Inside the Market’s roundup of some of today’s key analyst actions
Industrial Alliance Securities analyst Brad Sturges upgraded Minto Apartment Real Estate Investment Trust (MI.UN-T) to “strong buy” from “buy”, citing “its robust organic growth outlook in the next 12 months, potential for additional distribution rate increases (perhaps annually), and possible further P/AFFO [price to adjusted funds from operations] multiple expansion over time driven by improving unit trading liquidity and as the REIT continues to build a successful track record of generating unitholder value.”
In a research note released late Tuesday, Mr. Sturges said the REIT's "strong" key operating metrics, as seen in its second-quarter results released Monday, are now trending above its initial public offering forecasts.
"Since its IPO was completed over a year ago in July 2018, MI has executed on all strategic fronts, including consistently generating quarterly operating results above its IPO forecasts," he said. "MI’s Ontario urban-weighted portfolio remains well positioned to capture improving underlying apartment property fundamentals.
He raised his target for the Ottawa-based REIT to $25 from $22. The average on the Street is $23.11.
Elsewhere, Desjardins Securities analyst Michael Markidis raised his target to $23.50 from $22, keeping a "buy" rating.
“We continue to like this name for its urban concentration, strategic relationship with the Minto Group and high-single-digit FFOPU growth potential,” said Mr. Markidis.
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A depleted backlog could prove “problematic” for Total Energy Services Inc. (TOT-T) moving forward, according to AltaCorp Capital analyst Tim Monachello.
Following the release of in-line second quarter results late last week, Mr. Monachello reduced his estimates for the Calgary-based company, pointing to a more conservative outlook for its Compression and Process Services (CPS) business "amidst persistent E&P capital discipline, and weaker than expected margins in Q2."
"While we continue to believe that fundamental demand for natural gas compression and processing remains strong longer-term, volatility is likely over the coming quarters, and we believe TOT’s near-to-mid-term results are highly exposed to near-term bookings given its depressed backlog at the end of Q2," he said. "As such, we believe there is downside risk to consensus forecasts for TOT – our revised EBITDAS estimates sit roughly 7 per cent, and 14 per cent. below consensus for 2019 and 2020, respectively. Given our reduced estimates we are cutting our rating."
Emphasizing E&P capital discipline has deleted its CPS backlog, Mr. Monachello downgraded his rating for Total Energy Services to "sector perform" from "outperform."
"Capital discipline has been a persistent headwind facing North American field activity levels over recent quarters," he said. "For TOT we note that the impact has been especially acute in its CPS business where backlog has fallen for 3 consecutive quarters and exited Q2 at only roughly $77-million, representing roughly 65 days of product sales throughput (based on ACC estimates; TTM product sales revenue), and the lowest level since Q1/17. In addition, we note that in Q2 CPS segment gross margins fell to roughly 10 per cent from 15 per cent in Q1/19 and 14 per cent on-average through 2018. We believe lower margins are likely a function of lower margin projects being processed in the quarter, which is likely a reflection of the margin profile which remains in TOT’s backlog. Furthermore, we are cautious that reduced bookings activity could result in sustained lower margins for the CPS segment as 1) reduced revenues result in weaker fixed cost absorption; and 2) excess capacity could be backfilled with lower margin projects in an effort to better cover fixed costs. That said, we note that TOT also earns CPS revenues from service and rental business lines which do not enter the backlog and provide some level of base-line revenue contribution – though we believe product sales represent the lion’s share of CPS revenue and cash flow.
"We note that soft bookings activity in 2019 has been ubiquitous across our gas compression and processing coverage universe, and while conversions have been slow, we believe long-term demand remains relatively robust. We also note that international bookings tend to be larger and lumpier in nature than North American bookings, and given the reduced backlog today, could result in a materially better outlook for the segment if TOT is able to capture a sizeable project(s) over the coming quarters. Absent this, or a significant uptick in North American bookings over the near-term, we forecast CPS segment contribution is likely to move significantly lower over the coming quarters."
Mr. Monachello lowered his target for TOT shares to $7.75 from $11.50. The average on the Street is $9.61.
Meanwhile, Paradigm Capital’s Jason Tucker lowered his target to $8 from $9.50 with a “buy” rating (unchanged).
Mr. Tucker said: “TOT continues to take a cautious approach to capital deployment in today’s market. The focus continues to be on debt reduction and using cash flow to buy back shares. Because of management’s diligent efforts to maintain discipline in a difficult market, the company has been able to maintain its dividend while taking steps to improve the balance sheet. We have lowered our 2020 estimates to reflect a reduction in our expectations for the CPS segment.”
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Desjardins Securities analyst Benoit Poirier moved Transat A.T. Inc. (TRZ-T) to “tender” from “hold” after Air Canada (AC-T) raised its offer to buy the Montreal airline and travel company by 38 per cent to $720-million.
“We believe the price is fair and represents the total value-creation opportunity for AC (our initial expectations were for $12–16/share),” he said. “The offer implies an EV/FY2 EBITDA multiple of 4.5 times for the tour operator (a similar number is derived using EBTIDAR), in line vs AC and WestJet (WJA, TSX, not rated).”
Mr. Poirier thinks the current offer limits the likelihood that a superior bid will appear, adding: “AC has increased the break fee payable by TRZ to $40-million ($1/share) in the event of a termination of the agreement under certain circumstances. TRZ has also changed the definition of a Superior Proposal under the agreement to one which must be equal to or exceed $19/share in cash. At these levels, we believe the only remaining bidder would be Onex (ONEX, TSX, not rated) but its proposed acquisition of WestJet will not close early enough for it to submit an offer for TRZ ahead of the special shareholder meeting.”
The analyst moved his target to $18 from $14 to reflect the bid. The average on the Street is $15.21.
“While we believe there is still some regulatory risk surrounding the closing of the transaction, we believe investors are fairly compensated by AC’s superior offer and we see a low probability of a higher bid,” said Mr. Poirier. “As a result, we recommend investors Tender their shares.”
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Following “major” recent investments, Premium Brands Holding Corp. (PBH-T) is likely to see accelerated growth into the the second half of 2019, said Industrial Alliance Securities analyst Neil Linsdell, following the release of better-than-anticipated second-quarter results on Tuesday.
The B.C.-based specialty food manufacturing and distribution company reported revenue of $945.5-million, up 24.1 per cent due largely to contributions from recent acquisitions and exceeding the consensus projection on the Street of $943.1-million. Adjusted earnings per share of $1.03 also topped the consensus estimate (90 cents).
“In 2018, PBH was very active on the acquisition front, deploying a total of $753-million across 12 deals,” the analyst said. “This compares to eight acquisitions in 2017 for $200-250-million, and seven acquisitions in 2016 for $220-million. As expected, 2018 was PBH’s busiest year yet, and acquisition activity should continue well into 2019, supported by the Company’s strong balance sheet (further supported by the equity investments made by CPPIB and other parties) and $208-million of FCF in 2019E (PBH calculation). We are confident in management’s disciplined approach given that the Company is very selective in its acquisitions and targets an IRR of at least 15 per cent unlevered and after-tax over a 10-year horizon. We believe that attention will also be given to integration, with PBH having heavily invested in production capacity, namely by implementing a number of initiatives (including accelerated investments in automation and robotics) that are producing operational efficiencies that will result in a greater focus on profitability. Over the long run, management has guided for organic volume growth of 4-6 per cent, with price increases and acquisitions providing upside to this guidance.”
With a “buy” rating, Mr. Linsdell increased his target to $98 from $95. The average on the Street is $98.61.
“As PBH continues to execute on its growth strategy, its share price should deliver some tasty returns for investors seeking long-term capital and dividend growth,” he said. “We continue to see considerable organic growth and acquisition opportunities for PBH and reiterate our Buy rating.”
He added: “PBH offers investors strong profitability growth, a focus on strategic M&A and diversification which help reduce some of the headwinds faced in a challenging input cost environment, and a robust balance sheet and free cash flow which support dividend growth. Although not reflected in our forecasts, future acquisitions could provide upside to our forecasts.”
Meanwhile, Desjardins Securities analyst David Newman increased his target to $105 from $103, keeping a "buy" rating.
Mr. Newman said: “Overall, we remain optimistic about the company’s long-term growth prospects, with tangible initiatives and M&A opportunities poised for execution; short-term challenges are moving into the rear-view mirror.”
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Cervus Equipment Corp.'s (CERV-T) second-quarter results represented “one step forward, two steps back,” said Raymond James analyst Ben Cherniavsky.
Last Thursday, the Calgary-based equipment dealer reported segmented earnings before interest and taxes of $5.9-million, well below Mr. Cherniavsky’s $15.6-million projection due largely to a 90-per-cent miss in its agriculture segment.
“We are maintaining our Outperform rating on Cervus,” the analyst said. "Admittedly, it is becoming more and more challenging to support the stock considering the state of the company’s primary end markets and the recent series of EPS ‘misses,’ which seem to get worse by the quarter. For us, it continues to feel like the company is taking one step forward and two steps back. Just as Cervus appeared to fix its trucking segment, the Western Canadian Ag market falls apart! Farmers have deferred capex in response to depressed farm incomes, increased input costs, reduced commodity prices, trade disputes with China, and dry weather conditions. Earnings have suffered terribly as a result. 2Q19 pre-tax earnings for Cervus’ Ag segment declined nearly $12-million year-over-year. To put this in context, $12-million of EBT taxed at a rate of 26 per cent equates to 54 cents of EPS.
“We are not excusing Cervus’ poor results. We simply believe that now is the wrong time to throw in the towel. At the risk of sounding overly philosophical, its always darkest before the dawn. While there are no obvious catalysts on the near-term horizon, we maintain our belief that the intrinsic value of Cervus is above where the stock is trading and recommend patient investors buy shares.”
With the “outperform” rating, Mr. Cherniavsky dropped his target to $12 from $16. The average on the Street is $13.70.
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BMO Nesbitt Burns analyst Ryan Thompson initiated coverage of a pair of precious metals companies in a research note on Wednesday.
Seeing “strong growth on the horizon,” Mr. Thompson gave Leagold Mining Corp. (LMC-T) an “outperform” rating.
"Leagold Mining is expected to deliver peer-leading growth in the coming years, driven by two key projects: the phased expansion of the Los Filos mine in Mexico, and the restart of the Santa Luz mine in Brazil," he said.
“The company has a large proven/probable reserve inventory of over 7.1Moz of gold. Leagold is a relatively new company (formed via the acquistion of Los Filos in 2017) but is run by an experienced management team with a proven track record.”
He set a $4 target. The average on the Street is $3.89.
Calling it a “unique silver exploration story,” Mr. Thompson also gave New Pacific Metals Corp. (NUAG-X) an “outperform” rating.
"Large silver development projects are rare, which we think creates scarcity value for Silver Sand. This thesis is supported by investments from two major mining companies: Silvercorp Metals (SVM-T, “outperform”) and Pan American Silver (PAAS-Q, “outperform”).
“As Silver Sand continues to advance, we see the potential for shares to re-rate higher if the market gains a better understanding of the potential scale and economics of the project via delivery of a 43-101 resource estimate at year-end.”
His target is $3.75 per share, which exceeds the $3.50 consensus.
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In other analyst actions:
National Bank Financial analyst Michael Parkin raised Centerra Gold Inc. (CG-T) to “outperform” from "sector perform with a target of $13.50, up from $11.75. The average on the Street is $12.20.
David Leeder