Inside the Market’s roundup of some of today’s key analyst actions
Citi analyst Alexander Hacking said he struggles to see Teck Resources Ltd. (TECK.B-T) stock outperforming without “more clarity” on both the timing and capital expenditure needs for its Quebrada Blanca Phase 2 copper project in Chile.
Accordingly, despite it currently trading at the widest discount to net asset value in his coverage universe, Mr. Hacking downgraded Teck to "neutral" from "buy" after reducing his earnings expectations for both 2020 and 2021.
“QB2 will add 200 kilotons attributable of high quality copper to Teck’s portfolio helping rebalance earnings away from met coal,” he said. "Yet, the economics of the project appear increasingly marginal with the prospect of further delays and potentially higher capex. Ultimately the economics of QB2 may be justified by the optionality of a QB3 expansion – but this is a very long-dated prospect.
"On balance we see more upside in other industrial miners including Vale and Freeport and move to Neutral on Teck to reflect this relative preference."
Pointing to lower met coal sales forecasts and a decline in production from the Antamina copper/zinc mine, Mr. Hacking reduced his 2020 EBITDA projection by 16 per cent to $1.7-billion. His 2021 expectation slid 5 per cent to $3.1-billion due largely to minor changes to his commodity price assumptions.
The analyst dropped his target price for Teck shares to $10 from $21. The average target on the Street is $19.66, according to Thomson Reuters Eikon data.
Elsewhere, RBC Dominion Securities analyst Sam Crittenden lowered his target to $21 from $23, keeping an "outperform" rating.
"We have lowered our 2020 estimates to reflect (our best guess at) the potential impacts from COVID-19 but left 2021 estimates largely unchanged," said Mr. Crittenden.
"Uncertainty around the pandemic is likely to linger for at least a few months and met coal could drift lower; however, Teck offers considerable upside to a potential recovery in 2021 in our view.
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It’s time to “bail” on retail real estate investment trusts, according to Raymond James analyst Johann Rodrigues.
He advises investors to reduce positions before May in the wake of Tuesday’s release of operational updates from RioCan (REI.UN-T), First Capital (FCR.UN-T) and SmartCentres (SRU-UN-T), noting April rent deferrals were at the high end of his 10-20-per-cent forecast.
“Both RioCan and First Capital have been working with tenants on a case-by-case basis to determine which retail tenants are in need of rent deferrals,” he said. "Thus far, RioCan has approved $15-million of rent deferral requests which represents 17 per cent of gross April rents. First Capital has only formally approved $3.5-million,or 6.5 per cent of April gross rents, however with a number of pending requests, which management expects to be mostly approved, total rent deferrals are closer to 15 per cent of gross April rent. At this time, rent deferrals approved by both REITs are for two months.
“While April numbers came in within our forecasted range, we continue to be increasingly worried about May rent payments. We think rent deferrals could total 40-60 per cent.”
He said the fact that April’s deferrals came in at the high end of his projection range “highlights the significant pressure this pandemic is placing on retailers and we expect data in following months will likely be incrementally worse.”
That led him to lower his ratings for the three REITs to "market perform" from "outperform." He maintained his target prices, which are:
- First Capital at $18. The average on the Street is $19.07.
- RioCan at $21. Average: $23.39.
- SmartCentres at $21. Average: $28.44.
“While the retail landscape certainly remains tough, we believe both REITs have sufficient liquidity to weather the storm,” said Mr. Rodrigues. “RioCan currently has $1.0-billion of available liquidity (including undrawn credit facilities) while First Capital has $700-million. In terms of debt coming due, RioCan has $126-million of debt maturities due in 2020 (which it expects to refinance) while First Capital has $97-million. We do not see any refinancing risks with either of the REIT’s expiring debt at this time.”
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Canaccord Genuity analyst Yuri Lynk is “getting more cautious” on material distribution companies, seeing the macro-economic picture for housing “quickly deteriorating.”
“The annualized rate of U.S. housing starts plunged 22 per cent month-over-month in March, despite the first half of the month being relatively unscathed from COVID-19 containment measures,” he said in a research report released Wednesday. “A National Association of Home Builders release showed the large monthly decline in homebuilder confidence occurred in April. In Canada, March housing starts fell 7 per cent month-over-month. Surely, the data are going to worsen with 22 million Americans filing for unemployment in the last month, erasing nearly all the jobs added since the last recession in 2008. To put 22 million unemployment claims into perspective, we note the largest four week surge in claims during the 2008-2009 recessions was just 2.6 million. These jobs are unlikely to snap back based on it taking seven years for the unemployment rate to reach pre-recession levels following the 2008 Great Recession.”
Given that outlook, he downgraded both companies from the sector in his coverage universe.
Mr. Lynk lowered Hardwoods Distribution Inc. (HDI-T) to “hold” from “buy,” though he noted: “Investors looking to maintain exposure to the positive long-term fundamentals of the North American housing market should HOLD Hardwoods shares.”
His 2020 and 2021 adjusted earnings per share projections for the Langley, B.C.-based company slid by 27 per cent and 32 per cent, respectively, to $1.21 and $1.25, due to an expected revenue decline.
That led him to move his target for Hardwoods shares to $11 from $15, falling short of the $17.47 consensus on the Street.
“Hardwoods enters this uncertain period with a strong balance sheet and low dividend payout ratio,” said Mr. Lynk. “The company’s net debt-to-EBITDA ratio (2019, non-IFRS-16 compliant) is 2.0 times and should only increase to 2.1 times by year-end. We see no covenant issues and the dividend consumes just 19 per cent of 2019 FCF [free cash flow]. The company is well positioned to continue its acquisition program as this downturn could push many in Hardwoods’ fragmented industry to sell their business.”
Mr. Lynk lowered CanWel Building Materials Group Inc. (CWX-T) to "sell from “hold” after dropping his 2020 and 2021 EPS estimates by 98 per cent and 38 per cent, respectively, to 1 cent and 16 cents.
“With 58 per cent of sales from the distribution construction materials used in the front-end of home construction, CanWel is likely to feel the impact of the housing contraction as early as Q1/2020,” he said. "CanWel’s construction material exposure means over half of its top line fluctuates with commodity solid wood prices, which sit 8 per cent below the 2019 average.
“We remain concerned over CanWel’s ability to absorb a recession-induced drop in business without reducing its generous quarterly dividend of 14 cents (17-per-cent yield). The 2019 payout ratio was 138 per cent, and we forecast it heading to 274 per cent by year-end. With a 4.9 times net debt-to-EBITDA (2019, non-IFRS-16 compliant), CanWel doesn’t have the balance sheet to support the dividend beyond a quarter or two, in our view. Without a cut, our new forecast implies an 8.2 times debt-to-EBITDA by year-end, which is unlikely to be supported by lenders in the name of keeping the dividend."
His target for CanWel shares slid by a loonie to $2.50. The average on the Street is $4.36.
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Raymond James analyst Chris Cox made a pair of rating changes on Wednesday in a research note reviewing changes to the firm's commodity price deck.
It increased its 2020 and 2021 WTI assumptions to US$33.25 and US$35.27 per barrel, respectively, from US$33.01 and US$34.38 in order to fall in line with forward prices.
For natural gas, the firm moved its 2020 and 2021 projections to US$2.06 and US$2.60 per thousand cubic feet, respectively, from US$1.99 and US$2.39.
Concurrently, Mr. Cox raised Imperial Oil Ltd. (IMO-T) to “market perform” from “underperform” with an $18.50 target, up from $13. The average is $21.89.
"We have upgraded shares of Imperial Oil ... given the significant deterioration we expect in light oil grades - especially in Canada - should help buoy cash flows from the company's refining operations, even as utilization is likely to take a hit due to demand contraction from COVID-19," said Mr. Cox.
Mr. Cox lowered Seven Generations Energy Ltd. (VII-T) to “market perform” from “outperform” with a $2.50 target, down from $3.50.. The current average is $4.71.
“The stock has been one of the strongest performers following the initial sell-off in oil, outperforming the TSX Energy Index by 30 per cent since the end of March,” he said. “With production cuts in the oil sands likely to prove deeper and longer than previously expected, we believe condensate realizations could suffer over the next few quarters, leading us to take a more cautious stance on the stock.”
For senior oil and gas producers, the firm made the following target price changes:
- Canadian Natural Resources Ltd. (CNQ-T, “outperform”) to $24 from $23. Average: $29.30.
- Cenovus Energy Inc. (CVE-T, “market perform”) to $3.50 from $2.50. Average: $6.26.
- Husky Energy Inc. (HSE-T, “underperform”) to $2.75 from $2. Average: $4.40.
- Ovintiv Inc. (OVV-N, “market perform”) to US$3 from US$2.50. Average: US$10.93.
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Desjardins Securities analyst Benoit Poirier raised his financial expectations for Canadian Pacific Railway Ltd. (CP-T) in response to the “strong” first-quarter results that exceeded his expectations.
After the bell on Tuesday, CP reported fully diluted earnings per share of $4.41, topping the projections of both Mr. Poirier and the consensus on the Street ($4.02 and $4.12, respectively). Its operating ratio, a key measure of its efficiency, improved to 59.2 per cent, also beating estimates.
"Management now expects adjusted EPS to remain mostly stable while RTM [revenue ton mile] volumes should decline in the mid-single digits in 2020," the analyst said. "While the revised guidance is mostly in line with our initial forecasts and consensus, we expect investors to appreciate that CP has enough visibility to provide guidance during these uncertain times (we had expected CP to withdraw its 2020 guidance). Management maintained its $1.6-billion capex envelope as it intends to take advantage of available track time to invest in high-return projects and better position the network for the recovery."
After CP paused its NCIB program and delayed a dividend increase to protect its balance sheet, the analyst said management’s “prudent approach to capital allocation is welcome in these uncertain times.”
He increased his adjusted EBITDA estimates for 2020 through 2022, leading to a 1-cent increase in his adjusted earnings per share projection for 2020 to $17.81. His 2021 expectation slid by a penny to $19.63.
Mr. Poirier maintained a “hold” rating and $334 target for CP shares. The average on the Street is $336.62.
"While we are impressed by management’s operational performance in 1Q, we prefer to wait for additional clarity on the impact of COVID-19 on volumes in the upcoming months before revisiting our thesis as we believe the stock is fairly valued in the current context," he said.
Elsewhere, RBC Dominion Securities' Walter Spracklin kept an "outperform" rating and $352 target.
Mr. Spracklin said: “While there will be less focus on Q1 results for most companies, we nevertheless view the significance of the operating performance of CP in Q1 as demonstrative of the power of the CP model. Moreover, we expect a positive reaction to the in-line guidance that reinforces the high-quality nature of the CP franchise. CP remains our favourite name in the rail space and one of our Transportation Top Three.”
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Shawcor Ltd.'s (SCL-T) financial update “speaks to the company’s uncertain future,” said Industrial Alliance Securities analyst Elias Foscolos.
On Tuesday before the bell, the Toronto-based oilfield services company announced several measures aimed at dealing with the fallout from the COVID-19 pandemic. They include a 7.5-per-cent reduction in salaried headcount and a drop in capital spending of $40-$50-million in 2020.
With the moves, Shawcor also released preliminary first-quarter financial results, including revenue of $320-million and adjusted EBITDA of $5-$7-million. Both fell short of Mr. Foscolos's projections ($322-million and $22-million, respectively).
"Preliminary Q1/20 results were weaker than expected, and while quarter-end backlog was solid, we see little growth going forward due to weak industry fundamentals," the analyst said. "SCL is implementing a number of initiatives to reduce costs and generate liquidity, and the ability of SCL to stay within its debt covenant will likely be dependent on either the success of these initiatives or additional covenant relief."
Mr. Foscolos expects covenant relief will be required, adding: SCL is required to comply with a minimum net debt/TTM [trailing 12-month] EBITDA ratio on its credit facility (4.25 times Q1-Q2/20, 4.0 times Q3-Q4/20). Based on our revised estimates, we project a covenant breach in H2/20. Compliance will likely either depend on SCL’s ability to execute on the aforementioned restructuring initiatives or additional covenant relief."
With the release, he lowered his financial expectations for both 2020 and 2021, leading him to reduce his target for Shawcor shares to $1.75 from $3 with a “hold” rating (unchanged). The average on the Street is $4.95.
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There are “challenging” quarters ahead for Canadian Tire Corporation Ltd. (CTC.A-T), said Canaccord Genuity analyst Derek Dley.
“Canadian Tire’s remaining retail banners, including Mark’s, SportChek, and Party City, remain closed and will continue to stay closed until further notice. Having said that, the banners (as well as CTR) have seen significant e-commerce growth, although we believe the increase in e-commerce will not offset lost in-store sales,” said Mr. Dley "Furthermore, CT REIT announced on Monday that tenants representing 6.2 per cent of its annual minimum base rent are not open, with another 33.5 per cent of those stores including CTR’s Ontario locations, operating on a limited basis.
"The company also noted it is holding off on certain capital expenditures across all categories of projects and temporarily pausing its share buyback program in an effort to preserve cash and remain financially flexible."
Ahead of the release of its first-quarter results, which he expects around May 7, Mr. Dley said he is now projecting a same-store sales decline of 5 per cent for Canadian Tire stores for the quarter and a 30-per-cent drop for SportChek and Mark’s. For the second quarter, he’s projecting declines of 15 per cent and 50 per cent, respectively.
Overall, he's now forecasting revenue of $2.8-billion, down 2 per cent year-over-year. His EBITDA expectation of $315-million tops the consensus on the Street of $305-million, however his earnings per share estimate of 53 cents falls 13 cents lower.
Keeping a “hold” rating for Canadian Tire shares, Mr. Dley dropped his target to $108 from $160. The average is currently $134.78.
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In the wake of a period of share price appreciation following his upgrade of its stock six weeks ago, BoA analyst John Murphy downgraded Tesla Inc. (TSLA-Q) to “underperform” from “neutral,” expressing concern about its current valuation.
Also warning of a “slew of downside risks including production challenges," he lowered his target to US$485 from US$500. The average on the Street is US$466.05.
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Avicanna Inc. (AVCN-T) removed a financing overhang with a non-brokered private placement of $2.56-million, said Raymond James analyst Rahul Sarugaser.
On Tuesday, the Toronto-based medical cannabis company announced the deal with a group of strategic investors led by Tasly International Capital Ltd. It plans to used proceeds for commercialization, corporate development and general working capital purposes.
"More importantly, this investment from a pharmaceutical company, we speculate, may be the precursor to a larger co-development deal that is yet to come. We'll be watching this closely," said Mr. Sarugaser.
At the same time, in the wake of the release of its quarterly results last week, the analyst cut his fiscal 2020 revenue estimates by 50 per cent, expecting sales delays due to COVID-19.
With that move, he lowered his rating for Avicanna, which focuses on plant-derived cannabinoid-based products, to "market perform" from "outperform."
"While the potential for upside remains in the form of chunky revenues from Aureus API sales, first sales of AVCN's medical cannabis products through Shoppers, the development of AVCN's clinical programs, and the possible evolution of a commercial relationship with Tasly, we, at present, have limited visibility on these processes, and so we revise our recommendation," he said.
Mr. Sarugaser trimmed his target to $2.50, matching the current consensus, from $3.
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BoA analyst Bob Hopkins upgraded Johnson & Johnson (JNJ-N) to “buy” from “neutral.”
"We are upgrading JNJ due to our belief that in the current unprecedented environment the most defensive names will continue to outperform," said Mr. Hopkins.
Citing its long history of outperforming during difficult times and noting it has outperformed the S&P 500 meaningfully during the last two recessions in 2001 and 2008, he raised his target to US$175 from US$150. The average is US$161.89.
“Risks around pharma pricing are now lower due to Covid-19, and we view JNJ’s decision to distribute their Covid-19 vaccine (should it prove successful) on a non-for-profit basis as a master stroke,” he said.
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In other analyst actions:
RBC Dominion Securities raised Intertape Polymer Group Inc. (ITP-T) to “outperform” from “sector perform” with a $14 target, rising from $12. The average is $16.19.
Eight Capital raised PrairieSky Royalty Ltd. (PSK-T) to “neutral” from “sell”
David Leeder