Inside the Market’s roundup of some of today’s key analyst actions
Centerra Gold Inc.'s (CG-T) valuation is likely to improve with “stronger” production results from its Mt. Milligan mine in British Columbia. and the early 2020 start-up of its Öksüt project in Turkey, said RBC Dominion Securities analyst Stephen Walker.
Seeing both as near-term catalysts, he raised his rating for Centerra shares to "sector perform" from "underperform."
“Following the recent receipt of permits for additional sources of water, the Mt. Milligan Au-Cu mine in British Columbia is well positioned to ramp up throughput from 27 kilo tons per day in Q1/19 to a sustainable level of 55 Ktpd beginning in mid-Q2/19,” he said. "The Öksüt low-cost heap-leach project in Turkey continues to progress toward first production in Q1/20. We forecast these assets to drive an improvement in CG’s gold production and all-in sustaining costs from 738,000 ounces at $882 per ounce in 2019 to 794,000 ounces at $827 per ounce in 2020 with improving free cash flow (FCF).
“At $1,350 gold and spot copper, we forecast negative FCF of $12-million in 2019, increasing to $165-million in 2020 and $240-million in 2021 (’20–21 estimated FCF yield of 10 per cent), with FCF growth from Mt. Milligan and Öksüt partially offset by assumed capex for the Kemess Underground project beginning mid-2020. Capital allocation includes debt reduction and reinstating the dividend. Sale of CG’s non-core molybdenum assets would further strengthen the balance sheet.”
Mr. Walker thinks the overhang stemming from the outstanding $50-million 2017 settlement agreement with the Kyrgyz government is “likely priced in” to Centerra’s valuation currently, noting its shares now trade at a 16-per-cent discount to intermediate gold producers on a price-to-net asset value basis.
Mr. Walker raised his target for Centerra shares to $9.50 from $7. The average target on the Street is $9.46, according to Thomson Reuters Eikon data.
Spark Power Group Inc. (SPG-T) is “well-positioned at the forefront of a fragmented industry undergoing disruption,” according to Desjardins Securities analyst David Newman.
Pointing to a potential total return of 76 per cent, Mr. Newman initiated coverage of the Oakville, Ont.-based electrical power services and solutions company with a “buy” rating.
"Our positive view is premised on SPG’s: (1) leadership position and increasing diversification (electrical services, customers and geographies); (2) stable, recurring business model (reoccurring/contractual arrangements); (3) strong organic growth opportunities given its alignment with growing verticals; (4) long runway of M&A growth; and (5) attractive valuation," he said.
Mr. Newman said Spark is "firing on all circuits," having evolved into a "leading diversified provider of electrical power services across the entire spectrum of power-generating assets (including renewables, and high, medium and low voltage), primarily through strong organic growth and strategic acquisitions in Ontario, Alberta and the U.S.."
He feels it should be able to add market share through its "holistic" offering of "pole to product" solutions.
“SPG should increasingly be able to leverage its strong positioning in growing verticals primarily through its entry into new markets, including an aggressive branch expansion in Canada and the U.S., the acquisition of new customers, the expansion of existing customer relationships and cross-selling opportunities,” said Mr. Newman. "In 2018, SPG posted robust organic growth of 17.4 per cent (14.7 per cent in 1Q19), well exceeding the GDP-type organic growth witnessed by the industry.
"SPG frames its market opportunity at $30-billion (low- and medium/high-voltage markets in Canada); the US$179-billion U.S. industry also offers significant consolidation opportunities. The highly fragmented electrician industry is mainly comprised of mom-and-pop operators (24,000 electrical contracting firms in Canada and 210,000 in the US). The consolidation tailwinds should propel SPG to execute on future deals beyond the nine completed to date at attractive multiples (2.0–6.0 times EBITDA). The company had just over $30-million in dry powder at the end of 1Q19 (including $25-million on its acquisition line) which could be used to acquire $5–6-million in EBITDA."
Mr. Newman set a 12-month target for the stock of $3. The average on the Street is now $3.42.
“We see several catalysts that could spark interest in the story, namely: (1) greater investor confidence over time as it is relatively early days since SPG went public (September 2018), especially if the company executes to plan and posts strong growth, backstopped by its emerging competitive moat, unique strategy and differentiated service offering; (2) greater diversification of the business across service offerings, customers and geographies; (3) accretive acquisitions at reasonable multiples, augmented by synergies; (4) strong cash flows and the financial resources to support its growth plans (eg cash flows, balance sheet, access to funding); (5) greater investor understanding of SPG’s integrated service offering across the renewables, and high-, medium- and low-voltage markets; and (6) removal of the stigma surrounding its listing through a special purpose acquisition corporation (SPAC) and the ongoing liquidity overhang (inside ownership at 60 per cent of the basic shares outstanding),” he said.
Bombardier Inc.'s (BBD-B-T) sale of its regional jet program to Mitsubishi Heavy Industries Ltd. for US$550-million in cash and assumption liabilities worth about US$200-million is a “small net positive” for the company, said Raymond James analyst Steve Hansen.
He said the deal, announced Tuesday before the bell, allows Bombardier to "take in a modest amount of net cash; 2) cap its future RVG liability; and 3) re-focus its time & attention on the firm's core Business Aviation and Transportation businesses. Because we have long carried the CRJ program at little-to-no value (given its weak/negative margin profile), we see little fundamental reason to alter our estimates/target at this time.
“Finally, while we continue to admire Bombardier’s multi-year turnaround strategy, recent setbacks associated with the firm’s Transportation division (legacy contracts) keep us broadly cautious until better visibility emerges. We will continue to monitor accordingly.”
He maintained a “market perform” rating for Bombardier shares and did not specify a target. The average target is $3.81.
Elsewhere, Desjardins Securities analyst Benoit Poirier maintained a "buy" rating and $4.50 target.
Mr. Poirier said: “From a valuation standpoint, the divestiture of the CRJ program will unlock value creation of US$550-million, which is mostly in line with our previous expectation of US$250–500-million, although the net impact on the balance sheet is US$150-million once the remaining liabilities associated with the program of US$400-million are taken into account. That said, we are pleased with the transaction as it should enable management to focus its efforts and capital on the core businesses (BA and BT) while solidifying the balance sheet. Recall that the CRJ program was expected to generate EBIT of negative US$25-million in 2019 and was therefore dilutive to our valuation. ... [We] recommend that investors revisit the story and buy the shares. BBD still trades at a significant discount vs peers (EV/FY1 EBITDA discount of 3.3 times vs aerospace OEMs and 2.1 times vs transportation OEMs), which is unjustified in view of the progress made since 2015 to derisk the business.”
Raymond James analyst Frederic Bastien raised his target price for shares of WSP Global Inc. (WSP-T) following recent institutional meetings with chief financial officer Bruno Roy in London and Stockholm.
“Mr. Roy was coming off a team building event the firm had organized for its global leaders in Edinburgh, and the group’s collective enthusiasm for the business was palpable in his delivery to investors,” said Mr. Bastien. “He also came across as highly consistent and credible across meetings, which to us are key measures of management quality.”
Mr. Bastien said the growth opportunity for the Montreal-based professional services firm remains “significant.”
“Never mind that WSP now ranks among the top 5 engineering consultancies in the world," the analyst said. "It still makes up only about 3 per cent of a highly fragmented market that seeks the professionalism and expertise of a global leader, but still hires locally.This powerful combination was most recently on display in New Zealand when the Kiwi government selected WSP Opus to engineer the largest rail project the country has ever seen(an opportunity previously out of reach to both firms as standalone entities). How much runway does WSP still have? A lot if we take stock of the progression of the Big 4 accounting firms, which today employ north of 200,000 professionals and share 99% of the Fortune 500 as clients. These companies were successful in leveraging their best-in-class auditing services to grow their advisory practices into even larger revenue contributors. We can easily envision a similar scenario in which WSP solidifies its core design practice in OECD countries and at the same time accelerates the growth of its planning and permitting services. Since these activities occur earlier in the lifecycle of a project, they should notionally bring the firm closer to its clients and allow it to capture a larger share of their wallets.”
Reaffirming WSP as his “Best Pick for 2019,” Mr. Bastien hiked his target to $86 from $80. The average is $80.29.
He maintained an “outperform” rating.
Possessing a “unique” portfolio of products and strong distribution channels, The Yield Growth Corp. (BOSS-CN) “is well positioned to stake out a claim in the enormous global wellness industry,” said Fundamental Research analyst Siddharth Rajeev.
He initiated coverage of the Vancouver-based hemp and cannabis-infused wellness and therapeutic products company, with a “buy” rating, pointing to the rapid expansion of its Urban Juve brand, which is set to be carried in 110 retailers across North America four months after its launch.
"Given that infusion of cannabinoids is a major business of the company, Yield Growth may be able to access linkages between the cannabis and wellness markets, enticing wellness consumers with cannabinoid-infused wellness products, and vice versa with cannabis consumers," said Mr. Rajee.
“In addition to their skincare and topicals product lines, the company has also acquired a line of wellness-focused cannabinoid-infused beverage formulas. In addition, the company has developed a capsule product that is intended to treat hangovers induced from excessive alcohol consumption. The beverage line has been consolidated in a separate subsidiary named UJ Beverages. According to the company, the beverage line has been developed to offer various health benefits, such as anxiety reduction, toxin removal, and anti-inflammatory effects. Note that we cannot verify these claims. In the U.S., cannabinoid-infused beverages are available depending on the state, whereas in Canada, edibles and beverages are still prohibited pending legalization expected in October 2019.”
Mr. Rajeev set a target for its stock of 55 cents per share.
Though he said capital efficiency is "running high " its midstream business, Raymond James analyst Andrew Bradford lowered his earnings projections for Secure Energy Services Inc. (SES-T), citing “more difficult field conditions in Alberta than expected for a second quarter.”
Mr. Bradford is now forecasting EBITDA for the second quarter of $33-million, down from $35-million previously. However, he emphasized that his new estimate remains 7 per cent higher than the result during the same period a year ago.
“The field conditions ranged from an early-season wildfire, and its impact on general field operations, to wet conditions further south in June. These primarily affected Secure’s Technical Services division. Field conditions have been much less of a problem in North Dakota, where Secure’s facilities are functioning at or near capacity. We have lowered our 2020 EBITDA estimates as a result of running Secure through our lower Canadian rig count estimate.”
Overall, he lowered his 2019 and 2020 EBITDA estimates to $201-million and $245-million, respectively, from $206-million and $265-million. His earnings per share projections fell to 7 cents and 28 cents from 8 cents and 40 cents.
Maintaining a “strong buy” rating, his target for Secure shares dipped to $13 from $13.50. The average on the Street is $10.98.
“Between SES stock stuck in the low-$7s and high-$6s since late May and its persistent and structurally strong performance within its core Midstream division, we have little choice but to reiterate our Strong Buy rating on this Analyst Current Favorite,” he said. “We believe the attractiveness of the stock lies not just in its low multiples and high AFFO yield, but equally by virtue of its demonstrable ability to grow its Midstream business in today’s challenging market. To be clear, we don’t expect material same-store-sales growth at current drilling rates,though we do expect both price and volume stability. We also expect price and differential volatility to play important roles in developing demand for further growth initiatives.”
He added: “Over the last 3-1/2 years, SES stock has essentially been range-bound between the mid-$6s and high-$9s. Today at $7.02 it is on the lower-end of that range.Meanwhile, over the same period, SES’ EBITDA has more than doubled to an estimated $20-million this year, while its multiple has approximately halved - now 7.9-times current-year EBITDA and 6.2-times 2020 (6.8 times at strip oil and gas pricing). It seems trite to point out this inverse relationship cannot go on forever. At some point, the multiple will stabilize and at that point, SES’s real EBITDA growth will translate into share price growth as well. Today, Secure has a 13-per-cent trailing yield. This is close to the top end of its historic range for sure,but it is also unusually above the higher-end of its relative range with the traditional midstream companies.”
In other analyst actions: