Inside the Market’s roundup of some of today’s key analyst actions
“It’s deja-vu all over again” for Mullen Group Ltd. (MTL-T), according to Andrew Bradford, who said “it’s time to back up the truck” with its share price falling below $10.
"It's been 10-years almost to the day since Mullen last traded below $10," he said. "It was in the depths of the 2009 financial crisis and Oilfield Services represented 70 per cent of total EBITDA, which proceeded to drop 30 per cent year-over-year. While multiples usually expand during sharp downswings, MTL's EBITDA multiple remained at or below its historical norms, averaging 8.0 times through 2009. MTL's stock marched upward over the next five years, almost unabated until it reached $31.34 in 2014. The next five years saw the unwinding of the previous five year's gains, bringing us backdown to where we are today: $9.80 and 7.9 times EBITDA."
Saying he finds himself in "unfamiliar territory," Mr. Bradford raised his rating for Mullen stock to "strong buy" from "outperform" for the first time since assuming coverage of the Okotoks, Alta.-based trucking and logistics services company in 2003.
"We readily acknowledge the stock has been re-rated, hence our reduced target price," he said. "However, we aren't in new territory: today's valuation would be perfectly at home in the context of Mullen'spost 2009 multiples all the way to 2013. Our reduced $12.50 target is also well-within the context of that historic multiple range.
"Our belief is that a quick-and-dirty sum of the parts analysis based on Mullen's segmented reporting and average Canadian-listed comps results in two systematic biases: (1) Most CanadianOFS comps are primarily U.S. OFS companies with Canadian listings, and; (2) As much as 20 per cent of Mullen's Trucking & Logistics EBITDA is directly or indirectly oilfield-related. Adjusting for these two biases results in a 9.2 times to 9.5-times target range and our $12.50 target price."
Mr. Bradford lowered his target for the stock to $12.50 from $14.50. The average on the Street is currently $14.04, according to Thomson Reuters Eikon data.
"We learned long ago not to 'fight the tape' with our targets, which in retrospect explains why our prior target was $14.50 instead of $12.50," he said. "But after watching Mullen's 4-year long run of high multiples while EBITDA was cyclically declining, one might reasonably ask, 'why would the multiple re-rate now?' The irony arises out of the fact that Mullen's EBITDA has been trending upward for the last 4-quarters and has done so with high capital efficiency: net PP&E has increased $88-million while trailing EBITDA has grown $26-million, implying some combination of strong marginal return on invested capital and increasing capital efficiency on existing capital. Either of these two features tend to augur for higher multiples."
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Pointing to “strong” fundamentals and an “attractive” entry point after a recent sell-off, Raymond James analyst Chris Cox raised his rating for Gibson Energy Inc. (GEI-T) to “outperform” from “market perform.”
“Gibson remains a story with a very attractive fundamental set-up,” he said. "The company boasts an enviable combination of a top-tier balance sheet, low dividend payout ratio and fully funded growth outlook. The core terminals business at Hardisty and Edmonton is, in our view, one of the strongest franchises across the broader North American Energy Infrastructure sector; existing assets retain long-term take-or-pay contracts with investment grade customers, the business has strong economic moats that limit competition, and we see line of sight to continued growth at project returns that should remain top-tier within the sector. Over the long-term, those characteristics tend to support premium valuations.
“Admittedly, the company is not a pure-play on the terminals business - although the successful asset sale process and organic growth has gone a long way to focusing the story, with a level of commodity exposure that is not that dissimilar to peers. The U.S. infrastructure strategy remains a ‘show-me’ component to the story, though one that’s more likely to drive upside to the story vs. diluting the value of the core Canadian Terminals business; and while the Marketing segment rightfully supports a much lower multiple than the core infrastructure assets, we expect heavy oil differentials to re-widen as we get into the back half of 2019, providing a tailwind for earnings.”
On Monday, the Calgary-based company reported first-quarter results that largely fell in line with expectations. Adjusted EBITDA from continuing operations of $118-million fell slightly below Mr. Cox’s $129-million forecast due largely to one-time corporate costs.
"Management provided guidance for the Marketing segment to come in at the low-end of the company's $15-$20-million per quarter range for performance from the segment under mid-cycle commodity assumptions," he said. "Notably, this is despite expectations for differentials to remain at cyclically lowlevels and for Moose Jaw to undergo a turnaround during the quarter. We believe Management has understandably been cautious on guidance for Wholesale longer-term, with the range of $15-$20-million per quarter ultimately reflecting more of a bottom-of-cycle earnings outlook."
Mr. Cox maintained a $25 target for Gibson shares, which is 7 cents higher than the average.
“With the stock trading at a 1.3-times discount to peers on 2020 EBITDA, we see a compelling risk-reward opportunity to the name and believe the recent sell-off (underperforming peers by 7.5 per cent since the highs in late-April) has created a compelling entry point to support our upgrade to Outperform,” he said.
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Though Alaris Royalty Corp.'s (AD-T) first-quarter earnings topped his forecast, Desjardins Securities analyst Gary Ho lowered his target for its stock to account for a declining contribution from partner Providence Industries.
On Tuesday before the bell, Alaris, a Calgary-based company providing capital to private businesses, reported normalized earnings before interest, taxes, depreciation and amortization of $24.9-million, exceeding the projections of both Mr. Ho ($24.6-million) and the Street ($24.4-million).
“AD provided a favourable Providence update — distributions restarted at 52 per cent of the previous rate; Providence owners injected capital back into the company, which shows confidence in the business; and the FV writedown was lower than what some had feared,” said Mr. Ho.
“The shares slid more than 10 per cent in mid-April due to the suspension of distributions from Providence (5 per cent of total distribution, or 1 per cent of book value). In our view, this was an overreaction — after the quarter, management of AD and Providence along with the senior lender of Providence came to an agreement to restart distributions at US$2.34-million per year, or 52 per cent of the previous rate, for 24 months. The adjusted terms require Providence management to inject significant capital into the business for working capital purposes and partial debt repayment. Consequently, this resulted in a fair value writedown of US$5.0-million, which in our view is manageable and much less than what some had feared.”
Despite that positive view, Mr. Ho lowered his 2019 and 2020 EBITDA projections to $101-million and $114-million, respectively, from $104-million and $118-million.
Keeping a “buy” rating for Alaris shares, his target fell by a loonie to $22. The average on the Street is $21.17.
“AD has a diverse portfolio, strong capital deployment (since inception) and a solid track record of dividend growth,” he said. “Our Buy thesis is predicated on the following: (1) noise related to the company’s underperforming files will slowly dissipate; (2) our belief that the environment is changing in AD’s favour, with interest rates increasing the appeal of its royalty structure; (3) net capital deployment could pick up, reducing the payout ratio; and (4) AD’s valuation is attractive — the stock is trading at 1.1 times P/BV, with a 9-per-cent dividend yield.”
Elsewhere, Acumen Capital's Brian Pow lowered his target to $23.50 from $25 with a "buy" rating.
Mr. Pow said: “The negative market reaction to Providence’s recent challenges appear to be overcome by the quick resolution that the Company was able to announce with the Q1/19 results.”
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Believing its earnings beat and guidance raise should give investors increased confidence in its path forward, Raymond James analyst Brenna Phelan increased her target for shares of Element Fleet Management Corp. (EFN-T).
On Tuesday after the bell, the Toronto-based company reported adjusted core earnings per share for the first quarter of 21 cents, exceeding the 18-cent projection of both Ms. Phelan and the Street.
"There were significant changes made to presentation in the quarter, making our forecasts less useful," she said. "What is clear in analysis vs. prior periods is that growth is healthy and profitability is improving.
"Guidance for 2020 Adjusted EPS was increased from $0.90-$0.95 to $1.00-$1.05, reflecting increased confidence in the profitability improvement based on success to date, the organic growth outlook from a now-stabilized core fleet business and the P&L impact from utilizing syndication to a greater degree. In general, syndication pulls forward revenue recognition,but results in lower net earnings (interest margin) from the asset since credit risk exposureis sold. We think there was some concern that long-term EPS growth (and guidance) would be sacrificed for capital-light syndication revenues. With several specific mentions to a 'large, rapidly-growing' customer in materials, we think much of the syndicated originations would be upside to a normalized fleet asset growth assumption in the mid-single digits."
Ms. Phelan raised her 2019 and 2020 EPS estimates to 87 cents and $1, respectively, from 80 cents and 93 cents.
Keeping a "strong buy" rating, her target for Element Fleet shares rose to $11.50 from $10.50. The average is $10.28.
“Our thesis on Element has been that with its detailed profitability plan in place, the company andits share price are set up well to be rewarded periodically for each successful step completed,” said Ms. Phelan. “Seven months into this ambitious profitability plan, progress to-date has given management the confidence to increase its 2020 Adjusted Core EPS Guidance up by 10 per cent at the mid-point to $1.00-$1.05. Using syndication to a greater degree, as was first introduced on the 4Q18 call, is a material driver of earnings upside. Revised earnings guidance implies originations ramp meaningfully -syndication gives EFN a capital-light (ROE accretive!) tool to manage the credit-risk concentration from a large, rapidly-growing client and it accelerates deleveraging. We think this quarter’s strong result should give investors a great deal of confidence in EFN meeting its revised guidance. There is 38-per-cent (+2.2-per-cent yield) upside to our new target price, and we stress that we see meaningfully more upside from there from both upward earnings revisions and trading multiple expansion as strong execution continues and financial results consistently demonstrate the solid organic growth and meaningful operating leverage and free cash flow generation inherent in this business.”
Elsewhere, CIBC World Markets' Paul Holden raised his target to $12 from $10 with an "outperformer" rating.
Mr. Holden said: “Our EPS estimates move higher and we also increase our target multiple to account for higher growth expectations and lower financial leverage. ... Continued execution against plan should result in a higher share price over time.”
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“Moving to sidelines as management works to refocus the business,” Canaccord Genuity analyst Bobby Burleson lowered Mjardin Group Inc. (MJAR-CN), a Denver-based cannabis company, to “hold” from “speculative buy.”
“We believe it is prudent to reduce our rating to HOLD while MJAR refocuses the business on more attainable targets,” he said. “Following the CEO change in February, we reduced our estimates for MJAR largely through the elimination of Massachusetts from our forecast. We are now reducing them further, eliminating California, and lowering our assumptions for Canada and Colorado based largely on their slower than anticipated ramp. While SB 1090 may unlock additional value for Colorado assets, the stock is likely to remain range bound medium term as management defines and implements a new growth strategy.”
His target fell to $2 from $5.50. The average is $1.63.
“We believe MJAR’s proprietary cultivation database is unique, and along with other proprietary operational data, can be leveraged to deliver exceptional operational metrics," said Mr. Burleson. "The company’s grow software enables comprehensive monitoring of plant growth, yields, and inventory levels in real time and enables predictive analytics to optimize harvest cycles and planting rotations for the most effective yields.”
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Despite lowering her target for Sleep Country Canada Holdings Inc. (ZZZ-T) in response to Tuesday’s release of its quarterly results, Laurentian Bank Securities analyst Elizabeth Johnston said her outlook for the retailer remains unchanged.
"We continue to have comfort with key parameters including new store openings, gross margin, renovation activity and SG&A costs," she said. "Furthermore, the company indicates that they are continuing to gain share. Sleep Country’s balance sheet remains well-positioned to continue to invest in new stores, renovations, and remain flexible for potential future partnerships (we forecast FCF of $85-million; $56-million net of dividends payable), as well as potential future dividend increases and NCIB activity."
“Prior to the quarter, ZZZ traded at 7-times forward EV/EBITDA compared to the peer group at 12.5 times. We acknowledge that a discounted multiple is warranted, given the lower organic growth. However, we believe that this multiple gap should close as the company continues to execute on overall top line growth, improves their gross margin, and maintains a strong balance sheet (while financing their growth internally). Furthermore, we expect SSSG to stabilize (we are forecasting 0 per cent for balance of 2019) which we believe will provide much needed confidence to the market.”
Maintaining a “buy” rating, her target dipped to $30 from $32. The average is currently $24.
Elsewhere, CIBC World Markets' Matt Bank lowered his target to $20 from $21 with a "neutral" rating.
Mr. Bank said: “Sleep Country reported soft Q1 results and continued pressure on organic growth, directionally in line with expectations. ZZZ is gaining share from its #1 position in physical and online, yet overall growth prospects are relatively soft, and industry trends are negative even in a relatively stable consumer environment. We view the shares as fairly valued on modest growth expectations and limited visibility.”
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Mosaic Co.'s (MOS-N) value is “finally apparent,” said Credit Suisse analyst Chris Parkinson, upgrading its stock to “outperform” from “neutral” based on “asymmetric risk/reward.”
“We are upgrading MOS to Outperform as we believe (i.) global phosphate prices have limited downside risk to Chinese marginal costs, (ii.) lower ammonia / sulfur prices will offset recent regional price degradation, (iii.) potash prices will remain at current levels for the time being (only gradual ramps from EuroChem in ’19/ ’20), (iv.) issues in Brazil re: P rock production are transitory, and (v.) the situation in the U.S. is likely to normalize by fall,” he said. “We understand we are likely a bit early, but in our view expectations are now in a free fall, including on the ag macro. On that front, we fully understand the situation may get worse in the very NT, but any glimmer of a trade agreement, the prospect of ’20 feed demand to rebound dramatically off of ’19 lows (likely late summer) and biofuel optionality in late ’19 / ’20 all drive our belief that ag sentiment is likely going to improve off of subdued levels. From our perspective, the biggest risk to our upgrade will be an extension of Brazilian mining issues into 2020.”
His target fell to US$28 from US$30. The average is US$35.10.
David Leeder