Inside the Market’s roundup of some of today’s key analyst actions
RBC Dominion Securities analyst Douglas Miehm sees few negative catalysts over the next six months for Valeant Pharmaceuticals International Inc. (VRX-N, VRX-T), expecting to see guidance increases.
However, Mr. Miehm said its current valuation “keeps us on the sidelines” following a recent appreciation in share price.
“In our view, 2018 guidance (specifically EBITDA of $3.15–3.30-billion) remains conservative,” he said. “As a result, we believe Street estimates for both ’18/’19 ($3.22-billion/$3.29-billion) are too low and see room for upward revisions. Management has noted that Q1/18 would be a trough quarter. Q1 is generally the weakest quarter of the year; as such, our outlook continues to forecast a sequential rise in EBITDA.”
“With leverage more than twice its peers, Valeant shares have benefited drastically from EV/EBITDA multiple expansion in the spec pharma space … Short interest in select names in the space has declined significantly year-to-date. For Valeant specifically, shares short have declined by 63 per cent between October 2017 and May 2018, from 45 million (13 per cent of float) to 17 million (4 per cent of float), respectively. VRX shares have outperformed relative to peers given a quality earnings beat + guidance raise (which is still conservative in our view) plus strong performance in key business areas, most notably B+L and Salix. Furthermore, we believe the continued terming out of debt maturities further helped company-specific sentiment.”
Mr. Miehm raised his fiscal 2018 and 2019 earnings per share projections to US$3.51 and US$3.81, respectively, from US$3.37 and US$3.43.
Maintaining a “sector perform” rating for Valeant shares, he raised his target to US$25 from US$19.The average target on the Street is currently US$21.67, according to Bloomberg data.
“Despite the progress that management has made, we continue view the company’s premium valuation as unjustified, especially given net leverage at 7.6 times, which is twice that of the company’s peer group,” said Mr. Miehm. “While this relative analysis suggests a more reasonable metric if Cooper Companies, which owns a consumer business like Valeant’s B+L, is included, the former also runs a very attractive device business that further justifies a higher valuation. In other words, we do not believe it is valid to assign a premium like Cooper’s to Valeant due to the overlap of just a single business line. Perrigo may be a better comparator given its consumer business exposure … We believe consensus estimates remain too low. Consequently, valuation begins to look more reasonable based on our estimates (9.6 times vs. our 9.5 times target multiple on 2019 estimated EBITDA). Nevertheless, we would look for a more favourable entry point (less than $22 per share) in the shares, as we believe execution risk remains elevated.”
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Seeing “plenty of runway for growth” for BSR Real Estate Investment Trust (HOM.U-T) in the U.S. apartment space, Raymond James analyst Johann Rodrigues initiated coverage of the Arkansas-based REIT, which completed its initial public offering on June 18, with an “outperform” rating.
“There have been multiple vehicles over the past few years that have allowed Canadian investors an opportunity to enjoy strong multi-family fundamentals in the U.S. Southcentral,” he said. “[BSR] management has a solid understanding of the in-demand nodes within their markets, clustering their assets in these areas. The vast majority of those offerings have focused on Texas. BSR REIT, while heavily exposed to the Texas market (52 per cent of NOI), is also currently focused on non-traditional MSAs (to Canadians): primarily within Arkansas, Louisiana, and Oklahoma. While these are smaller markets, they offer reasonable growth, especially when weighed against new supply. We expect these markets to generate normalized rent growth of 2-4 per cent. Going forward, BSR will focus on the broader Sunbelt, which accounts for 37 per cent of the U.S. population, with estimates projecting growth to 50%+ over the next five year.”
Mr. Rodrigues called BSR’s approach a “value-add” strategy, believing it possesses “plenty of embedded organic growth.”
“With just shy of 10,000 apartment units, BSR is a fairly large portfolio, for Canadian IPO standards,” he said. “However, these aren’t mature properties and there is a good amount of embedded growth for management to extract. The strategy is to acquire B-/B quality assets and invest capital to bring them up to B+ quality. To this end, just over $50-million has been invested in the assets over the last three years, with a little over half going towards suite upgrades. Since then, SPNOI has increased +16% on aggregate and we believe more is likely to come, this time flowing to public shareholders. Management believes another 3,000 units could benefit from similar capex and plans to spend $20-$25-millionn over the next three years, with 75 per cent going towards in-suite renovations. Furthermore, occupancy sits at 93 per cent and the REIT’s NOI [net operating income] margin at 51 per cent. We feel that there is quite a bit of potential upside, should management be able to pull all the right levers at the right time.”
Sitting in a U.S. apartment space that is “ripe for external growth,” Mr. Rodrigues set a target price of $11 per unit. He’s currently the only analyst covering the equity, according to Bloomberg.
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Citing Twitter Inc.’s (TWTR-N) emergence as the “source of breaking news,” Summit Insights analyst Jonathan Kees set a Street-high target price for its stock of US$52, believing a premium multiple is justified with the platform’s status as a destination for sports partnerships.
Maintaining a “buy” rating, Mr. Kees believes Twitter’s unique blend of events provides increased advertising traction.
His previous target was US$35, while the average on the Street is US$31.86.
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The timing of Killam Apartment Real Estate Investment Trust’s (KMP.UN-T) $57.7-million equity financing indicates its investment pipeline is “robust,” said Desjardins Securities analyst Michael Markidis upon resuming coverage.
“Aside from the full repayment of the credit facility (current balance of $30.5-million outstanding), a use for the proceeds has not been identified,” he said. “Keep in mind, however, that management has established a strong track record of execution on the external growth front. KMP has already completed $124-million of acquisitions thus far in 2018. And with a stated target of $150–200-million, we expect that additional announcements will be made in the back half of this year, with a particular emphasis on adding scale in Ontario and Alberta.
“Post the offering, our forward net debt/EBITDA immediately declines to 10.3 times from 10.7 times. Our revised 2018–19 outlook now incorporates $80-million of speculative acquisition activity at an unlevered yield of 4.25 per cent in 4Q18. Despite this assumption, D/GBV in our model is still down by close to 100 basis points, to 49 per cent, throughout 2019.”
With the financing, Mr. Markidis lowered his fiscal 2018 and 2019 funds from operations per unit projections to 93 cents and 97 cents, respectively, from 94 cents and 98 cents. He kept a “buy” rating and $16 target, which is above the $14.33 consensus.
“Our Buy–Average Risk rating is underpinned by KMP’s (1) multifamily exposure, (2) conservative payout and sound capital structure, (3) comparatively low capital intensity (vs multifamily peers), and (4) advanced development program,” he said.
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Desjardins Securities analyst Raj Ray raised his target price for shares of Wesdome Gold Mines Ltd. (WDO-T) in reaction to recent “repeated success” in the exploration results for its Kiena Complex in Val D’Or, Que.
“Year-to-date results in both the primary Deep A Zone and the lower-priority secondary zones have been positive and lend support to a potential restart of operations in the near to medium term,” he said.
Keeping a “buy” rating, Mr. Ray’s target now sits at $4, up from $3.15. The average is $4.19.
“While we expect continued operational improvements at Eagle River in 2018, we believe the key catalyst and upside for Wesdome relies on unearthing value via exploration and a potential restart of operations at its Kiena asset,” the analyst said. “We expect the significant newsflow from exploration at Kiena to continue through 2H18, and would view sustained positive exploration results as favourable for the potential restart.”
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Calling it a “profitable cannabis-focused New Age CPG company,” Beacon Securities analyst Douglas Cooper initiated coverage of Cannex Capital Holdings Inc. (CNNX-CN) with a “buy” rating, believing it can be a dominant player in the sector through its operations in Washington state and soon-to-be completed acquisition of California-based Jetty Extracts.
“In Washington, one of the country’s oldest and most established cannabis markets, Cannex is the owner of turn-key real estate leased and the supplier to the leading producer/processor with trailing sales of $27-million and shelf space in all of the state’s major retailers,” he said. “Its pending acquisition in California will dramatically increase sales (40 per cent or more) and provide CNNX with massive growth potential as the U.S.’s largest state embarks on legal adult use. On a proforma basis, we believe CPG companies should be able to achieve 30-per-cent EBITDA margins much like branded consumer companies in other retail sectors.”
Mr. Cooper set a target price for its shares of $1.80, or 3 cents above the consensus.
“We expect Cannex to continue to grow its sales and deepen its brand awareness in Washington and California and to also pursue an M&A strategy to acquire anchor brands in other states,” he said.
“Despite these strong industry and company fundamentals, Cannex trades at an ~50% discount to its U.S. peers. In our view, the recent price of $1.00 attributes ZERO value to its pending California acquisition and its entry into the largest cannabis market in the world. Hence, the opportunity for significant share price appreciation when the acquisition closes.”
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In other analyst actions:
TD Securities analyst Jonathan Kelcher upgraded Northview Apartment Real Estate Investment Trust (NVU.UN-T) to “buy” from “hold” and raised his target by a loonie to $30, exceeding the average on the Street of $28.64.
Mr. Kelcher downgraded Canadian Apartment Properties REIT (CAR.UN-T) to “hold” from “buy,” but he raised his target to $46 from $41. The average is $41.57.
Beacon Securities analyst Douglas Cooper initiated coverage of Cannex Capital Holdings Inc. (CNNX-CN) with a “buy” rating and $1.80 target, which is 3 cents ahead of the consensus.
With files from Bloomberg News
David Leeder