Inside the Market’s roundup of some of today’s key analyst actions
National Bank Financial analyst Mike Parkin sees Gold Fields Ltd.’s (GFI-N) all-share takeover offer for Canada’s Yamana Gold Inc. (YRI-T) for US$6.7-billion as “fully valued.”
While he warned investors should expect “heightened volatility while upside is communicated,” he moved his recommendation for Yamana shares to “tender” from “outperform” on Wednesday.
“In our view and based off share price responses, the market has shown that there are some concerns on this deal, which we believe are largely tied to price being paid,” he said in a research note. “We believe Yamana’s assets have strong exploration upside potential, and in some cases the latest technical report is not fully capturing this upside potential in our view. Thus, we believe there is an education period needed to fully understand the value of the assets being acquired. In our opinion we may see heightened stock price volatility in the near term while this upside is communicated. We see this as a risk to shareholder returns and believe other quality names in the sector could prove safer homes for invested funds.”
Gold Fields’ US$6.7-billion takeover offer for Canada’s Yamana Gold hits turbulence
Not expecting a competing offer to emerge, Mr. Parkin thinks the management teams of both companies need to now “focus on communicating the upside that exists within the Yamana portfolio, which helps to warrant the price being offered.”
“We believe there could be heightened share price volatility during this marketing period of the deal. Yamana does boast upside and growth potential (Odyssey’s tremendous resource growth potential and Jacobina’s potential Phase 3 and 4 expansions for example), however, we believe that this will take time to communicate to the market and there are other quality names in the sector that could prove to be safer investments while this communication period takes place,” he said.
Mr. Parkin reduced his target for Yamana shares to $7.20 from $9.25 based on the exchange ratio of the acquisition and Gold Fields’ current share price. The average on the Street is $8.88, according to Refinitiv data.
Elsewhere, CIBC World Markets’ Anita Soni cut her target to US$5.80 from US$7.50 with an “outperformer” rating.
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Seeing the outlook for methanol “weakening,” Scotia Capital analyst Ben Isaacson thinks its time to take profits from Methanex Corp. (MEOH-Q, MX-T).
Warning the risk of a global recession is increasing, he downgraded his recommendation for its shares to “sector perform” from “sector outperform.”
In a research report released Wednesday, Mr. Isaacson reduced his 2022 and 2023 global methanol demand projections, seeing the market is “well supplied, with better-than-expected Russian exports, while in China, production is increasing post-spring maintenance. Also, there are few unplanned outages worldwide.”
Reducing his price outlook by US$25 per metric ton per quarter and also emphasizing higher gas costs, he now sees greater-than-expected margin compression in the near term.
“We have reduced EBITDA estimates to 28 per cent and 10 per cent below the Street on ‘22 (Q2-Q4) and ‘23, respectively,” the analyst said. “Specifically, we’re now looking for ‘22 and ‘23 EBITDA of $986-million and $860-million, respectively.”
“We see more near-term negative catalysts than positive ones: (1) gas costs continue to rise; (2) oil prices have likely peaked and should have more downside than upside; (3) coal prices in China are falling; (4) GDP expectations continue to move lower, potentially toward a recession; and (5) most capital allocation catalysts are known and priced in.”
Mr. Isaacson target for Methanex shares dropped to US$50 from US$60. The average on the Street is US$56.92.
“In the current trading range of $48 to $51 per share, we think the stock is now fairly valued,” he noted.
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Citing its current valuation, Wells Fargo analyst Neil Kalton downgraded Fortis Inc. (FTS-T) to “underweight” from “equal weight” on Wednesday.
“On a price-to-earnings multiple basis, FTS shares trade at 5-10-per-cent premiums relative to U.S. Regulated Electric peers on our 22-24 estimated EPS and at 7-9-per-cent premiums relative to Canadian Utility peers,” he said. “As it currently stands, FTS’s P/E multiple is comparable to that of the perceived high quality names (AEE, CMS, ES, LNT, WEC & XEL).
“Put simply, we think FTS’s valuation is arguably unwarranted given the U.S. peers have higher EPS growth prospects (6-8 per cent vs. 5-6 per cent for FTS), better balance sheets (FTS’s FFO/Debt ratio of 11 per cent compares to 13-18 per cent for the peers) and better financial track records (FTS’s EPS was flattish during the period ‘17-21).”
Also expressing concern of a recent challenge to subsidiary ITC Holding’ capital structure from the Iowa Coalition for Affordable Transmission, Mr. Kalton maintained a $62 target for Fortis shares. The average is $61.82.
“For swap ideas we suggest AEE [Ameren Corp.] – similar valuation, higher EPS growth (7-8 per cent) and also leveraged to the Midwest transmission thematic – or Hydro-One (H-T) if investors want to stick with a Canadian utility,” he said.
“Risks to our Underweight rating include positive transmission developments that have a greater impact on long-term EPS power than anticipated, unexpected positive regulatory developments and FX sensitivity.”
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Calling it a “global leader in labels with scale and operating leverage,” National Bank Financial analyst Ahmed Abdullah initiated coverage of CCL Industries Inc. (CCL.B-T) with an “outperform” recommendation on Wednesday, touting its “diversified customer base fueling above GDP organic growth that’s boosted by M&A.”
“CCL Industries consists of four segments, 1) CCL (61 per cent of 2021 revenue), 2) Avery (12 per cent), 3) Checkpoint (14 per cent), and 4) Innovia (13 per cent),” he said in a 52-page launch report. “The Company generates an Adjusted EBITDA margin (approximately 21 per cent in 2021) above peers and has an Adjusted EBITDA to FCF conversion rate at 45 percent. CCL Industries is a global leader, with expanding scale, that is well-positioned to continue capitalizing on a successful strategy which drives growth and profitability while enhancing shareholder value.”
“The Company’s long-term organic growth profile can be characterized as above global GDP by a fluctuating margin (average of 0.8 per cent above GDP over the last decade). Its diversified blue chip customer base provides a solid footing for growth, with smaller niches within its segments offering potential upside. Since 2013, and including its latest completed acquisition in Brazil, CCL Industries has spent just over $3.8 billion on roughly 52 transactions. These include its larger acquisitions of Avery ($500-million, 2013), Checkpoint (~$532 million, 2016), and Innovia ($1.1-billion, 2017) in addition to tuck-ins of different sizes. M&A will continue as the right targets arise, with Net Debt to Adjusted EBITDA at 1.2 times paired with ample liquidity.”
In justifying his bullish investing stance, Mr. Abdullah noted the Toronto-based company has raised its dividend in each of the last 30 years, including a 14-per-cent raise to 24 cents per quarter with the release of its fourth-quarter results in late February.
“With low leverage and strong FCF generation, share repurchases could also be pursued, as seen in 2022, and ahead of larger acquisitions ultimately getting done,” he said.
Mr. Abdullah set a target of $79 per share, referring to CCL as an “industry leader that is well-positioned to continue capitalizing on a successful strategy.” The average target on the Street is $76.89.
“Our target is based on the average of the 2022 estimated metric in our DCF [discounted cash flow] and the 2023 value derived from our Net Asset Value (NAV) analysis for implied target EV/EBITDA multiples of 11.9 times 2022E and 10.8 times 2023E,” he said. “We believe CCL Industries warrants a multiple based on 2023E of around 11.0 times given its above GDP revenue growth profile, strong Adjusted EBITDA margin versus peers, and a well-executed strategy that’s driving organic and M&A growth. Packaging peers sit just below 10.0 times, while Packaging & Labelling Material Suppliers are at about 12.0 times. Since its last large acquisition in 2017, the stock has traded at an average forward multiple of just under 11.0 times. We see potential capital appreciation of 31.4 per cent complemented by a dividend yield of 1.6 per cent.”
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Seeing it as “a need to have in your portfolio,” iA Capital Markets analyst Gaurav Mathur resumed coverage of Slate Grocery REIT (SGR.UN-T) with a “buy” recommendation on Thursday.
“With inflation and rising rents being top of mind for investors, the REIT is insulated from inflationary pressures as 97 per cent of leases are net leases, thereby passing on cost inflation to the tenant,” he said. “With 5 per cent of floating rate debt, the REIT is well-positioned to manage interest rate risk.”
Following “strong” first-quarter financial results, including funds from operations per diluted unit growth of 13 per cent year-over-year, Mr. Mathur sees the Toronto-based REIT poised to benefit from current economic conditions, which he summarized as “needs squeezing out the wants.”
“In our view, rising costs are forcing shoppers to make tough decisions,” he said. “Based on management feedback from retailers, customers are trading down to cheaper, private-label groceries. The retailers find themselves with rising inventories of clothes, electronics, and other discretionary items which customers are not buying as they channel spending into basic needs and services. The REIT will benefit from this tailwind with 95 per cent of its GLA consisting of properties anchored by grocery stores.”
“The REIT’s properties are key to the distribution of in-store, click-and-collect and home delivery grocery sales. Based on our channel checks, shoppers are engaging in omnichannel across a variety of shopping missions—weekly grocery shopping and midweek top-ups, for example—and they expect similar assortments, pricing, and promotions, among other factors, across channels. In effect, the REIT has built a food logistics network.”
Given Slate’s entire operations and earnings stem from the United States, Mr. Mathur said it isn’t wise for investors to evaluate it versus Canadian-listed peers, which he said “many of whom are looking at retail-plus strategies to drive value.”
“Instead, finding comparable companies in the U.S. retail REIT sector—given factors such as portfolio location, tenant quality, investor appetite, etc.—provides a better understanding to equity investors who are truly comparing similar businesses,” he noted.
“With companies such as Walmart Inc. (WMT-N, Not Rated) and Target Corp. (TGT-N, Not Rated) reporting higher-than-normal expenses, the market has erased $550-billion in market value from consumer discretionary stocks, adding downward pressure on a market already strained by fear of inflation and rising interest rates. In our view, part of the problem lies in the fact that stores are awash in products that consumers do not want. This phenomenon, combined with the fact that the cost of finding new goods to sell and getting them to stores is surging – fuel, labour and other expenses – is a headwind for most retailers. As costs for consumers increase, we believe that spending will be targeted on a narrow range of products, first and foremost being household groceries. From a real estate perspective, not all consumer retail sectors are expected to suffer the same fate. Retailers that sell essential and necessity-based goods–like grocery stores–are expected to not only survive but also thrive in, what we expect to be, a continued challenging retail environment.”
Mr. Mathur set a target price of US$14 for Slate units. The current average is US$12.04.
“The market is providing an attractive entry point to a name with: (1) strong earnings and NAV growth profile, (2) defensive strengths of a grocery-anchored portfolio, (3) value-add initiatives and a strong development pipeline, and (4) an attractive dividend profile (7.3-per-cent yield),” he said.
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While acknowledging Vermilion Energy Inc.’s (VET-T) $477-million acquisition of Leucrotta Exploration Inc. received a “lukewarm market response,” Desjardins Securities analyst Chris MacCuloch expects the deal to “create long-term shareholder value by providing significant exposure to the Montney.”
Resuming coverage of Vermilion following Tuesday’s close of the deal, Mr. MacCulloch said it provides “scalable future drilling inventory from a world-class asset,” calling it an important addition to its business model given its “overriding focus on sustainability.”
“With the Leucrotta acquisition now in the rear-view mirror and the Corrib transaction expected to close in 2H22, VET has capped off a busy stretch of M&A activity which was extremely well-timed as commodity prices continued rising faster than most investors expected,” he said. “Ideally, our preference would be for VET to primarily focus on overseas acquisition opportunities; however, we also recognize that European energy security challenges have likely stretched overseas acquisition multiples. Meanwhile, the Leucrotta transaction could eventually open the door to additional commodity price diversification for VET through future West Coast LNG supply agreements. Otherwise, we expect the company to continue focusing on debt repayment as it remains on track to meet its $1.2-billion net debt target in 4Q22, which should be a catalyst for enhanced shareholder returns through some combination of an increased base dividend, special dividends and share buybacks.”
After raising his production and cash flow projections through 2023, the analyst hiked his target for Vermilion shares to $40 from $32.50. The average is $34.82.
“We expect the company to continue focusing on debt repayment as it remains on track to meet its $1.2-billion net debt target in 4Q22, which should be a catalyst for enhanced shareholder returns through some combination of an increased base dividend, special dividends and share buybacks,” Mr. MacCulloch said.
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After it hosted an IFRS 17 education session on Tuesday, several equity analysts lowered their target prices for Sun Life Financial Inc. (SLF-T).
The firm projects a 15-20-per-cent reduction in shareholders’ equity and a mid-single digit decline in underlying net income move the move.
“While accounting changes do not equate to economic changes, deployable capital certainly looks different. SLF’s retained earnings will decline by $4-5-billion on transition and a commensurate increase will appear in SLF’s liabilities, with new liabilities included in the LICAT ratio,” said National Bank Financial’s Gabriel Dechaine. “However, all is not the same. We have to consider such factors as leverage ratios (which could move close to 30 per cent) or certain limits to capital mix in the LICAT formula (e.g., retained earnings as a percentage of net tier 1, PfADs capped at 70-per-cent inclusion in Core Tier 1). In our view, there is an economic change.”
Mr. Dechaine cut his target for Sun Life shares to $68 from $72, maintaining a “sector perform” rating. The average is $71.33.
Others making adjustments include:
* BMO’s Tom MacKinnon to $72 from $75 with an “outperform” rating.
“While IFRS17 impact to underlying EPS, at 5 per cent, was perhaps larger than expected, with 2023E underlying EPS estimates/target price declining accordingly, a positive outlook for future growth on larger contractual service margin (CSM) (including helpful disclosure around its components) provides good visibility into future underlying EPS growth,” he said. “SLF maintains 8-10-per-cent medium term underlying EPS growth outlook and sees modest positive to already strong LICAT. With underlying EPS being primary valuation metric, we see little impact from outsized BVPS impact (15-20 per cent), with this largely offset by underlying ROE target upped to 18 per cent-plus.”
* TD Securities’ Mario Mendonca to $68 from $72 with a “hold” rating.
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In other analyst actions:
* Reducing his financial expectations following weaker-than-expected growth from its Data Solutions business in the first quarter, Canaccord Genuity analyst Aravinda Galappatthige downgraded EQ Inc. (EQ-X) to “hold” from “speculative buy” with a Street-low $1.25 target, down from $1.50 and below the $4.28 average.
“With supply chain issues likely extending into F2023, we have moderated revenue growth expectations somewhat, lowering our F2022 revenue estimate from $17.5-million to $16.6-million,” he said. “This still translates to 38-per-cent top-line growth, led by the ramp-up in Paymi and a robust contribution from Data Solutions, including the LOCUS SaaS offering. Our 2023 estimates suggest 33-per-cent further top-line growth to $22.2-million, reflecting the material investments currently being made as well as good early traction for EQ’s SaaS products. We are, however, modeling in somewhat higher EBITDA level losses, with 2022 EBITDA revised from a loss of $2.3-million to a $4-million loss. In any case, much depends on the contribution from Paymi, which upon successful execution could contribute up to $2.5-million in revenue to F2022.”
“We believe the key for the stock remains steeper growth in data solutions, given the low base and more meaningful traction with Paymi.”
* Citing its “reduced machines sales outlook in 2022 and sustained near-term margin pressure at NutraDried on surging cheese prices,” Raymond James analyst Steve Hansen lowered EnWave Corp. (ENW-X) to “market perform” from “outperform.” His target slid to $1.10 from $1.65, below the $1.15 average.
* Barclays’ Benjamin Theurer initiated coverage of Nutrien Ltd. (NTR-N, NTR-T) with an “overweight” rating and US$116 target. The average is US$123.66.
“We see lasting supply/demand tightness beyond 2023, which bodes well for the broader group despite recent outperformance against major indexes,” he said.
* Stifel’s Cody Kwong raised his targets for Bonterra Energy Corp. (BNE-T, “hold”) to $14 from $13.75 and Obsidian Energy Ltd. (OBE-T, “buy”) to $17.75 from $17.25. The averages on the Street are $12.61 and $13.81, respectively.
* Desjardins Securities’ Gary Ho cut his PowerBand Solutions Inc. (PBX-X) target to 50 cents from 85 cents due to dilution from a private placement and lower origination count.
“Under new management, PBX is turning to a new chapter with cost-cutting measures, a more focused scope of growth and a revised 2022 outlook (provided by 3Q22),” said Mr. Ho, keeping a “buy” rating.
“Our positive thesis is predicated on: (1) increasing dealer adoption and a better inventory situation, which should result in an acceleration in originations; (2) limited competition in an untapped used leasing market presents a massive opportunity; and (3) asset-light model with zero inventory or credit risk exposure.”
* Following “mixed” first-quarter results, Stifel’s Martin Landry reduced his target for shares of Wildpack Beverage Inc. (CANS-X) to 20 cents from 30 cents, keeping a “hold” rating, citing “limited visibility on future profitability level and the effects of cost-cutting measures on top-line growth.” The average is $1.05.
David Leeder