Inside the Market’s roundup of some of today’s key analyst actions
Bausch Health Companies Inc. (BHC-N, BHC-T) is likely to “change dramatically” over the next 12-18 months, according to RBC Dominion Securities’ Douglas Miehm, who thinks the market is “only starting to understand the value that could be surfaced.”
After being “on the sidelines for more than five years,” the equity analyst now sees the path to the expected spin off its eye-care business and thinks the “implications of possible divestitures provide near-term upside potential.”
That led him to raise his rating for the Laval, Que.-based company’s shares to “outperform” from “sector perform” on Wednesday.
“Bausch management plans to spin-off the Bausch + Lomb eye care business and potentially raise B+L equity and/or divest assets to pay down debt, which we believe could occur by H1/22,” said Mr. Miehm. “At the same time, as the business rebounds from COVID-19 and with several revenue growth drivers in place, we estimate organic EBITDA and balance sheet improvements in 2021 and beyond. We see significant valuation upside over the next 12 months when taking into account the improving financial outlook as well as the implications and timing of the potential deleveraging transactions.”
“We expect a spin-off of Bausch + Lomb would allow this business to rerate higher, more in line with vision care peers currently trading at approximately 23 times consensus 2021 estimated EV/EBITDA, above spec pharma companies at 8.3 times and BHC at 10 times. While Bausch’s leverage (7.1 times 2020 estimated net debt/EBITDA vs. peer groups at 2-3 times) is an overhang, we forecast this figure to organically improve to 6.1 times by Q1/22, and management outlined leverage targets of 4.0 times for the B+L SpinCo and 5.5 times for the BHC RemainCo at the time of the spin. We estimate these targets could be achieved in H1/22 via a prospective $2.0-4.0-billion IPO of/investment in B+L, at the lower end of this range if accompanied by asset sales (RBCe Solta & Amoun, potentially for $2.5-billion), which could support deleveraging and could provide equity valuation upside, potentially sooner than some investors expect.”
Mr. Miehm said this optimistic view is “underscored by interest from activist investor funds, including Glenview and Carl Icahn, which between them now hold 14 per cent of BHC shares and have issued statements suggesting management pursue transformation to ensure this potential value is showcased and ultimately emerges.”
With his rating change, the analyst hiked his target for Bausch shares to US$42 from US$26. The average on the Street is US$29.06, according to Refinitiv data.
“Three key factors previously kept us on the sidelines on Bausch shares, including the leverage outlook, the implications of Xifixan genericization in 2028, and the revenue and EBITDA growth outlook vs. management’s latest targets, in the context of COVID-19 uncertainties,” he said. “We now upgrade the shares to Outperform from Sector Perform to reflect our four key takeaways: (1) the rerating potential on the B+L spin is significant; (2) required deleveraging could occur in ~12 months, ahead of investor expectations; (3) price target increased to $42 on a 12- month view, supported by scenario analysis for valuation and deleveraging timelines, and (4) the fundamental outlook is improving.”
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Though its fourth-quarter financial results fell in line with expectations, Industrial Alliance Securities analyst Elias Foscolos downgraded Emera Inc. (EMA-T) to “buy” from a “strong buy” recommendation, pointing to a “tempered” near-term outlook against his “constructive thesis for long-term growth in the sector.”
Before the bell on Tuesday, the Halifax-based electric power distribution company reported adjusted earnings per share of 69 cents. After removing a 15-cent gain from a litigation award, Mr. Foscolos calculated a 60-cent profit, which topped his estimate by a penny but fell 2 cents below the consensus projection.
“EMA achieved double-digit regulated earnings growth in 2020, driven by strong performance at Tampa Electric,” he said. “The Company deployed record capex in the year of $2.7-billion.”
“EMA plans to grow the rate base at a CAGR [compound annual growth rate] of 7.5-8.5 per cent from 2019-2023. The baseline capital program of $7.4-billion would likely result in growth closer to the low end, while EMA has identified $1.2-billion of potential opportunities under development that could provide growth upside. The Company will target annual DPS [dividend per share] growth of 4-5 per cent, which is intended to lower the payout ratio into a sustainable target range of 70-75 per cent.”
Mr. Foscolos said the record capex result is “indicative of favourable macro trends surrounding clean energy investment and grid modernization,” however he “moderated” his expectations for 2021 based on forex headwinds and “more normalized” weather in Florida.
“We still expect strong year-over-year growth due to rate case and economic tailwinds,” he said.
With his rating change, he trimmed his target for Emera shares to $61 from $63. The average target on the Street is $60.20.
Elsewhere, RBC Dominion Securities analyst Robert Kwan cut his target to $62 from $64, keeping an “outperform” rating.
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Ahead of next week’s start of earnings seasons for Canadian banks, Scotia Capital analyst Meny Grauman upgraded Bank of Montreal (BMO-T) to “sector outperform” from “sector perform” with a target price of $111, rising from $104. The average on the Street is $101.78.
“As we approach another earnings season for the Canadian banks, the market continues to be less focused on the quarterly results themselves and much more interest in what earning power will be on the other side of the pandemic,” said Mr. Grauman in a research note titled Achieving Escape Velocity. “Despite another wave of lockdowns both in Canada and across the globe, investors remain convinced that vaccinations will lead us out of this health crisis and that growth is poised to bounce back with the force of a loaded spring. We share that optimistic view, and note that it suggests upside to the current consensus numbers.
“That said, while we do believe that we are on the cusp of a post-pandemic economic boom, it looks like the U.S. economy will be able to achieve this ‘escape velocity’ from this pandemic well before Canada given the relative pace of vaccinations. To us this suggests that the Canadian Banks with relatively higher exposure to the US will have an advantage over their more domestically focused peers. Our favorite name to play this mismatch in recovery timing is BMO, which is one key reason why we are upgrading the stock.”
For the quarter, Mr. Grauman is projected core cash earnings per share of $1.89, which is flat from the third quarter and down 8 per cent year-over-year.
“On average our estimates are 3 per cent above consensus, and we expect to see beats from each of the Big Six banks we cover led by RY and BMO, while we forecast an essentially in-line quarter for CWB and a miss for LB,” he said. “We are higher than consensus primarily because of a more favorable outlook for capital markets-related revenues and a more favorable outlook for credit.”
Mr. Grauman also made these target price adjustments:
- Canadian Imperial Bank of Commerce (CM-T, “sector outperform”) to $139 from $137. Average: $122.06.
- National Bank of Canada (NA-T, “sector outperform”) to $89 from $88. Average: $78.14.
- Royal Bank of Canada (RY-T, “sector outperform”) to $129 from $125. Average: $114.61
- Toronto-Dominion Bank (TD-T, “sector perform”) to $82 from $80. Average: $75.74.
“From a positioning perspective, we continue to believe that investors should be looking towards the valuations laggards as the market’s focus is now squarely on value instead of safety, but we also note that given the pace of vaccine rollouts it is reasonable to expect the U.S. economic recovery to get a head start on Canada which should favour banks with more US exposure,” he said. “As a result we reiterate our Sector Outperform rating on CIBC, but add to that BMO as well. Meanwhile, our other Sector Outperformers, namely Royal Bank and National Bank are best positioned to benefit from an upgraded outlook for capital markets. Despite its large U.S. exposure we remain cautious on TD given ongoing risk of outsized margin pressure, elevated M&A risk, and a stretched relative valuation.”
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CIBC World Markets analyst John Zamparo thinks Hexo Corp.’s (HEXO-T) $235-million all-stock acquisition of New Brunswick-based Zenabis Ltd. should “materially improve and accelerate” its profitability, leading him to raise his rating to “outperformer” from “neutral.”
“The most important part of this deal, as with any in the Canadian cannabis space in our view, is the synergies (estimated at $20-million; we forecast $15-million),” he said. “ZENA shares have struggled in the past, but this largely reflected balance sheet woes, which have been mostly addressed, and an all-stock deal to acquire a profitable player at 4-times sales when HEXO trades at 8 times provides meaningful value. With valuation in check versus peers (though we acknowledge the sector’s well-above average valuations), moderate sales momentum, and the upcoming catalyst of positive EBITDA, we believe HEXO has upside.”
Mr. Zamparo hiked his Hexo target to $13.50 from $5.60, exceeding the $5.05 consensus.
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Though he fears the Street’s digital ad forecasts are too high, Citi analyst Jason Bazinet sees a lengthy list of positive factors to keep him bullish on Amazon.com Inc. (AMZN-Q), which is his “favourite internet stock.”
“We see eight reasons to remain bullish on Amazon. 1) U.S. eCommerce penetration rates are just 20 per cent leaving ample room for growth. 2) Amazon is maintaining share within the US eCommerce market. 3) Around 70 per cent of Amazon’s revenues come from the U.S.. But, for the first time in 10 years, International dollar growth eclipsed U.S. dollar growth. 4) Amazon is rapidly shifting from a B2C products company into a (higher margin) B2B services company. 5) With the exception of Ads, Street estimates look reasonable. 6) Street EBIT margins also appear achievable (particularly once COVID costs fade). 7) ROICs remain healthy and well above the firm’s WACC. 8) If Amazon’s equity does not move over the next three years, the firm will be valued at its lowest multiple since 2013 on both EV-EBITDA and levered FCF multiples,” he said in a research report released Wednesday.
Mr. Bazinet said his “singular concern” is the Street’s expectation that Amazon’s revenue from its “Other” segment, which largely comes from advertisements, will grow from US$22-billion in 2020 to US$48-billion in 2023.
“Data from Merkle suggests advertisers that spend on Amazon are spending more on ads relative to sales than ever before. This suggests ad revenues may disappoint relative to the Street’s bullish outlook. Our ad forecast is about 25 per cent below the Street by 2023,” he said.
Despite that view, Mr. Bazinet hiked his target for Amazon shares to US$3,750 from US$3,600, maintaining a “buy” rating. The average on the Street is US$4,007.15.
“We believe Amazon is leveraging dual-purpose infrastructure (servers, fulfillment centers, web traffic) to profitably sell services to Enterprises,” he said. “There have been ongoing concerns about anti-trust risk as it pertains to Amazon. However, the U.S. DoJ has suggested the current laws (Section 2 of the Sherman Act) are quite capable of addressing antitrust concerns. And, under prevailing laws, we see few legal risks to Amazon’s business model.”
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Calgary-based Oncolytics Biotech Inc. (ONCY-Q, ONC-T) is “well-positioned for the oncolytic virus trend,” according to H.C. Wainwright analyst Patrick Trucchio, who initiated coverage with a “buy” recommendation.
“Oncolytics Biotech .... is a biotechnology company focused on developing oncolytic viruses (OVs) for cancer treatment,” he said. “Oncolytics’ lead compound, pelareorep (pela), an unmodified reovirus and first-in-class systemically administered immuno-oncology (I-O) viral agent for solid tumors and hematological malignancies, is on the cusp of demonstrating potential to upend the treatment paradigms of several cancers, in our view. OVs are a group of viruses that infect and kill cancer cells preferentially to normal tissues; although the OV concept is not new, the field is gaining momentum only recently as advancements in technology have made it feasible to thoroughly study viruses and analyze the safety and antitumor efficacy. Oncolytics is evaluating pela in various combination trials in co-development or combination collaborations with Roche, Merck, Pfizer, Incyte, and Bristol-Myers Squibb. We believe it is the studies being conducted in breast cancer (BrCa) that could generate substantial value for shareholders in 2021 and beyond.”
Seeing its Pelareorep intravenous therapy having “blockbuster potential” for the treatment of breast cancer, Mr. Trucchio set a target of US$15 for Oncolytics shares. The current average is $8.26 (Canadian).
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Canaccord Genuity’s Luke Hannan expects to see incremental point-of-sales trend improvement from Gildan Activewear Inc. (GIL-N, GIL-T) when it releases its fourth-quarter 2020 financial results on Feb. 25 before the bell.
The analyst is projecting revenue of US$604-million for the quarter, down 8 per cent year-over-year and narrowly below the $611-million average on the Street. However, his EBITDA and earnings per share estimates of US$97-million and 24 US cents, respectively, exceed the consensus of US$94-million and 22 US cents.
“Recall that Gildan noted point of sale (POS) trends were showing that imprintable product sellthrough at the distributor level in October 2020 was down 10 per cent in the U.S. and down 20-25 per cent internationally, both improvements from the trends seen in Q2/20 and Q3/20,” said Mr. Hannan. “Based on our conversations with management, POS trends continued to show improvement during Q4/20. We note this is consistent with what activewear peers Hanesbrands Inc. (HBI-N) and Delta Apparel Inc. (DLA-N) reported during their most recent quarters, reporting healthy topline progression across most categories, and activewear in particular, during Q4/20.
“Accordingly, we are forecasting Activewear segment revenues to decline 15 per cent year-over-year, to $411-million, an improvement from Q2/20′s 26.3-per-cent decline, and are expecting Hosiery & Underwear revenues to increase 10 per cent year-over-year, below Q3/20′s 21.2-per-cent year-over-year increase, noting the company is comping against the introduction of a private label men’s underwear program at their largest mass retail customer.”
Also expecting “healthy” improvements in its gross margin, Mr. Hannan increased his target for Gildan shares to US$27 from US$23 with a “hold” rating (unchanged). The average on the Street is US$26.97.
“While the company’s fundamentals and outlook have improved significantly, at current valuations we believe the risk-reward profile remains unfavourable, leading us to remain on the sidelines,” he said.
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In other analyst actions:
* Cowen and Co. analyst Cai von Rumohr lowered Bombardier Inc. (BBD.B-T) to “underperform” from “market perform” with a 27-cent target. The average on the Street is 59 cents.
* Desjardins Securities analyst John Chu lowered his target for Neptune Wellness Solutions Inc. (NEPT-T) to $3.75 from $6 with a “buy” rating. The average is $4.75.
“The near-term sales outlook for Neptune looks more murky with continued supply chain issues and the early launch of its Mood Ring branded products. Despite Neptune’s impressive list of distribution and CPG partners, we need to see more evidence of the rebound of its health and wellness business as well as more revenue progress from its CPG partners before we have greater comfort with its outlook,” said Mr. Chu.
* CIBC’s Anita Soni lowered her Agnico Eagle Mines Ltd. (AEM-N, AEM-T) target to US$104 from US$107, keeping an “outperformer” recommendation. The average is US$88.68.
* Cormark Securities analyst David Ocampo reduced his Air Canada (AC-T) target to $24 from $25 with a “market perform” rating. The current average is $26.88.
* TD Securities analyst Craig Hutchison raised his Copper Mountain Mining Corp. (CMMC-T) target to $3.25 from $2.75, exceeding the $2.88 average, with a “buy” rating, , while BMO Nesbitt Burns analyst Rene Cartier raised his target to $2.70 from $2.60 with an “outperform” rating.
* BMO’s Ray Kwan raised his Bonterra Energy Corp. (BNE-T) target to $2 from $1.50 with an “underperform” recommendation, while Canaccord Genuity’s Anthony Petrucci increased his target to $3 from $2.50 with a “hold” rating. The average on the Street is $1.80.
“Despite the reduction in our estimates, improving oil prices and investor sentiment have provided a significant tailwind for BNE and its share price,” said Mr. Petrucci.
* BMO’s John Gibson increased his target for Black Diamond Group Ltd. (BDI-T) to $4 from $3.50, keeping an “outperform” rating. The average is $3.02.
* Alliance Global Partners analyst Brian Kinstlinger increased his Enthusiast Gaming Holdings Inc. (EGLX-T) to $11 from $7.50 with a “buy” rating. The average is $7.04.
* National Bank Financial analyst Adam Shine raised his Quebecor Inc. (QBR.B-T) target by a loonie to $40, maintaining an “outperform” rating. The average is $37.95.
* National Bank’s Vishal Shreedhar increased his Sleep Country Canada Holdings Inc. (ZZZ-T) target to $30 from $29 with a “sector perform” rating. The average is $29.07.
* Canaccord Genuity analyst Matthew Lee hiked his target for shares of Score Media and Gaming Inc. (SCR-T) to $6 from $2.50 with a “buy” rating. The average is $2.05.
“SCR shares have seen a significant upsurge throughout F21 due to a potent tandem of a) increased momentum around OSB/iGaming and b) a significant positive revaluation of small-cap growth names,” said Mr. Lee. “Despite this, we believe that SCR still has upside as the company unlocks the potential associated with online sports betting (OSB) and iGaming across Canada and the US. Given the regulatory progress in Canada and the imminent launch of SCR’s iGaming platform, we reassess what we see as the vast opportunities ahead of the firm with an in-depth examination of the North American total addressable market (TAM).”
* Seeing the potential for its revenue to triple from its Treosulfan chemotherapy drug, Canaccord’s Tania Gonsalves increased her Medexus Pharmaceuticals Inc. (MDP-X) target to $9.50 from $5.25 with a “hold” rating. The average is $7.94.
* TD Securities analyst Tim James cut his Transat AT Inc. (TRZ-T) target to $6.50 from $7.50 with a “hold” rating. The average is $6.20.
* TD’s Greg Barnes raised his First Quantum Minerals Ltd. (FM-T) target to $33 from $31, keeping a “buy” rating. The average is $27.27.
* TD’s Arun Lamba increased his target for Solaris Resource Inc. (SLS-T) to $10 from $8.50 with a “speculative buy” recommendation. The average is $8.40.
David Leeder