Inside the Market’s roundup of some of today’s key analyst actions
The additional liquidity gained by Air Canada (AC-T) through its recent share and convertible note offerings is “important to ensure the company emerges from the COVID-19 shutdown able to resume operations effectively,” according to AltaCorp Capital analyst Chris Murray.
However, upon resuming coverage following the deals, worth $1.6-billion, he slashed his target price for its stock based on the dilution of the share issuance and the expected conversion of the debentures in full.
With an “outperform” rating, he moved his target to $37 from $46. The average on the Street is currently $25.91.
“We are revising our estimates to incorporate the impact of the two offerings as well as the Company’s recent commentary around advance ticket sales, with management noting that of $2.6-billion in advance ticket sales, 15 per cent were sold on refundable fare types and that the total value of cash refunds in April totaled $142-million, excluding taxes and related fees,” said Mr. Murray. “We have not included the impact of the potential acquisition of Transat AT, which continues to be in the hands of Canadian and EU regulator.”
Despite trimming his 2020 earnings expectations for Canadian telecom companies, Canaccord Genuity analyst Aravinda Galappatthige raised his target prices for the companies' shares based on the overall market recovery since March lows and the prospect of low rates for an extended period.
"We have revised our estimates in Telecom as we revisit key assumptions around travel (roaming, overage), pricing pressure, volumes, etc., and factor in commentary from the companies during recent conference calls and presentations," he said. "All in all, we have lowered 2020 EBITDA estimates by an additional 1-3 per cent, with the cumulative COVID-19 impact at 3-8 per cent in terms of EBITDA and a market cap weighted average of 12 per cent on EPS on fiscal 2020. We have revised down estimates for 5 of the 6 Canadian Telecom names in this note, with the exception of Quebecor, where we felt our recent post Q1 forecasts were reasonable.
“Much of the reductions are on the incumbent wireless side, where we are forced to reassess the timing around a recovery in roaming revenue, which we now feel is likely a late Q4 or early 2021 consideration, and factor in a steeper decline in data overage. Additionally, comments at recent conferences suggest early signs of pricing pressure on wireless (inbound calls to re-rate plans), which we had previously seen largely in wireline. Volume growth is also reported to be more muted in Q2, than originally expected. On the positive side, much of the comments suggest bad debts are still well contained.”
For investors, Mr. Galappatthige thinks a fiscal 2021 rebound "could separate the stocks," expecting "excessive B2B exposure (including SME), Alberta exposure, etc., could be a headwind."
He added: "On the other hand, companies well placed to benefit from the prospect of sustained lower COAs in wireless should enjoy tailwinds. We see Rogers as well positioned in this respect."
Mr. Galappatthige made the following target price changes:
- BCE Inc. (BCE-T, “buy”) to $61 from $59. The average on the Street is $60.67.
- Cogeco Communications Inc. (CCA-T, “hold”) to $96 from $93. Average: $110.
- Quebecor Inc. (QBR.B-T, “hold”) to $31 from $29. Average: $35.58.
- Rogers Communications Inc. (RCI.B-T, “buy”) to $62 from $60. Average: $67.86.
- Shaw Communications Inc. (SJR.B-T, “buy”) to $26 from $25. Average: $27.46.
- Telus Corp. (T-T, “hold”) to $24 from $23. Average: $25.61.
“[We] maintain our preference for a combo of SJR.b, RCI.b and BCE,” he said. “We believe this combination provides a good balance of torque and rate sensitivity. Shaw’s wireless prospects beyond the near term look quite positive as a Shaw branded product is likely around the corner. BCE provides stability and rate sensitivity in a volatile market, while RCI’s valuation downswing and fiscal 2021 recovery prospects make it attractive.”
Citi analyst Timm Schneider slashed his financial expectations for Enbridge Inc. (ENB-T) to relect “the more challenged environment.”
He is now expecting lower-than-expected Mainline throughput for the remainder of the 2020 fiscal year, projecting a trough in the second quarter of 2.3 million barrels per day before a rebound to 2.9 million barrels in the first quarter of 2021. That will bring an overall negative EBITDA impact of $400-million.
“ENB maintained DCF/EBITDA guidance for 2020 at $4.50-4.80 per share/$13.7-billion, respectively, but adjusted the approach to 2020 spending (operating and capex),” said Mr. Schneider. “Recall that ENB outlined 2020 financial sensitivities to lower-than-expected throughput on the Mainline ($12-million per month per 100,000 barrels per day less than the anticipated 2.85 million barrels per day ‘baked in’ to guidance) as well as 2020 positives, helping to offset headwinds from lower-than-expected throughput (FX, interest rates, O&A reductions, and better-than-expected 1Q results). All told, our 2020 EBITDA estimate now stands at $13.5-billion (vs initial guide of $13.7-billion and our previous $14.2-billion), while DCFPS [discretionary cash flow per share] is now $4.57 ($4.50-4.80 guide).”
Mr. Schneider lowered his 2020, 2021 and 2022 earnings per share projection to $1.69, $2.92 and $3.03, respectively, from $3, $3.17 and $3.25.
Keeping a "neutral" rating, he cut his target for Enbridge shares to $46 from $55. The average on the Street is $51.44.
“Our positive view on the company’s risk-averse business model and earnings growth projections are tempered by what we believe is a full valuation,” said Mr. Schneider. “Enbridge’s performance since the beginning of the decade is highlighted by industry-leading returns.”
There is still money to be made in Zoom Video Communications Inc. (ZM-Q) stock, said RBC Dominion Securities analyst Alex Zukin.
Following the release of “historic” first-quarter results after the bell on Tuesday, he raised his rating for the California-based company to “outperform" from “sector perform.”
Reaping the benefits of the work-from-home trend necessitated by the COVID-19 pandemic, Zoom reported revenue of US$328-million, exceeding the consensus projections on the Street (US$201-million) and representing growth of 169 per cent year-over-year (versus guidance of 64 per cent). The jump was due, in large part, to a rise in customers with more than 10 employees of 184,000, easily topping expectations.
“Possibly even more impressive, the company raised its annual guidance by 96 per cent, to $1.787-billion at the mid-point, reflecting 188-per-cent year-over-year growth (versus previous guidance of $910-million, 46 per cent year-over-year),” said Mr. Zukin.
“While the quarter’s results were unquestionably impressive, with the stock trading at 26 times on our CY21 base case revenue, it’s fair to ask is now the time to still be buying.”
Mr. Zukin raised his 2021 and 2021 earnings per share projections to US$1.28 and US$1.56, respectively, from 43 US cents and 57 US cents.
His target for Zoom shares doubled to US$250 from US$125 previously, The average on the Street is currently US$160.83.
“We believe there is also a case to be made that churn could actually improve in 2H given Zoom’s technologies may be even more important today than they were just 3 months ago,” he said. "Furthermore, with an installed base of 265k customers with 10+ employees, we see a significant opportunity to cross-sell Zoom Phone (PBX) and Zoom Rooms (conference rooms). In our view, Zoom Phone represents a TAM expansion opportunity that could yield an incremental $35-billion in the company’s addressable market, based on 350 million global seats (per RNG) at $10 per seat, a significant expansion from its existing $43-billion video conferencing market. We believe this sets up Zoom to be a global unified communications provider that integrates voice and video for the large enterprise, the consumer, and everyone in between.
“Furthermore, we see a significant untapped opportunity to create tailored video solutions to address a variety of new use cases including telehealth, education, and consumer. While there are significant competitors going after this large opportunity, we believe they are focused on developing the capabilities, technology, and architecture that Zoom already has today. In our view that creates a multi-year head-start in market leadership, combined with TAM expansion, and still modest penetration, supporting a multi-year beat-and-raise story that can more than grow through its current multiple and make money for investors.”
Elsewhere, Citi analyst Walter Pritchard said Zoom enjoyed “a quarter for the ages.”
"While clearly well-advertised, Zoom put up the strongest quarter we’ve seen in 20+ years covering the software sector," he said.
Keeping a “neutral” rating for Zoom shares, he increased his target to US$217 from US$186.
“While it might have been challenging to exactly dial in expectations for the Zoom quarter going into the report, results were well ahead of any expectation by a reasonable margin and we expect near-term follow-through in shares,” said Mr. Pritchard. “Medium-term, we expect debate will focus around three areas 1) sustainability of customer adds (we assume reversion to +10K per Q by end of FY21, slightly above pre-COVID levels) 2) potential upsell of Phone (we view favorably) and 3) competitive landscape (MSFT and GOOGL will likely re-invest here, which is worth watching).”
In other analyst actions:
* Seeing “multiple reasons for optimism,” CIBC World Markets analyst John Zamparo raised Alcanna Inc. (CLIQ-T) to “outperformer” from “neutral” with a $4 target, rising from $2.50. The average target is $5.
“CLIQ has moved 45 per cent in just two weeks, but we believe incremental upside exists,” he said. “Multiple factors impacting Alcanna have recently improved; its Alaska operations sale stabilized the balance sheet, Alberta’s economic prospects have recovered from a few months ago, and the specter of a large block trade from Aurora (which owns 20 per cent) no longer seems likely. But most importantly, CLIQ’s margin expansion strategy is working, and increased athome liquor consumption appears to be a longer-term tailwind than previously thought, as consumers continue to imbibe at home. With Alcanna trading at 9 times 2021 estimated EBITDA, valuation appears reasonable despite what we view as favourable conditions. Our EBITDA estimates are mostly unimpacted (despite the Alaska sale), but we have increased our target liquor multiple up a half-turn to 8.5 times.”
* In the wake of the release of in-line third-quarter results, Paradigm Capital analyst J. Marvin Wolff raised his target for NanoXplore Inc. (GRA-X) to $4.85 from $3.85 with a “buy” rating (unchanged). The average on the Street is $3.07.
“With the graphene plant set to start commercial production soon and supply contracts under negotiation, we are maintaining our target EV/EBITDA multiple of 17.5 times using 2023 (a full year of 10,000-tpa graphene production), EBITDA of $48.5-million and a 7.5-per-cent discount rate (10 per cent prior), reflecting management’s strong execution ability and the retirement of production risk,” said Mr. Wolff. “We are increasing target price ... as the company nears commercial production. While the former Sigma operations will have short-term negative performance, we concentrate on the longer-term highly valued graphene production and value of the graphene production patents.”