Inside the Market’s roundup of some of today’s key analyst actions
In reaction to its agreement to acquire the 66 per cent of GGP Inc. (GGP-N) that it does not already own, Canaccord Genuity analyst Mark Rothschild upgraded his rating for Brookfield Property Partners LP (BPY-Q, BPY.UN-T).
Under the deal, announced late Monday, GGP shareholders can elect to receive US$23.50 in cash per share, or either one Brookfield unit or one newly created share that trades as a real estate investment trust (REIT). GGP shares closed trading on Monday at US$21.21.
“We believe that GGP shareholders are most likely to accept the offer as there does not appear to be another buyer and if the transaction is not successful, we expect GGP’s share price will drop materially,” said Mr. Rothschild. “For BPY unitholders, we believe the transaction is not likely to be viewed positively as it is dilutive to NAV [net asset value] while also increasing exposure to retail properties. BPY’s unit price is down 13 per cent since year-end 2017.
“As BPY would be issuing a significant amount of equity at a substantial discount to NAV, this transaction would be dilutive to our NAV estimate of BPY. Assuming the transaction were to close, our pro forma NAV estimate is US$27.92.”
Mr. Rothschild emphasized the latest bid for GGP, a Chicago-based real estate investment trust that invests in shopping malls, is only a “slight” improvement from Brookfield’s initial US$14.8-billion cash-and-stock buyout offer from mid-November of 2017 and may be viewed as disappointing to its shareholders as it sits “well below” its NAV, which is projected to be US$28.06 by the Street.
The material change is the creation of a new U.S. REIT, under the ticker BPR, which will issue shares in the transaction.
“A key component of the revised bid is the creation of a new U.S. REIT which will offer investors the choice to invest in BPY’s high quality portfolio through a U.S. REIT,” he said. “BPR will be listed on a major U.S, exchange. Importantly, the REIT is likely to be added to some of the various REIT indices, which should further attract interest from REIT investors.”
“The acquisition should be accretive to FFO per unit by approximately 5 per cent, although it will likely depend on the timing of asset sales to reduce leverage. At this point we are not changing our estimates as we believe there is a possibility the acquisition will not be successful.”
Moving Brookfield to “buy” from “hold,” Mr. Rothschild maintained a target price of US$24. The average target on the Street is US24.44, according to Bloomberg data.
“BPY’s units now trade at a 30-per-cent discount to our pro forma NAV per unit estimate, which is the widest discount since we began covering BPY in July 2014,” he said. “While we are concerned that the increased exposure to retail will be viewed negatively, the discount to NAV is dramatic. Therefore, we are raising our rating.”
Dalradian Resources Inc. (DNA-T) is “very attractive” at its current level, according to Canaccord Genuity analyst Tom Gallo, who assumed coverage of the Toronto-based mineral exploration and development company from colleague Eric Zaunscherb.
“Our view remains that Dalradian’s wholly owned CurraghinaltProject, one of the highest grade, undeveloped gold projects globally, is a top-tier development asset despite recent headwinds,” said Mr. Gallo.
He maintained a “speculative buy” rating for Dalradian shares and a target price of $2.50. The average among analysts currently covering the stock is $2.43.
“A recent share price lag (down 22 per cent year-to-date) appears to be fueled in part by a very small group of protesters gaining traction through local and social media,” he said. “These groups vehemently oppose construction of the Curraghinalt mine, fearing toxic cyanide will ruin the local environment. This movement has drummed up sporadic government support, notably with Sinn Féin’s non-binding motion presented at its ard fheis last November looking to prohibit the use of cyanide in gold extraction. We remain of the view that an operating mine in the community providing an economic benefit to many will outweigh concerns raised by a select few. Lack of clarity surrounding Brexit is also playing a role in applying pressure to the stock, in our view.”
“Through all the noise, we still expect a final permit decision in the second half of 2019, which would lead to production, based on our model, by Q4/2020. In the event that permitting is delayed and production is pushed back a full year, our target price would be affected by 16 cents. This does not consider further de-risking (i.e., permit in-hand will lead to a lower WACC), the effect of which would erase a negative impact from a delay. We explore several of these circumstances in our scenario analysis below which outlines an upside (or bull case) that far outweighs the downside (bear case).”
Lassonde Industries Inc. (LAS.A-T) sits “adequately” positioned in the evolving beverage industry, according to Desjardins Securities analyst Frederic Tremblay, highlighting both its focus on product innovation in branded products and customer development in private label.
On Monday, the Rougemont, Que.-based drink manufacturer reported fourth-quarter 2017 results deemed “strong” by Mr. Tremblay.
Sales of $402.6-million exceeded his $379.8-million estimate, while EBITDA of $53.5-million also topped expectations ($49.6-million) and represented a jump of 11 per cent year over year. Earnings per share of $3.86 “easily” beat his $3.28 forecast.
“While fruit juice and drinks market sales continue to decline slightly (down 1.5 per cent in 2017), Lassonde is guiding for another year of positive sales growth in 2018 excluding the impact of FX fluctuations,” said Mr. Tremblay. “Management expects a year-over-year growth rate that is slightly below that of 2017 (2.4 per cent excluding FX), which in part reflects the impact of selling price adjustments made during periods of favourable commodity prices in 2017.
“Overall, we remain comfortable with our forecast of low-single-digit organic revenue growth (including 2 per cent in 2018), as consumers’ evolving tastes represent new growth opportunities which Lassonde can capture thanks to its deep knowhow and innovation philosophy (eg health and wellness beverages). In addition, Lassonde’s strong positioning in both private label and national brands is welcome in an evolving retail environment, and is a differentiating factor (most competitors focus on only one of the two categories.)”
With the results, Mr. Tremblay bumped his fiscal 2018 and 2019 EPS estimates to $12.44 and $14.07, respectively, from $12.39 and $13.81.
“We believe management continues to look for established businesses with volume in private-label or national brands that would enhance Lassonde’s overall position in the industry by adding scale, enabling the company to leverage existing customer relationships, reduce procurement costs and/or optimize distribution,” he said.
“Despite some high-profile M&A activity in the sector (eg Refresco buying Cott’s traditional beverage business, PAI-bcIMC acquiring Refresco and Dr Pepper Snapple merging with Keurig Green Mountain), we expect Lassonde to maintain its disciplined approach when evaluating potential M&A opportunities. We estimate that Lassonde could acquire $60–90-million in incremental EBITDA assuming leverage returns to 3 times, no equity raise and a transaction multiple of 7.0–9.5 times EBITDA.”
Keeping a “buy” rating for Lassonde shares, Mr. Tremblay raised his target to $285 from $280, which sits above the average on the Street of $277.50.
Beacon Securities analyst Michael Curran sees “attractive” upside for SilverCrest Metals Inc.’s (SIL-X) Las Chispas silver-gold project in Mexico, leading him to raise his rating for the Vancouver-based exploration company to “buy” from “speculative buy.”
“We consider the combination of size and grade of resource to be large enough already to support an economic underground mining operation at Las Chispas,” said Mr. Curran. “We also believe SilverCrest can add resource ounces with further drilling. Main vein systems (Babicanora and Chispas/Giovanni) are easily accessible underground, either using existing adits and/or with new adit/ramp development.”
The analyst expects drilling to continue at the project in the first half of the year, leading to both a resource update and preliminary economic assessment. He pointed to both as potential catalysts for the stock.
Mr. Curran set a $4 target for SilverCrest shares, which is above the $3.55 analyst average.
Citing both its current valuation and the downside risks stemming from both U.S. tariffs and a potential slowdown in China, J.P. Morgan analyst Paul Coster downgraded Canadian Solar Inc. (CSIQ-Q) to “underweight” from “neutral.”
“We do expect the stock to underperform the mean of our alt energy coverage over the next 6-9 months,” said Mr. Coster.
He kept a target of US$17, which is a dollar below the average.
People Corp. (PEO-T) is a “predictable, low-risk growth business,” said Clarus Securities analyst Noel Atkinson, initiating coverage of the stock with a “buy” rating.
“PeopleCorp is one of the largest providers of employee group benefit consulting and third-party benefits administration (TPA) services in Canada,” he said. “The Company has enjoyed average organic growth of 12 per cent year over year over the past 8 quarters. This is complemented by an opportunistic acquisition strategy, which we expect to continue through our forecast period.”
Mr. Atkinson set a target of $8.5, which is 19 cents below the consensus.
In other analyst actions:
Tudor Pickering & Co analyst Colton Bean upgraded TransCanada Corp. (TRP-T) to “buy” from “hold” while lowering his target to $66 from $69. The average on the Street is $68.59.
The firm also initiated coverage of Enbridge Inc. (ENB-T) with a “hold” rating and $46 target, which is below the average among analysts covering the stock of $54.89.
RBC Dominion Securities analyst Dan Rollins upgraded Detour Gold Corp. (DGC-T) to “outperform” from “sector perform” with an unchanged target of $20, which is 4 cents more than the average.
Accountability Research Corp analyst Harriet Li upgraded Teck Resources Ltd. (TECK.B-T) to “buy” from “hold” and raised her target to $41 from $30.50. The average is $41.58.
Macquarie’s Matt Murphy also upgraded Teck to “outperform” from “neutral.”
Mr. Murphy also raised Hudbay Minerals Inc. (HBM-T) to “outperform” from “neutral.”
Citi upgraded Kinder Morgan Inc. (KMI-N) to “buy” from “neutral” with a US$21 target, which is 90 US cents below the average.
GMP analyst Stephen Boland upgraded Intact Financial Corp. (IFC-T) to “buy” from “hold” with a target of $107.50. The average on the Street is $110.35.
Eight Capital analyst Ian Macqueen initiated coverage of Frontera Energy Corp. (FEC-T) with a “buy” rating and target of $52.50. The average is $56.33.
TD Securities analyst Aaron MacNeil initiated coverage of Horizon North Logistics Inc. (HNL-T) with a “buy” rating and target of $3, which is above the $2.35 consensus.
Editor’s note: An earlier version of this version stated Alta Corp. Capital made several changes to their ratings for Canadian energy companies. The firm has since said it incorrectly published the moves. This version has been updated.