Inside the Market’s roundup of some of today’s key analyst actions
Near-term headwinds are driving a “much lower” financial outlook for Laurentian Bank of Canada (LB-T), according to Canaccord Genuity analyst Scott Chan.
He downgraded his rating for its stock to “hold” from “speculative buy” in the wake of Tuesday’s release of weaker-than-expected quarterly results, which drove its share price down 6.2 per cent.
“LB reported a significant EPS miss with low earnings quality relating to total revenue (NII and Other income), elevated expense growth, and a lower tax rate,” said Mr. Chan. “On the call, management provided weak near-term guidance, and we have adjusted our estimates down accordingly.”
The analyst dropped his fiscal 2019 EPS projection by almost 12 per cent to $5.33 from $6.02, citing slower-than-anticipated loan growth, “tempered” net interest margin (NIM) expansion and a higher NIX ratio.
His target for Laurentian shares dropped to $44 from $53. The average target on the Street is now $49.20, according to Bloomberg data.
“We have also lowered our target price-to-earnings multiple to 8.4 times (from 9.0 times), implying a 30-per-cent discount to peers (versus 25 per cent prior). Our higher discount rate reflects execution risk, negative EPS growth forecasts (a drop of 5-7 per cent year-over-year for F2018/19), overhang regarding union negotiations, and potential indirect ramifications on recently completed mortgage review.”
Elsewhere, BMO Nesbitt Burns’ Sohrab Movahedi downgraded Laurentian Bank to “market perform” from “outperform” with a target of $50, down from $57.
Desjardins Securities’ Doug Young kept a “hold” rating, lowering his target to $47 from $50.
Mr. Young said: “The seven-year transformation plan has been a lot bumpier than we initially expected: NIMs could be weighed down by higher liquidity balances, NIX are expected to remain elevated through FY18 and FY19 and we still view management’s goal of closing the ROE [return on equity] gap vs large-cap peers by 2022 as aggressive. That said, we could argue a lot of bad news is already priced in (8.0 times our estimated FY19 EPS and 0.8 times book value).”
Loblaw Companies Ltd.’s (L-T) plan to sell its 62-per-cent stake in Choice Properties Real Estate Investment Trust to parent company George Weston Ltd. (WN-T) simplifies its structure in a “simple, tax-free manner,” said CIBC World Markets analyst Mark Petrie.
“Loblaw is now a simplified entity, with no material real estate ownership,” said Mr. Petrie. “As a result, we would not be surprised to see investors move to a simpler valuation approach over time, reducing or removing previous discounts. Free cash flow suffers from the lack of Choice dividends, but capital allocation is simpler, and the implied dividend increase (24 per cent based on Loblaw's dividend holding flat even after the removal of the CHP distributions and the assumed payout on the WN ownership) is clearly a positive.
“One element of valuation uncertainty is that Loblaw shareholders are being handed shares that they didn't directly want, with no premium paid on the CHP units (or discount provided on the WN shares). Though WN valuation is debatable, 27 million shares will need to find a home, which could lead to some pressure and potential agitation for a modest premium on CHP by Loblaw holders. Of course this all depends on how Loblaw shares react to the transaction, how material the market discount was and how the tax-free solution is valued, but we flag this as a potential debate to emerge.”
Maintaining an “outperformer” rating for Loblaw shares, Mr. Petrie bumped his target to $82 from $81. The average is $77.
From George Weston’s perspective, Mr. Petrie thinks the move will “dramatically change investor perceptions in the near-term,” but he called it “a step in the right direction.”
He raised his target for its stock to $119 from $114, keeping a “neutral” rating. The average is $120.50.
Mr. Petrie said: “In our view, this transaction achieves WN's stated goal of further diversifying the portfolio. Loblaw will comprise roughly 60 per cent of the total value (from 90 per cent), while Choice moves up to 35 per cent. Cash flow also benefits from the CHP payout, improving stability and optionality. Furthermore, liquidity in WN is improved as the float goes from 46.8 million shares to 73.5 million, and cash flows also improve given the increased distributions from Choice. Though we do believe further diversification is needed to more substantially shift investor perceptions - and stabilization in bakery would help as well - we see this as an attractive step for WN.”
"While the outlook for demand and pricing growth are favourable and we expect CN Rail to improve operating margins in F2019, the strong share price performance in recent months leaves a modest margin of safety in valuation," he said.
Mr. Chamoun also downgraded CSX Corp. (CSX-Q) to “market perform” from “outperform” with a US$77 target, rising from US$72. The average is US$74.
"CSX’s transformation to a precision railroading model continues to be a source of significant improvement in earnings and FCF, with the potential to achieve a 58-per-cent OR [operating ratio] over the medium term; however, visibility into the cyclical tailwinds that have supported earnings growth is low and the margin of safety in valuation has significantly moderated," the analyst said.
“Investor conversation over the past month has been somewhat ‘hijacked’ by concerns highlighted in a short report in August,” said Mr. Arthur. “To be clear, several of the topics in the report are legitimate concerns, and ones we (and Maxar) have discussed continuously over the past 18 months (re DigitalGlobe), 5 years (re SSL) or 15 years (re MDA).
“Leverage, cashflow, contract renewals, accounting treatment are of course valid topics, but not new ones – they have been addressed repeatedly. The short report introduced little that was new, in our view, but took an extreme view that led to conclusions that we sharply disagree with.”
On Aug. 24, Maxar, previously known as MacDonald Dettwiler & Associates Ltd., responded to a report from short-seller Spruce Point Capital Management, which claimed a “brazen accounting scheme to mask failures from its levered acquisitions of Space Systems Loral (SSL) in 2012 and DigitalGlobe (DGI) in 2017.”
Maxar called Sprice Point “a hedge fund with a track record of launching negative campaigns against North American public companies after taking a short position in their stock.”
"Our view on MAXR remains positive, after extensively weighing over many years the opportunities and risks with respect to Maxar and its shares,” said Mr. Arthur. “This report discusses growth drivers, product opportunities, contract renewals, competitive positioning, balance sheet, cashflow and leverage levels,accounting, management, corporate structure and key risks.
“Out of it, our core thesis is unchanged: Unique technology and service offerings with very high barriers to entry; Largely recurring revenue streams offer visibility on earnings and cashflow; Cashflow has been weak in recent years, and capex requirements are high over the next 2 years. However, we are comfortable with leverage at current levels, and expect significant improvement in the 2020-23 timeframe. Maxar can also take mitigating actions in the meantime; and Extensive corporate restructuring positions the company to expand its reach in the large U.S. market.”
Maintaining an “outperform” rating, Mr. Arthur lowered his target to US$65 from US$73 due to lower forecasts for its geostationary orbit (GEO) segment, though he said it has “compelling upside.” The average target on the Street is US$60.88, according to Bloomberg data.
Citing a series of upcoming catalysts and a current valuation disconnect, Desjardins Securities analyst Benoit Poirier sees an “excellent buying opportunity” with SNC-Lavalin Group Inc. (SNC-T),
“Overall, we are pleased with management’s recent actions (divestiture of a portion of Highway 407 and turnaround of core E&C) and see numerous catalysts that should unlock value for shareholders,” said Mr. Poirier following a recent marketing meeting with company president and chief executive officer Neil Bruce and vice-president of investor relations Denis Jasmin.
“We believe the shares are poised for a re-rating following the implementation of the DPA and settlement of legal issues.”
Mr. Poirier emphasized management’s belief that it is an “opportune” time to sell its stake in Ontario’s Highway 407 and that analysts are undervaluing its worth.
“We understand that the sales process is advanced and that management expects to close the transaction by year-end,” he said. “Given the strong results announced by Highway 407 and SNC’s comments, we are raising our valuation of Highway 407 to $28.87 from $26.39, and continue to believe that our number is conservative. Management has already announced its intention to sell a stake of 6.76 per cent and this remains the focus. Assuming the sale goes through, it could result in net cash proceeds of $2.0-billion (after tax), which it intends to deploy as follows: (1) pay the existing CDPQ loan of $1.0-billion, which has an interest rate of 6.5 per cent, (2) pay down a further $100–200-million of debt, (3) maintain a cushion of $350-million, which could potentially be deployed toward the remaining legal fine (average analyst consensus of $350-million), and (4) deploy the remaining amount (we calculate $500-million) toward share buybacks. However, if an attractive offer were to present itself for the entire stake of 16.76 per cent , given its fiduciary responsibilities management would be obligated to consider that option. Based on previous shareholder agreements, we understand that keeping 10% ownership is strategic for SNC as we believe it provides the company with a competitive advantage, allowing it to maintain joint control of the asset with the other two shareholders.”
Mr. Poirier also pointed to the federal implementation of deferred prosecution agreements (DPA), which allow companies to settle legal cases without admitting wrongdoing, as a “key lever” moving forward.
“Management reiterated that the 90-day consultation period will end on Sept. 20,” the analyst said. “Subsequently, the DPA will become law. Management estimates that it has lost $5-billion of revenue opportunities since 2012 as a result of these legal issues and believes it remains at a competitive disadvantage vs its peers, as the DPA regime has already been implemented in countries such as the UK, the US, France and Australia. Once the DPA is implemented in Canada, we would expect both parties (the Canadian government and SNC) to enter into discussions and attempt to settle the legal fine out of court, which could potentially be completed by year-end. We believe it is in both parties’ interest to settle the legal fine as soon as possible. This remains the only hurdle for investors, in management’s view, and we would expect institutional investors to revisit the story once it is resolved.”
Despite lowering his earnings projections slightly for fiscal 2018 and 2019, Mr. Poirier expects SNC’s free cash flow generation to “turn the corner” in the near future.
He raised his target price for its shares to $75 from $73 to reflect a higher value for Highway 407. The average target is $70.73.
Mr. Poirier maintained a “buy” rating, calling it at “an inflection point.”
MTY Food Group Inc.’s (MTY-T) US$35-million deal for sweetFrog Premium Frozen Yogurt shows the “success” of its opportunistic acquisition strategy, said Acumen Capital Research analyst Brian Pow.
On Monday before market open, Montreal-based MTY announced the deal for Arizona-based sweetFrog, which has 254 franchised locations and 78 corporate-owned locations.
“The acquisition further increases MTY’s weighting to the frozen treat category adding to a brand portfolio that includes Cold Stone Creamery and Pinkberry,” said Mr. Pow in a research note released Tuesday afternoon. “Based on our conversation with Management, we do not expect any cannibalization between brands given the size of the frozen treat category.”
He maintained a “buy” rating for MTY shares and raised his target to $63.50 from $58.50. The average is $59.67.
“Management highlighted that sweetFrog is a newer, faster growing brand with good growth potential, strong branding, and a premium product,” he said.
Canaccord Genuity’s Brendon Abrams initiated coverage of BSR Real Estate Investment Trust (HOM.U-T) with a “buy” rating and US$11 target, which is 8 cents less than the consensus.
Mr. Abrams said: “We believe BSR provides investors with exposure to an attractive asset class in secondary markets with positive supply and demand fundamentals. In our view, the REIT’s fully integrated management platform, experienced management team, and conservative financial profile form an attractive foundation from which it can grow unitholder value. This positions BSR to capitalize on the market opportunity by executing its hybrid growth strategy of value-add organic initiatives and external acquisitions.”
In other analyst actions:
TD Securities analyst Aaron MacNeil downgraded ShawCor Ltd. (SCL-T) to “hold” from “buy” with a target of $31, falling from $33. The average is $33.50.
Mr. MacNeil also downgraded both Enerflex Ltd. (EFX-T) and Precision Drilling Corp. (PD-T) to "buy" from "action list buy." His target for Enerflex rose to $22 from $21 (versus an average of $21.17), while his Precision Drilling target jumped to $7.50 from $7 (versus $6.02).
Mackie Research Capital Corp. initiated coverage of Valens Groworks Corp. (VGW-CN) with a “buy” rating and $4.50 target.
Haywood Securities Inc. initiated coverage of Steppe Gold Ltd. (STGO-T) with a “buy” rating and $1.75 target.
Craig-Hallum Capital Group LLC initiated coverage of Mogo Finance Technology Inc. (MOGO-T) with a “buy” rating.