Inside the Market’s roundup of some of today’s key analyst actions
Citi analyst Prashant Rao thinks Canadian large-cap oil producers have moved into “survival mode” in reaction to the drop in demand stemming from COVID-19, responding with production cuts, the suspension of dividends and buybacks, reducing capital expenditures and boosting liquidity.
"While announced productions cuts total 400 thousand barrels per day for 2020, we think that in reality, the pullback is closer to 1 million barrels per day," said Mr. Rao. "Mining assets can cut first; in-situ assets follow as realized prices fall below variable costs. But despite these near-term challenges, we think that our covered companies have ample liquidity to weather the downturn"
In a research report released Wednesday, Mr. Rao dropped his earnings per share projections for the financial positions of four companies in his coverage universe by an average of 322 per cent for the first quarter of 2020 and by 270 per cent for the full fiscal year, which is now 111 per cent below the consensus on the Street.
That came after he conducted stress tests on the financial positions of the four companies to evaluate their abilities to adapt “through the disruption.” He concluded further capex cuts and deferrals through 2021 are likely required for each, suggests dividend suspensions are likely “prudent” and expects year-end 2021 financial positions will not revert back to year-end 2019 “but all are well withing convenant’s restrictions.”
"While all of our covered companies have sufficient liquidity near-term, stronger balance sheets and high levels of downstream integration at Suncor and Imperial Oil provide defensive value and downside protection in a more gradual demand-recovery scenario," he said. "Excess marketing capabilities at both Suncor and Husky Energy should help on retail margins, offsetting pressures from Upstream price realizations. Cenovus looks relatively more challenged in a slower recovery, given higher leverage, 100-per-cent in-situ Upstream assets, and partial Downstream integration, but also presents quicker equity upside on a faster oil price recovery."
Mr. Rao reduced his 2020 production forecast by an average of 9 per cent, led by 10-per-cent declines to both Cenovus and Husky. That led him to drop his funds from operations per share projections by 90 per cent on average.
With those changes, he made the following reductions to his earnings per share estimates for 2020:
Cenovus Energy Inc. (CVE-T) to a $1.92 loss from a 63-cent profit (down 406 per cent)
Husky Energy Inc. (HSE-T) to a $1.85 loss from an 89-cent gain (down 307 per cent)
Imperial Oil Ltd. (IMO-T) to a loss of $2.42 from a profit of $2.46 (down 198 per cent).
Suncor Energy Inc. (SU-T) to a $2.32 loss from a $3.43 profit (down 270 per cent).
With those changes, Mr. Rao upgraded his rating for Imperial Oil to “neutral” from “sell” with a $21 target, down from $31 and 42 cents lower than the consensus on the Street.
"We downgraded IMO when EV/DACF [enterprise value to debt-adjusted cash flow] was 3 times higher and a noted premium to peers," he said. "Post the year-to-date pullback and on our updated estimates, 2021 EV/DACF of 6 times (now in-line with SU) seems fairly valued. In fact, IMO’s strong balance sheet (debt-to-capital ratio sits 9 ppts below peers) and lower capital needs have defensive appeal in this downturn, while dividends appear safest of the group."
He also made the following target changes:
Suncor Energy ("buy") to $28 from $50. Average: $30
Cenovus Energy ("buy") to $7 from $15. Average: $6.21.
Husky Energy (“neutral”) to $4 from $9.50. Average: $4.40.
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Raymond James analyst Farooq Hamed downgraded First Quantum Minerals Ltd. (FM-T), pointing to “uncertainty” at its Cobre Panama mine.
The open-pit copper development project is currently closed due to COVID-19, leading Mr. Hamed to emphasize the impact on cash flow.
“Further, while we expect FM to remain in compliance with debt covenants if revised guidance is met and commodity prices remain near spot levels, we note that an extended downtime at Cobre Panama could again raise debt and covenant concerns,” he said.
"Key developments that would cause us to review our downgrade would include an earlier than expected re-start at Cobre Panama, increasing copper prices given FM's high level of sensitivity to copper price and the potential sale of a minority stake of its Zambian assets which would bolster the balance sheet."
With its first-quarter results, released Tuesday, First Quantum lowered its copper guidance by 9 per cent and its gold guidance by 10 per cent, due to the longer-than-anticipated suspension at Cobre Panama, which it now expects will restart in late June or early July.
"While the lower production will reduce revenues and EBITDA, our modeling suggests that the lost cash flows will be mostly offset by the $175-million reduction in 2020 capex guidance primarily coming from deferrals. As a result, we now expect higher capex spending in 2021," said Mr. Hamed.
The analyst lowered his 2020 earnings per share projection to an 83-cent loss from a 57-cent loss. He also introduced a 2021 estimate of a 3-cent loss.
Moving First Quantum to “market perform” from “outperform,” he trimmed his target to $10.50 from $11. The average is $11.87.
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Heading into earnings season, "it's time to get selective" on TSX-listed energy pipeline, midstream and fuel distribution companies, said Industrial Alliance Securities analyst Elias Foscolos.
"It has been a very eventful quarter for investors in terms of keeping up with (a) company news; (b) changes to the macro environment; and (c) share price movements," he said.
“The rapid and steep decline in oil demand is something the market and companies did not anticipate. As a result, production shut-ins are well underway and the ramifications are likely to be (a) increased gas drilling, (b) tightening oil differentials, (c) E&P restructuring/mergers/bankruptcies, and (d) unintended consequences. The focus on counterparty risk, while admirable, can’t begin to adequately quantify risk. In the short term, base level fee-for-service cash flows will be impacted. As a result, further reductions or deferrals to capital programs are likely. However, longer term, oil and natural gas will keep flowing through midstream pipelines and production plants.”
In a research report released Wednesday, Mr. Foscolos lowered his recommendations for six stocks, believing current upside returns no longer justify their previous ratings.
“Year-to-date in 2020, TRP has been the only outperformer relative to the TSX, exhibiting relative stability in the context of the sector and the broad market,” the analyst said. “ENB and ALA have also performed relatively well. TRP, ENB and ALA are more ‘utility’ like and carry less risk than the broader Midstream space. SPB and GEI have been mid-range sector performers and also have high customer dependency. SPB benefits from relatively stable propane volumes that are driven more by weather patterns than economic activity and are also weighted more to Q1 and Q4, and GEI benefits from its focus on storage infrastructure. KEY and IPL have been the bottom two performers, KEY likely due to its relatively high degree of non-investment grade counterparty exposure and IPL due to execution risk on the de-risking and construction of the Heartland Petrochemical Complex (HPC). Incidentally, IPL reduced its dividend by 72 per cent on March 30.”
Mr. Foscolos downgraded the following stocks:
Enbridge Inc. (ENB-T) to “buy” from “strong buy” with a $55 target (unchanged). The average on the Street is $53.
Analyst: “Recent commentary from the Company would suggest that there will be no issue funding the $11-billion secured growth plan. Nonetheless, we will be looking for any updates to the capital plan including L3R, as we believe that is heavily weighing on the stock price, as well as any details regarding volumetric exposure in Liquids Pipelines and Natural Gas Transmission amidst North American production shut-ins.”
Gibson Energy Inc. (GEI-T) to “hold” from “buy” with a $21 target. Average: $22.27.
Analyst: " The two issues that we highlight are capital spending and marketing margins. Gibson’s capital program centres on the construction of the Diluent Recovery Unit (DRU). Two potential issues are: 1) possible delays in construction due to COVID-19 work safety requirements, and 2) with the significant crude pipeline egress that is anticipated, we believe that the DRU, if under consideration today, would not proceed. Interestingly enough, we believe the economics of a DRU and rail transportation is roughly similar to TC’s Keystone XL pipeline. The question is how much ‘insurance’ end-users want. Finally, with reduced crude volumes and tighter differentials, we may see GEI’s marketing business come under some pressure."
Inter Pipeline Ltd. (IPL-T) to "hold from “speculative buy” with a $12 target, up from $11. Average: $12.56.
Analyst: “The moves taken by IPL over the last month, which include the reduction of the dividend and capital spending, and increase in the credit facility, are all positive. Our outlook for 2021 is above consensus, as we believe the Conventional Pipeline and Natural Gas Processing segments will rebound to more normalized levels. Based on the projected return, we have lowered IPL.”
Keyera Corp. (KEY-T) to “buy” from “strong buy” with a $28 target (unchanged). Average: $25.33.
Analyst: “We view the deferral of the KAPS pipeline and simultaneous suspension of the DRIP as prudent moves. While KEY is not completely self-funding on a free cash flow basis, we believe the Company’s dividend is safe. We would not be surprised if KEY comes up with some creative way to profit from depressed prices for propane, butane, and even condensate using its extensive storage cavern network. We are above consensus for Q1/20, 2020 and 2021, and we feel comfortable with our above-consensus estimates.”
Pembina Pipeline Corp. (PPL-T) to “hold” from “buy” with a $34 target, up from $33. Average: $36.95.
Analyst: “A few key items we will be looking for on the Q1/20 call will include an update on guidance which was pegged at $3,400 ± 150M (IA projection: $3.223-billion, cons: $3.19-billion), and any update on deferred capital projects. Given PPL’s strong return over the past month, we are moving to the sidelines and changing our rating to Hold.”
TC Energy Corp. (TRP-T) to “hold” from “buy” with a $70 target (unchanged). Average: $69.68.
Analyst: “We will be looking for commentary from the Company regarding the capital outlook, including any update on the $30-billion of secured growth projects, commentary on the recent unfavourable Keystone XL-related court decision, and an update on asset sales that are expected to close shortly, namely the sale of a 65-per-cent interest in Coastal GasLink and the sale of gas-fired power generation assets in Ontario. We are also hoping to gain insight into volumetric exposure on the Company’s North American liquids and natural gas pipelines.”
Concurrently, Mr. Foscolos raised his target for AltaGas Ltd. (ALA-T, “buy”) to $17 from $16. The average is $17.60.
His target for Parkland Fuel Corp. (PKI-T, “buy”) remains $37, which falls 89 cents below the consensus.
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After reducing his first-quarter financial expectations due to the impact of COVID-19, RBC Dominion Securities analyst Walter Spracklin cut his rating for Bombardier Inc. (BBD.B-T) “amidst historic risk and uncertainty.”
Ahead of the May 7 release of its results, he moved the Montreal-based company to “sector perform” from “outperform.”
“Following government mandates in Quebec and Ontario, management announced the suspension of all non-essential work at most of its Canada-based operations beginning on March 24 and extending until April 26,” he said. "The suspension included both BBD’s aircraft and rail production activities in Quebec and Ontario, with employees impacted by the shutdowns being placed on furlough. Additionally, and in conjunction with the announced suspension of operations, management also suspended its financial outlook for 2020 in response to uncertainty surrounding the future impacts of COVID-19.
“Overall, we view the moves as largely expected by investors (and accordingly priced into the shares), and see the operating closures materially impacting financial performance in Q2/20. That said, after speaking with management the company has restarted Transportation division operations in the UK & Belgium and recently announced the gradual resumption of Canadian operations as of May 11 – though it remains uncertain as to what extent this will mitigate the financial impact expected in Q2.”
Mr. Spracklin lowered his first-quarter EBITDA expectation to $146-million from $166-million, which is below the consensus on the Street ($178-million). His 2020 and 2021 projections of $770-million and $823-million, respectively, (from $869-million and $1.024-billion) also fall below the consensus ($869-million and $1.199-billion).
“We have attempted to reflect anticipated impacts from COVID-19 across our forecast horizon, and have accordingly adjusted our business jet delivery forecast to mirror the cadence reflected across the majority of companies under our coverage (i.e. initial impact in Q1, most pronounced in Q2, followed by a gradual recovery in Q3 and into Q4),” the analyst said. “We note that our current forecasts call for total business jet deliveries to be reduced by 60 for 2020 (from 162 to 102) and 44 for 2021 (from 173 to 129), reflecting production halts and more challenging logistics associated with successfully completing deliveries. Looking longer term, we believe the demand outlook for business jets remains highly uncertain at best and significantly strained at worst. Though affluent travelers may view business jets as a way to avoid travelling with hundreds of other passengers, it remains to be seen if this will offset the considerably reduced levels of air travel demand expected in the near term and a challenging macroeconomic backdrop that is unlikely to be conducive to elevated levels of discretionary spending.”
Mr. Spracklin dropped his target for Bombardier shares to 50 cents from $3.50. The average on the Street is $1.09.
“We are reducing our price target on the basis of our lowered estimates - and we have substantially lowered our target multiple on account of: 1) near-term disruption as a result of COVID-19; 2) uncertainty related to long-term demand levels for business aircraft; 3) high leverage levels; and 4) deal risk,” he said.
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Citing its “strong” production and cash flow in the first quarter, Canaccord Genuity analyst Tom Gallo raised his rating for Calibre Mining Corp. (CXB-T) to “buy” from “speculative buy” ahead of the release of its full first-quarter results on May 7.
On April 16, the Vancouver-based company reported quarterly production of 42,085 ounces of gold, exceeding Mr. Gallo’s 34,100-ounce projection. It was a jump of 26 per cent from the previous quarter, due largely to higher production at its La Libertad mine in Nicaragua.
"Q1/20 demonstrated that trucking ore from Pavon to the Libertad mill works in practice and that the Libertad mill is flexible enough to manage different ore types and sources," the analyst said. "It also demonstrated that a more integrated shipping strategy of ore from El Limon to La Libertad could boost consolidated production in the future. Currently, the mill at El Limon is limited to 500,000 tons per annum, though mining rates above this figure typically lead to stockpiled ore. In a modified processing scenario, material can be trucked and processed quicker at La Libertad, where there is excess milling capacity at a transport cost of less than 1 gram per ton. This scenario is not part of our base case, though we note it could be a major catalyst once an updated mine plan is fully implemented."
For the first quarter, Mr. Gallo is now projecting revenue of $66.6-million, rising from a previous estimate of $54-million. His earnings per share projection is now 5 cents, rising from nil.
His target for Calibre shares jumped to $1.90 from $1.50. The average on the Street is $1.74.
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Calling it a “market-leading durable medical equipment (DME) provider well positioned to grow via accretive acquisitions,” Industrial Alliance Securities analyst Chelsea Stellick initiated coverage of Protech Home Medical Corp. (PTQ-X)
Kentucky-based Protech provides a range of medical devices and services for in-home healthcare patients.
“DME is a highly fragmented market with more than 6,000 providers in the U.S., 70 per cent of which have annualized revenues below $15-million,” said Ms. Stellick. "Given its track record of immediately accretive acquisitions and its strong M&A team, PTQ is well positioned to acquire the smaller competitors in the Midwest and East Coast regions that have stable revenue generation of $4-12-million and 5-10-per-cent EBITDA margins.
"There is a strong and growing demand for DME due to an ageing population, a patient’s preference to be at home, and the increasing prevalence of chronic diseases requiring longterm care. More specifically, the DME market is expected to grow at an 5.6-per-cent CAGR [compound annual growth rate] before reaching US$98.4-billion by calendar 2028, up from US$54.9-billion in calendar 2018. This supports management’s target of 3-5-per-cent organic growth per year. However, PTQ believes that it can grow at 6-10 per cent by including strategic acquisitions and additional product lines within its existing markets."
Ms. Stellick set a target price for Protech shares of $2.40, which is 3 cents below the current consensus.
“PTQ trades at a significant discount to its peers (5.0 times versus 11.0 times fiscal 2020 estimated enterprise value-to-adjusted EBITDA), which we believe is unwarranted given its strong track record of successfully improving profitability, its robust recurring revenue model, and its aggressive growth strategy to achieve over $200-million in revenue and a 25-per-cent EBITDA margin in three to five years,” the analyst said. “As such, we apply an 11.0 times multiple on our fiscal 2020 adjusted EBITDA forecasts.”
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In other analyst actions:
* Raymond James analyst Stephen Boland resumed coverage of Goeasy Ltd. (GSY-T) with an “outperform” rating and $48 target. The average on the Street is $72.40.
"We are resuming coverage on goeasy Ltd. (GSY) at a unique time, with the pandemic having a meaningful impact on growth and possibly credit results," said Mr. Boland. "GSY is one of Canada’s leading consumer lenders that focuses on the non-prime segment of the population. GSY has grown their loan portfolio at a robust rate and with that growth has been consistent credit results and healthy margins. We believe management has taken a number of positive actions recently to focus on preserving capital and liquidity. These actions include slowing growth, limiting expenses and actively working with its customer base to limit an escalation of any credit issues.
“Despite forecasting limited growth and escalating charge offs, we believe there is real value with GSY at current levels.”
* CIBC World Markets analyst Chris Couprie lowered Extendicare Inc. (EXE-T) to “neutral” from “outperformer” with a $8 target, falling from $8.50. The average is $8.13.
“We believed that ParaMed was on the cusp of turning around; with the outbreak of COVID-19, we believe it will be difficult to know the magnitude of the recovery,” said Mr. Couprie. “While we had expected volumes to be down, average daily volumes are down a greater-than-expected 23.4 per cent since March 15 on a combination of social distancing, self-isolation, delays in elective procedures, and non-urgent care service restrictions. While expected to reverse over time, especially once elective health services can resume, it will likely take into 2021 to see if the base business has normalized and is back on a growth trajectory. As a result of our estimate revisions, we note our 2020 estimated payout ratio exceeds 90 per cent. EXE has a large cash position, but should conditions worsen, the payout ratio may creep higher.”
* BTIG analyst Camilo Lyon initiated coverage of Canada Goose Holdings Inc. (GOOS-T) with a “buy” rating and $41 target. The average is $35.39.
* BMO Nesbitt Burns analyst Fadi Chamoun lowered United Parcel Services Inc. (UPS-N) to “underperform” from “market perform” with a US$85 target, down from US$95. The average is US$103.39.
"The coronavirus (COVID-19 virus) led global recession is likely to accelerate the pace of growth in residential deliveries, shift volume mix toward larger customers, and potentially drive unfavorable changes in global trade patterns, including near shoring higher-value goods that typically utilize air cargo," he said.
“While cyclical headwinds will eventually ease, we believe that there is a structural component to the current compression in operating margins, which will mute the earnings, free cash flow, and ROIC [return on invested capital] recovery.”
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David Leeder