Inside the Market’s roundup of some of today’s key analyst actions
Alithya Group Inc. (ALYA-T, ALYA-Q) is “executing on a tested and true business model,” said Desjardins Securities analyst Maher Yaghi, who initiated coverage of the Montreal-based information technology and management consulting services provider with a “buy” rating.
The company began trading on the Toronto Stock Exchange and Nasdaq on Nov. 4 after completing a reverse takeover of Massachusetts-based Edgewater Technology Inc.
At the same time, Alithya completed a $53-million private placement in a deal led by Desjardins, which Mr. Yaghi thinks provides management with “additional dry powder to continue its ‘build and buy’ strategy once Edgewater is sufficiently integrated into ALYA’s operations.”
“ALYA’s strong management team and success in Canada have helped it to grow organically at a double-digit rate; however, this has also created a customer-concentration component that should benefit from the diversification of the business in the U.S. through the Edgewater acquisition,” said Mr. Yaghi. “We expect cost synergies from the acquisition to help boost the bottom line over the next year, providing ALYA with a runway to look for additional M&A targets.
“The IT services sector in North America continues to be very fragmented. With a strong balance sheet, helped by its recent equity financing, we expect ALYA to actively look for targets in both Canada and the U.S. to supplement its product offering and to gain scale — which should improve margins and cash generation.”
Mr. Yaghi projects organic growth will grow to 16 per cent by 2021 after Edgewater’s revenue stream is “stabilized,” and he sees the potential for “rapid” margin improvement as it integrates and gains scale.
“Management targets organic revenue growth in the low double digits in the medium term, which significantly outpaces the vast majority of public peers which disclose this information,” the analyst said. “In addition, the company has the opportunity to grow through acquisitions. The company’s margins also have ample room to grow, in our view, and the company has minimal debt, thus reducing the risk associated with stock ownership. These factors should support a higher valuation for ALYA.
“However, we acknowledge that the story includes more risk than the average of peers due to the company’s lack of control with regard to the use of third-party software, as well as its small size and customer concentration. Moreover, we believe that the integration of a large target such as Edgewater creates operational risk.”
Mr. Yaghi set a target price for Alithya shares of $7.
Following Tuesday’s release of “challenged” third-quarter financial results for George Weston Ltd. (WN-T), CIBC World Markets analyst Mark Petrie lowered his estimates for Weston Foods, believing challenges have “accelerated.”
“Weston’s challenged Q3 results reflect slower-than-expected progress on stabilizing top-line deterioration,” he said. “Modest progress on internal cost control and efficiency programs was also not nearly enough to offset material on-going cost pressures, with no relief from price increases. The steps to simplify and extend the timeline of the transformation plan from here are sound, but only further push out a recovery in profitability. Our estimate for 2019 Weston Foods EBITDA falls materially again, from $270-million to $216-million.
“Given the holding company structure, some form of holdco discount is certainly justified. We increased this from 5% per cent to 10 per cent when the CHP transaction was announced, and remain comfortable at this level, and believe this is roughly in line with what the market is pricing in.”
Despite the “weakness” in Weston Food’s bakery business, Mr. Petrie said the company’s overall platform sits “in good shape,” emphasizing “healthy Loblaw results and outlook combined with stability at Choice.”
He added: “Weston Foods represents only about 5 per cent of the total value of WN, so investors can patiently wait out a turnaround while the rest of the business moves forward. The next leg of M&A is likely at least a year away.“
Maintaining a “neutral” rating for the stock, Mr. Petrie dropped his target to $107 from $114. The average is $113.59.
“Valuation for WN is attractive, and staples stocks should generally be well positioned in a slowing economy and market,” he said. “However, it is difficult to have confidence in a turnaround in bakery and our REIT team rates Choice as Neutral. Net - we see better upside in Loblaw shares and recommend investors look directly to Loblaw for exposure.”
“While the company outlined a thorough Cardium development plan and a more cautious tone around spending, and consequently production growth, in the current environment we expect that historically wide price differentials for Canadian oil will continue to be a significant headwind for the stock,” he said.
“At strip, which currently reflects US$58/bbl WTI and US$19/bbl MSW differentials, funds flow falls to just $60-million, and this would put significant pressure on spending and the balance sheet. At this point, we ultimately expect that the next wedge of Cardium growth could in part be deferred to the back half of the year, pending visibility on potential improvements in Canadian oil price.”
Mr. Zack’s cash flow per share estimate for fiscal 2019 dropped to 33 cents from 41 cents, leading him to drop his target price for Obsidian shares to $1.15 from $1.75. The average is $1.39.
“We are maintaining our Hold rating as we expect negative market sentiment for Canadian oil prices will continue to be a significant headwind for the stock,” he said.
Western Forest Products Inc.’s (WEF-T) US$30.5-million purchase of Columbia Vista Corp. falls in line with its strategy and complements other recent acquisitions, said Raymond James analyst Daryl Swetlishoff.
The Vancouver-based company announced the deal for Columbia Vista, a Washington lumber manufacturer that focuses production on Douglas Fir specialty products for the Japanese and U.S. markets, on Tuesday after market close.
“We regard this acquisition as another diversification step for the company to increase exposure to the US PNW, which is further complimented by the acquisition of the Arlington facility in early 2018,” said Mr. Swetlishoff. “The company supports a healthy balance sheet with no debt and a net cash position of $42.8-million (as of 3Q18) prior to the acquisition, which will be used to fund the purchase price in addition to available credit facilities. With the company's well-developed Japanese channels in place, we are confident that the acquisition complements their existing Douglas Fir specialty product offerings. We highlight that Western lumber shipments to Japan have declined recently due to limited availability of Douglas Fir logs, we expect this acquisition to help spur those declines with added shipments from the Columbia facility to Japanese markets.”
In response to the deal, Mr. Swetlishoff raised his revenue and EBITDA projections for fiscal 2019 to $1.374-billion and $194-million, respectively, from $1.312-billion and $190-million.
He kept a “strong buy” rating and $3 target for WFP shares. The average is $2.81.
“Our Strong Buy rating for Western Forest is a function of the company’s steady free cash flow generation supporting a healthy dividend and strong balance sheet, even after funding the announced acquisition with cash on hand,” he said.
Though he called its third-quarter financial results “fine” and sees it “well-positioned” for the crucial holiday season, Citi analyst Paul Lejeuz cautioned that Ross Stores Inc. (ROST-Q) faces the similar wage and freight headwinds as other U.S. off-price department store chains.
The California-based company’s stock dropped 9.4 per cent on Tuesday due in part to the release of its quarterly results, which included a 3-per-cent jump in comparable same-store sales and a 7-per-cent increase in revenue, as well as general pessimism about the state of the U.S. retail sector.
Though he thinks Ross will benefit from a continued tailwind as larger department store closures continue, he lowered his fiscal 2018 and 2019 earnings per share estimates to US$4.21 and US$4.49, respectively, from US$4.23 and US$4.71.
Keeping a “neutral” rating, Mr. Lejeuz dropped his target to US$88 from US$98, which falls below the average of US$96.71.
“Even with the sell-off yesterday, the stock trades at a premium to TJX (13.5 times our fiscal 2019 estimated EBITDA vs TJX at 11.5 times), and we believe TJX has better top-line momentum,” he said.
In a separate note, Mr. Lejeuz called rival TJX Companies Inc. (TJX-N) a “top-line winner” for the quarter but emphasized management’s warnings on fiscal 2019 margins.
Massachusetts-based TJX fell 4.4 per cent on Wednesday despite reporting better-than-expected results, including comps of 7 per cent (versus a 4.1-per-cent expectation by the Street).
“It was a standout quarter on the top-line for TJX and a decent earnings beat versus consensus,” said the analyst. “But with freight and wage pressures continuing, management rang the warning bell about earnings headwinds in F19. Although near-term earnings will be hurt by higher freight costs and wage investments, we should not lose sight of the broader picture – that these pressures come with standout topline performance and TJX (and the off-price sector) are winners in the retail landscape longer-term. We see no slowdown in the traffic tailwind to the off-price channel, especially as Bon-Ton Stores Inc., Sears Holdings Corp. and J C Penney Company Inc are the latest department stores to donate share.”
With a “buy” rating, he lowered his target for TJX shares to US$58 from US$62.50. The average is US$54.56.
Mr. Lejeuz also lowered his target for shares of Kohl’s Corp. (KSS-N), which dropped 8.9 per cent on Wednesday, to US$71 from US$79, keeping a “neutral” rating. The average on the Street is US$76.67.
“While nothing was actually bad about the quarter, expectations for comps were slightly higher than the 2.5-per-cent KSS achieved and the stock sold off with the rest of the group,” he said. “And though many in the group face more challenging comparisons in 4Q, KSS is a standout, having achieved comps of 6.3 per cent in 4Q17. The company has several initiatives to help drive traffic in 4Q including an expanded partnership with AMZN and a bigger active assortment but we are concerned it will not be able to drive a positive comp. We believe the potential for a negative comp will limit stock upside in the near-term, while longer-term we believe the risk-reward is balanced as the opportunities for further partnerships are offset by the structural challenges faced by the dept. store group.”
Best Buy Co. Inc. (BBY-N) “appears to have settled on the right formula for long-term growth," according to Wedbush analyst Michael Pachter, who sees the electronics retailer delivering on its promises amid competition from Amazon.com Inc.
Shares of the Minnesota-based retailer jumped 2.2 per cent on Wednesday after its third-quarter results exceeded expectations and raised its full-year earnings forecast. Best Buy’s same-store sales in the U.S. climbed 4.3 per cent, topping analysts’ expectations of a 3.7-per-cent increase.
Believing Best Buy has established itself in the consumer electronics space as “the last man standing” in the face of the Amazon threat, Mr. Pachter raised his rating for its shares to “neutral” from “underperform” with a US$65 target. The average target is currently US$73.90.
Meanwhile, RBC Dominion Securities' Scot Ciccarelli lowered his target to US$69 from US$72, keeping a “sector perform” rating.
Mr. Ciccarelli said: “WQ results were in line with to just above expectations and the company essentially reiterated their 4Q outlook. Further, management estimates only 7 per cent of their COGS [cost of goods sold] are currently exposed to tariffs (lower than we had previously estimated). Nevertheless, comps trends seem poised to slow and when coupled with recent competitive announcements (AMZN/AAPL relationship) and potential tariffs, the near-term/medium-term set-up seems challenging.”
Touting its “proven record of success,” Beacon Securities analyst Kirk Wilson initiated coverage of Vertex Resources Group Ltd. (VTX-X) with a “buy” rating.
“With the recent, well-publicized downfall of oil prices in western Canada, most publicly listed energy related companies have felt selling pressure from investors,” he said. "Vertex Resource Group has been no exception as its share price has retracted 45 per cent since the start of Q4/18. However, we believe that investors will eventually differentiate between companies that will be significantly impacted by a potential decrease in WCSB drilling and those that are more insulated from a lower level of O&G activity. We believe Vertex is in the latter category.
“Without question, Vertex generates a material amount of its revenue/EBITDA from the O&G sector (60 per cent in H1/18), but it is the nature of the revenue base that we think is the key. The fact that VTX focuses on environmental services, mainly in western Canada, is a distinct advantage as this aspect of the O&G industry should fare somewhat better due to increasing environmental regulation and stakeholder participation. In addition, Vertex’s push for industry diversification (mining, utilities, forestry, telecommunications, agriculture, government) exposes the company to those expanding markets.”
Mr. Wilson set a target price of $1.05 for shares of the Sherwood Park, Alta.-based environmental and industrial services company.
“The company appears to be at an inflection point in terms of generating positive returns for investors,” he said. “We forecast net income and ROIC [return on invested capital] will turn positive this year and free cash flow will be generated in 2019. The balance sheet was materially strengthened a few months ago with debt termed out to 2021, which should save more than $2.5-million in finance costs next year. Couple all that with the above average rate of EBITDA growth, tempered somewhat by the liquidity issue due to a high insider ownership position (62 per cent FD), and we believe Vertex has the potential to outperform its peer group over the next year or two.”
In other analyst actions:
TD Securities analyst Bentley Cross upgraded Trilogy International Partners Inc. (TRL-T) to “buy” from “hold” with a $3 target, which is 30 cents lower than the average on the Street.
Clarksons Platou Securities initiated coverage of Copper Mountain Mining Corp. (CMMC-T) with a “buy” rating and $1.50 target. The average is $1.81.
Paradigm Capital analyst Don Blyth initiated coverage of Revival Gold Inc. (RVG-X) with a “speculative buy” rating and $1.85 target, which is 5 cents higher than the average.