term and note that AEM management team has an excellent track record of delivering on its operational targets and generating shareholder value, but we believe the risk/reward trade-off has become less attractive in the near term hence we are moving to the sidelines for now.
Ms. Jakusconek lowered her target to US$55 from US$64. The average is US$68.84.
Pointing to its “low capital intensity production growth, differentiated high-grade iron ore product, and high-quality flagship asset that give the company longer-term take-out potential,” RBC Dominion Securities analyst Alexander Jackson initiated coverage of Champion Iron Ltd. (CIA-T) with an “outperform” rating on Tuesday.
Mr. Jackson thinks investment made at its flagship Bloom Lake iron ore mine in Quebec by its previous owner provide Champion with a “unique” opportunity to more than double its production and free cash flow in 2022 by a completing a low capital intensive expansion with an estimate cost of $589-million.
“We estimate that the expansion will generate an incremental $620-million in NPV at a 22-per-cent IRR and that Champion will average 21-per-cent FCF yield at flat US$65 per ton iron ore following the ramp-up,” said Mr. Jackson. "We expect that Champion will be able to fund the expansion with cash from operations and $300-million in debt.
“Bloom Lake produces a high-grade iron ore concentrate that receives premium pricing. We expect premiums to remain strong due to its higher productivity in blast furnaces and lower CO2 emissions during the steel-making process. Bloom Lake’s concentrate can also be further processed to produce pellets for steelmaking and provides Champion with a broader potential customer base.”
Seeing it possess “strong” leverage to iron ore price changes and an “attractive valuation,” he set a target of $3 per share. The average is currently $3.18.
“Champion shares have performed well, as the company has done a good job of executing on the restart and ramp-up at Bloom Lake and benefited from strong iron ore pricing,” he said. “For shares to continue performing in what we expect to be a lower iron ore price environment, Champion will need to continue executing on its operations and the Phase 2 expansion.”
Canopy Growth Corp.'s (WEED-T) third-quarter results were “a step in the right direction,” said Canaccord Genuity analyst Matt Bottomley.
“After several quarters of declining sales, impairments and material sales write-offs, Canopy reported FQ3 financial results (ended Dec 31) that came in ahead of our expectations (and consensus) on all key metrics for the period,” he said.
On Friday before the bell, the Smiths Falls, Ont.-based cannabis producer reported total net revenues for the quarter of $123.8-million, exceeding Mr. Bottomley’s $99.5-million projection. He pointed to an 8-per-cent increase in adult use sales, 4-per-cent rise in domestic medical sales and a 42-per-cent jump in non-cannabis revenues.
“As a result of improved operating leverage/utilization at its cultivation/ production facilities, adjusted GM [gross margins] improved to 34 per cent in FQ3, inflecting back into positive territory after recording sizable write-offs and reserves in the prior quarter," he said. "Although we expected a sequential improvement, this metric was also well in excess of our estimated 25-per-cent adj. GM for the period and looks to be trending back to the company’s stated objective of inflecting to above 40 per cent in the near term. Adj. EBITDA loss for the period (while still quite lofty) saw a $64-million improvement, coming in at a loss of ($91.7-million), which was also ahead of our forecast loss of ($116.6-million). The better-than-expected loss was a result of higher revenues, improved margins and $20-million in G&A savings as costcutting endeavors were implemented during the period.
“Although a positive quarter overall, during the earnings call management noted that it expects flat to modest growth for next quarter (due to timing of sales and the still ongoing launch of its Cannabis 2.0 products). However, at current levels, we note that Canopy now has the clear-cut #1 market share in Canada (22 per cent of retail sales), with net cannabis revenues more than 60 per cent higher than its closest peer (ACB) for the same period.”
With the results, Mr. Bottomley “modestly” increased his “ramp to profitability exiting FY21″ and increased his target for Canopy shares to $28 from $25, keeping a “hold” rating. The average on the Street is $31.93.
Elsewhere, Desjardins Securities’ John Chu raised his target to $34 from $27 with a “hold” rating.
“While one quarter does not suggest a trend, we are encouraged by the solid 3Q beat (sales and EBITDA). More importantly, new CEO David Klein outlined his near-term priorities for the company, which touched on several key areas that give us optimism that the tide may be starting to turn for the better,” he said. “Near-term headwinds remain but a detailed outline of Mr Klein’s strategy in 4Q may prove to be a key catalyst for the company.”
Expecting to see good growth from Premium Brands Holding Corp. (PBH-T) when it releases its fourth-quarter 2019 results on March 12, Industrial Alliance Securities analyst Neil Linsdell raised his financial expectations and target price for shares of the Vancouver-based specialty foods company.
“During an Investor Day on Jan. 28, management remained exceptionally positive on the growth opportunities for not only the Phoenix sandwich facility, where the Investor Day was being held, but also for the entire firm, as they reiterated their outlook, which would assume almost $1-billion of contribution from new acquisitions to achieve their 2023 revenue target of $6-billion,” he said. “The acquisition pipeline was suggested to be many multiples of the $1-billion contribution target.”
Mr. Linsdell is projecting an 11-per-cent jump in revenue year-over-year for the quarter to $935-million and 7.4-per-cent rise in EBITDA to $74.3-million. The consensus estimates on the Street are $937-million and $73.4-million.
“Despite some lingering short-term headwinds our longer-term enthusiasm remains intact and heightened following the recent Investor Day in Phoenix,” he said. “We continue to see considerable organic growth and acquisition opportunities for PBH.”
After increasing his 2020 and 2021 estimates, Mr. Linsdell hiked his target to $107 per share from $96 with a “buy” rating (unchanged). The average on the Street is $105.29.
“PBH continues to offer investors strong profitability growth, a focus on strategic M&A and diversification which helps reduce some of the headwinds faced in a challenging environment, and a robust balance sheet and free cash flow, which support dividend growth. Future acquisitions could provide upside to our forecasts,” he said.
High Tide Inc.'s (HITI-CN) accretive sale of its KushBar retail assets to Halo Labs Inc. (HALO-NE) for $12-million in stock should “bolster” both its balance sheet and profitability, said Canaccord Genuity analyst Kimberly Hedlin, who called the deal, announced Friday, a “Valentine’s gift for investors.”
“The deal is expected to increase High Tide’s B2B consulting and management services revenues, while monetizing leases and development permits, which should result in overhead reductions relating to 6 stores,” she said. “The sale also allows High Tide to focus on its Canna Cabana branded stores versus developing two retail brands, which could reduce marketing costs. While we believe the main drawback of the sale is the receipt of shares versus cash (given that it could take several quarters to convert stock to cash at unknown prices), we still believe the company negotiated a good deal considering that it acquired its partner’s 50-per-cent interest in Kush Bar for $1.2-million in mid-December 2019. Lastly, based on our current forecasts, we estimate that the company is now fully funded, assuming Halo’s stock price is sustained at current levels.”
Ms. Hedlin, who is currently the lone analyst on the Street covering the Calgary-based company, kept a “speculative buy” rating and raised her target to 50 cents from 40 cents.
In other analyst actions:
* Ahead of the release of its fourth-quarter results, Raymond James analyst Steve Hansen slashed his target for Nutrien Ltd. (NTR-N, NTR-T) shares to US$55 from US$65 with a “strong buy” rating (unchanged). The average on the Street is US$56.25.
Mr. Hansen said: “While the collision of macro events has created stiff headwinds for Nutrien over the past 12+months, we remain optimistic that 2020 will bring about incremental improvement that should augment the firm’s outlook. In this context, while we’ve trimmed our target price ... we view the recent weakness in NTR shares as an opportunity to buy a high-quality, global enterprise at an attractive price/multiple.”
* Seeing "strong tailwinds behind a strong franchise, RBC Dominion Securities analyst Neil Downey raised his target for Brookfield Asset Management Inc. (BAM-N, BAM.A-T) in response to its “solid” fourth-quarter results.
“While perhaps not as evident in the full-year OFFO/share results, we believe that 2019 was a year of significant accomplishment for the business,” he said, increasing his target to US$75 from US$63 with an “outperform” rating. The average is US$70.22.
* TD Securities analyst Graham Ryding cut IGM Financial Inc. (IGM-T) to “hold” from “buy” with a $42 target, down from $43. The average is $41.67.
* Cormark Securities analyst Jesse Pytlak lowered Supreme Cannabis Co. (FIRE-T) to “market perform” from “buy” with a 45-cent target, down from $1.25 and below the 62-cent average.
* Calling it “ultimate ‘possibility’ stock,” Bernstein analyst Toni Sacconaghi hiked his target for Tesla Inc. (TSLA-Q) to US$730 from US$325 with a “market perform” rating. The average is US$489.47.
“Its core addressable market is likely to grow over 30 times over the next 20 years, meaning that even if its current share gets cut by 50 per cent, it will still grow 15 times during the period (a CAGR of 15 per cent for 20 years!) + it has significant addition optionality (truck market; self-driving; battery technology; solar, etc,)” he said. “We are skeptical that upside possibilities are likely to be expunged any time soon – suggesting no imminent negative catalysts for the stock.”