Inside the Market’s roundup of some of today’s key analyst actions
Expressing a preference for Canadian energy infrastructure companies with processing and fractionation exposure over pipelines, Credit Suisse analyst Andrew Kuske made a pair of rating changes on Wednesday following first-quarter earnings season and in reaction to recent market performance.
A day after it announced the sale of an 85-per-cent stake in its Northern Courier pipeline to Alberta Investment Management Corp. (AIMCo) for total proceeds of $1.15-billion, Mr. Kuske lowered TC Energy (TRP-T) to “neutral” from “outperform” with a target of $70 (unchanged). The average target on the Street is $66.43, according to Bloomberg data.
At the same time, he upgraded Keyera Corp. (KEY-T) to “outperform” from “neutral” with a $40 target, rising from $32 and exceeding the consensus of $39.56.
"Simply, our overall ratings tilt towards favouring those with processing and fractionation exposure, with a focus on KEY and Pembina Pipelines (PPL) in our core coverage universe versus the larger cap long-haul pipeline players Enbridge (ENB) and TRP (both rated Neutral)," he said. "We view the call as supported by commodity prices, an ongoing transition of asset bases, fractionation and processing fees and a focus on upcoming regulatory paths for capital allocation."
"During the Q1 results season, there was an ample amount of recurring commentary from many Canadian infrastructure names about a positive fractionation market with the new contract year that started on 1 April. Naturally, there is a level of opacity in parts of the Western Canadian processing and frac markets, but there has been consistent commentary about increased frac fees from the April 1, 2019 contract year."
Mr. Kuske also emphasized "rates reality," noting: "One key area to watch with this call is the rates reality, with the Canadian 10-year bond yield at 1.61 per cent versus 2.42 per cent a year ago. For context, the U.S. 10-year bond yield is 2.32 per cent (2.977 per cent a year ago). The decline in rates supports underlying infrastructure valuations along with the public/private valuation theme. On yield related metrics, a near-term rates reality would look to tilt in favour of the larger cap better credits like ENB and TRP versus the smaller (but still large) weaker processing exposed credits, but incremental issuance for the smaller would be positive."
Pointing to its reduced market liquidity and increased financial leverage, Canaccord Genuity analyst John Bereznicki cut Source Energy Services Ltd. (SHLE-T) to “speculative buy” from “buy” in a research report wrapping up earnings season for Canadian oilfield services companies.
His target fell to $1.60 from $2.25. The average is $1.54.
"Overall Q1/19 cash flow in our domestic E&P coverage universe improved 40 per cent sequentially despite a relatively static WCSB rig count," he said. "On a year-over-year basis, first quarter cash flow increased ~23% while capital spending declined 12 per cent. Put another way, our E&P coverage universe underspent cash flow by roughly 8 per cent in Q1/19, versus an overspend of about 29 per cent one year earlier.
“In our view, the Alberta election has boosted industry sentiment, while recent developments relating to the TMX expansion and Bills C-48 and C-69 are also incrementally positive. We believe many domestic management teams are quietly planning to increase the cadence of their 2H19 capital spending in a measured fashion, with a view to achieving 2019 exit production targets. We believe a protracted U.S.– China trade war is the most significant threat to our 2H19 thesis.”
Though Bank of Nova Scotia (BNS-T) sustained a “noisy” second quarter, Credit Suisse analyst Mike Rizvanovic expects a better second half and said his “longer-term view is unchanged.”
Before the bell on Tuesday, Scotia reported adjusted earnings per share of $1.70, missing both Mr. Rizvanovic's $1.77 estimate and the consensus projection on the Street of $1.74.
“The largest variance in Q2 was a sizable loss in the always-nebulous Other segment (a loss of 5 cents per share) due to various factors, some of which are expected to moderate in the near-term,” he said. “Canadian P&C Banking was 2 cents per share weaker than our forecast, Global Banking & Markets was modestly better (2 cents per share), Canadian Wealth was in line, while International banking missed by 3 cents per share.”
“We have reduced our fiscal 2020 estimated EPS by 1.2 per cent, largely to reflect weaker growth in Canadian P&C Banking and higher losses in Other.”
Mr. Rizvanovic lowered his target for Scotiabank shares by a loonie to $77. Consensus is currently $77.62.
He kept an “outperform” rating, noting “we do not believe that BNS’s international growth opportunities are reflected in the stock’s valuation.”
"With BNS trading at a sizable 6-per-cent discount to peers (on forward price-to-earnings based on NTM [next 12-month] EPS consensus as of May 27), we see limited relative downside for the stock," the analyst said. "We value BNS using a PE multiple of 10.1 times on our F2020 estimated EPS (a 4-per-cent discount vs. peers)."
Elsewhere, Desjardins Securities' Doug Young maintained a "buy" rating and $81 target.
Mr. Young said: "We have lowered our estimates but maintained our target and Buy rating. While the noise will likely continue through FY19, we are encouraged by the momentum in international banking, progress on integrating BBVA Chile and focus on expenses."
Polaris Infrastructure Inc.'s (PIF-T) operations “continue to deliver,” said Industrial Alliance Securities analyst Jeremy Rosenfield upon resuming coverage of the stock following the close of a convertible debenture offering.
On May 6, the Toronto-based renewable energy company reported first-quarter adjusted earnings before interest, taxes, depreciation and amortization of US$15.9-million, exceeding the projections of both Mr. Rosenfield and the Street (US$15.5-million and US$16-million, respectively). The analyst calculated adjusted funds from operations of 72 US cents per share, which topped his expectation by 2 US cents.
“Results were driven by strong generation from the San Jacinto (SJ) geothermal plant in Nicaragua, which produced in line with expectations, as well as a full quarter contribution from the smaller Canchayllo hydro plant in Peru,” he said. “Subsequent to quarter end, PIF completed maintenance work on the SJ Unit 4 (on schedule and on budget). Meanwhile, PIF has noted that construction on the 28MW Generación Andina (GA) hydro complex is progressing as expected (80-per-cent complete), with an in service date set for October 2019.”
On Tuesday, Polaris completed a $25-million offering of 7-per-cent coupon convertible debentures, maturing in May 2024.
"Proceeds from the offering are expected to be used for general corporate purposes, including corporate development," said Mr. Rosenfield. "Recall that the previously completed acquisition of Union Energy Group Corp. (UEG) included 20MW of late-stage and 189MW of early-stage development prospects. Management has also referenced additional attractive potential acquisition opportunities in Peru and elsewhere in Latin America.
"The overall financial outlook for PIF remains strong, and we continue to expect run-rate EBITDA of US$70-80-million and FCF of US$30-40-million in 2020. Meanwhile, in our view, cash on hand and proceeds from the financing should allow PIF to pre-fund future growth on relatively attractive terms (whether organic or acquisition based). We expect the Company to continue pursuing additional strategic development opportunities in the near term."
Mr. Rosenfield maintained a "speculative buy" rating for the stock with a $25 target. The average on the Street is $24.50.
"PIF continues to offer investors (1) cash flow stability from contracted power operations, (2) near-term and longer-term growth opportunities linked to organic developments and potential acquisitions, (3) a healthy dividend (6-per-cent yield, 35-45-per-cent FCF payout), and (4) a deeply discounted valuation compared with larger power producer peers (7 times FY2E P/FCF vs. 12 times for larger peers)," he said. "We continue to see organic development and M&A activity as potential catalysts for shareholder value creation as PIF diversifies its asset portfolio, ultimately leading to potential valuation multiple expansion."
"We believe Nutrien outlined a convincing strategy to grow the Retail segment through acceleration of Retail M&A, and building a moat around the business with the digital platform and financing program," said Mr. Wong. "Management highlighted that opportunities for M&A may be reaching a tipping point as smaller competitors are unable to compete in an increasingly digitized ag industry. We were also impressed with Nutrien's digital platform which we view as another sales channel that builds a moat around current customers, with potential to grow market share that could provide further upside."
"Management highlighted potential long-term potash brownfield expansion plans, at low capex. We see several key takeaways – 1) this potential capacity would be the lowest cost new production and should discourage new builds; 2) the volumes can be brought on-line gradually, which would minimize the market impact; and 3) the company has clearly stated a desire for stable prices which should help maintain steady demand and keep prices from nearing incentivized levels for new supply."
Mr. Wong maintained an "outperform" rating and US$63 target. The average on the Street is US$62.18.
"We think Nutrien shares are impacted by several recent factors - 1) spring planting delays; 2) negative sentiment towards ag due to African swine flu in China and U.S./China trade dispute; 3) global downturn in chemical equities; and 4) seasonal working cap fluctuation which raises EV temporarily," he said. "Currently, shares are trading at 7.5 times EV/EBITDA, a level not seen since 2016 during the market downturn in potash and nitrogen. We think the relatively normal market conditions justify a multiple closer to 9 times EV/EBITDA pro-forma average since 2011. Based on our valuation sensitivity analysis, at 9 times EV/EBITDA, Nutrien should be trading at $60-65/sh based on 2020E."
Husky Energy Inc. (HSE-T) is “taking the first steps toward regaining its stride,” said Raymond James analyst Chris Cox.
"Husky's 2019 Investor Day had a clear two-pronged focus," he said. "First, improving safety is top of mind for the company after a number of high profile incidents in recent years. While this garnered a lot of focus, the path forward remains somewhat unclear; Husky will have to demonstrate a longer-term track record before faith can be restored, likely weighing on the relative valuation for the foreseeable future. Second, FCF is being emphasized, not just as valuation support, but in corporate strategy. The company has pulled back the pace of development of the Lloyd Thermals, prioritizing nearer-term FCF vs. longer-term growth. We believe this is prudent, especially in the context of lingering takeaway constraints, although a meaningful FCF inflection looks to be a 2021 event.
"On balance, we see compelling longer-term upside once Husky starts to generate more robust FCF and delivers on improved safety and operational reliability; however, we struggle to see a catalyst to close this relative valuation discount over the near-term, especially given the more compelling FCF profiles we project for the company's peers over the next 1-2 years."
Mr. Cox raised his cash flow per share projection for fiscal 2019 to $3.93 from $3.75, while he lowered his 2020 forecast to $3.88 from $4.02.
He maintained a "market perform" rating and $17 target. The average is $16.58.
“On the topic of FCF allocation, there was a clear priority toward sustainable dividend increases over share buybacks; given the dramatic increase in FCF over the plan horizon and the US$7/bbl drop in the corporate break-even over this timeframe, the scale of the dividend increases could be significant,” he said. “While dividend growth is expected to garner the spotlight, we believe Management commentary also left the door open for M&A to potentially feature prominently as a use of FCF going forward.”
Elsewhere, GMP Securities analyst Michael Dunn upgraded Husky stock to “buy" from “hold” with a $17 target (unchanged).
In other analyst actions:
PI Financial analyst Chris Thompson upgraded Endeavour Silver Corp. (EDR-T) to “buy” from “neutral” with a $3 target, down from $3.15 and below the consensus of $3.50.
PI Financial’s Philip Ker upgraded Excellon Resources Inc. (EXN-T) to “buy” from “neutral” with a $1 target, which is 13 cents below the consensus.