Inside the Market’s roundup of some of today’s key analyst actions
Balancing its “heightened” investment risk profile with its “wide” discount valuation, Industrial Alliance Securities analyst Brad Sturges lowered his rating for Invesque Inc. (IVQ.U-T) to “speculative buy” from “strong buy” following a “noisy” second quarter.
“We do admit that Invesque’s share price and recent earnings results have not lived up to our expectations,” he said. “Furthermore, a near-term positive catalyst to materially narrow Invesque’s discount valuation may be lacking given the Company’s recent decline in FD AFFO [fully diluted adjusted funds from operations] per share , and the Company’s above-average investments risks that include an elevated FD AFFO payout ratio, above average financial leverage employed, high geographic and operating tenant concentrations, perceived U.S. SNF sector operating challenges, foreign currency exposure, and low share liquidity. However, we continue to view Invesque’s shares as undervalued relative to its U.S. seniors housing and SNF REIT/REOC peers, and to its estimated NAV, which may prove to be an attractive buying opportunity if Invesque can successfully generate FD AFFO/share accretion in 2020 from its recent and pending strategic transactions.”
On Aug. 14, the Toronto-based health care real estate company reported fully diluted funds from operations for the quarter of 18 US cents, excluding non-recurring abandoned acquisition due diligence costs and provisions for credit losses for outstanding loans and interest receivable. That was 2 US cents lower than Mr. Sturges’s expectation and down 7 US cents from the same period a year ago.
At the same time, it announced the completion of a US$340.4-million acquisition of Commonwealth Senior Living and private pay seniors living communities as well as a plan to transition all 13 of its assets currently operated by affiliates of Greenfield Senior Living to Commonwealth for US$4.5-million.
With those deals and a convertible preferred equity private placement, Mr. Sturges lowered his 2019 and 2020 AFFO estimates to 66 US cents and 71 US cents, respectively, from 68 US cents and 73 US cents.
His target for Invesque dipped to US$7.25 from US$7.50. The average on the Street is US$7.55.
“At the start of 2018, Invesque traded at a 12.7 times price-to-AFFO multiple, representing an 2.0 times P/AFFO forward multiple average discount to its North American healthcare REIT peers (P/AFFO multiple average: 14.7 times)," said Mr. Sturges. “Invesque’s discount P/AFFO multiple valuation has widened, as the Company now trades at 9.9 times 2019 estimated AFFO, representing an 6.1 times P/AFFO forward multiple discount to its publicly listed North American healthcare peers (P/AFFO forward multiple: 16.0 times). Also, Invesque’s shares trade at 21 per cent below our estimated NAV of $8.25 (using a 7.75-per-cent cash NOI cap rate), versus an 18-per-cent average NAV premium for its North American healthcare peers.”
Citi analyst Paul Lejuez released a series of research reports early Wednesday following a busy earnings day for U.S. releases.
Despite unveiling a series of initiatives for the second half of the year, Mr. Lejuez thinks Kohl’s Corp. (KSS-N) is “swimming against the tide,” leading him to lower his target for its stock to US$49 from US$60 with a “neutral” rating (unchanged). The average target on the Street is US$56.82.
“Though 2Q EPS and comps were no worse than expectations and the company did reaffirm annual guidance, GM was weak and high inventory levels may mean more GM pressure in 2H than management expects,” he said. “Also, while business accelerated in the last 6 weeks of the quarter (with comps up 1 per cent), it seems that trends quarter-to-date remain consistent with that level despite having the AMZN returns business for the full quarter-to-date period (the market may have hoped for more). And higher promos seem to be playing a part in the sales increase. KSS has many initiatives and product launches in 2H, which we applaud, and could help drive sales, but continued traffic challenges and high inventory levels across the sector act as a tide they are swimming against, which could derail the company’s plan for better in store sales results and profitability.”
Mr. Lejuez called TJX Companies Inc.'s (TJX-N) quarterly results “just ok” by their own standards but “strong” compared to most.
“While comps came in at the low end of plan (and below consensus), overall it was still a decent quarter," the analyst said. "GM was inline with plan and SG&A was better than expected and the company reiterated its annual guidance. With 3Q off to a “solid” start (when they have made this comment over the past 9 years comps have always come in at 3 per cent or higher) and the significant inventory availability in the market, we believe the company is likely to beat its guidance and consensus in F19. Longer-term, TJX remains well positioned to take advantage of the share shift away from the mall and will also likely to continue to benefit from disruption related to tariffs.”
He maintained a US$58 target and “buy” rating. The average on the Street is US$59.
He lowered his target for shares of Urban Outfitters Inc. (URBN-Q) to US$23 from US$28 with a “neutral” rating. The average is US$27.24.
“Quarter-to-date comps are running up 4 per cent, a big reversal vs 2Q (down 3 per cent); however, comps are being driven by higher promos (3Q GM guidance -200 bps) and guidance assumes EBIT $ reach a 10-year low for 3Q,” he said. “This is in part due to higher SG&A, as the company spends more on new services like rental, which is unlikely to help the top line near-term, but is a drag on EBIT. Management believes they will be able to mitigate most of List 4 tariff at 10 per cent (only a 10-15 bps drag on GM). However, with relatively few growth prospects outside of comp growth, a challenging traffic environment and inventory levels elevated across retail, we see URBN’s EPS power in the $2.00-2.25 range (and we don’t see that changing anytime soon). That’s assuming positive comps and before accounting for the risk of List 4 tariffs going to 25 per cent.”
Wanda Sports Group Company Ltd. (WSG-Q) is “more attractive than the price suggests,” said Citi analyst Jason Bazinet.
He initiated coverage of the unit of Chinese conglomerate Dalian Wanda Group, which began trading in New York in late July following a US$219-million initial public offering, with a “buy” rating, believing its three business lines are “attractive” drivers.
The analyst said: "Wanda generates revenues in three segments: First, in Spectator Sports, the firm secures contracts from 3rd party rights holders and resells TV rights to a particular sporting event in a specific geography. Second, in Digital, Production & Sports Solutions (DPSS), the firm works with rights owners and secures contracts for program production, host broadcasting, marketing services and digital media solutions. Third, in Mass Participation, the firm typically owns the IP for a sporting event – like Ironman – and generates revenue from ticket sales, merchandise, sponsorships and city host fees.
“Within the broader media ecosystem, Wanda benefits from three factors. First, as non-live video content moves to the cloud (via SVOD services), programming executives are hungry for popular live content like sports and news. This suggests robust programmer demand for sports rights (even if linear viewing declines). Second, with web-based apps, fans of niche sports can indulge their passions unrestrained by legacy TV economics (which required a mass audience). Third, live events – like concerts, theme parks and sporting events – have emerged as safe havens amidst the broader threats from digitization. All three trends should benefit Wanda Sports.”
Touting its “compelling” valuation, he set a target of US$5.50.
“A conservative SOTP approach – that applies an ad agency multiple to Spectator Sports and DPSS and a discount to sports franchises to Mass Participation suggests fair value is akin to 9.0 times 2020 EV-EBITDA, or $8.75 a share,” he said. “Today, Wanda commands less than $4 per share, or 7.0x the average of 2018 and 2019 EV-EBITDA. If Wanda holds a 7.0 times EV-EBITDA multiple through 2020, the shares will approach our target of $5.50 a share. And, if the shares command an appropriate multiple (9.0 times 2020 EV-EBITDA) the shares could more than double from prevailing levels.”
Though Eve & Co. Inc.'s (EVE-X) second-quarter fell short of his expectations, leading him to lower his financial expectations for the cannabis producer, Haywood Securities analyst Neal Gilmer continues to recommend investors accumulate its shares at current levels.
"While we are disappointed with the Q2 results, it has become clear that there will be some volatility for the Canadian LPs and the provincial buying patterns and / or agreements for wholesale purchases as was the case with Eve’s Q2," he said. "We look for further execution and start of sales to Germany and other provinces to drive near-term increases in sales."
On Tuesday, Eve & Co. reported revenue of $0.5-million for the quarter, fell below Mr. Gilmer's $2.9-million forecast. An adjusted EBITDA loss of $0.8-million was slightly better than his estimate of a $0.9-million deficit.
Based on the results, Mr. Gilmer lowered his 2019 revenue and EBITDA estimates, pointing to "Q2/19 revenue lower than expected and to be slightly more conservative going forward."
He maintained a “buy” rating and lowered his target to 70 cents from 80 cents. The average is 94 cents.
“We believe that Eve is well-positioned in the market with its low-cost greenhouse production,” he said. "The Company has been successful in securing three provincial supply agreements, with Ontario, Newfoundland and British Columbia. Eve is working to establish its brand in the marketplace as a premier recreational cannabis brand for women. While it is early stages since the Company received its sales license in late 2018, we do believe that there are merits to this approach.
“Eve currently has capacity of 10,000 kg of cannabis annually and through its phase 2 expansion can achieve production of 50,000 kg per year. The phase 2 expansion is expected to be complete in the summer of 2019, as a result, we expect them to enter 2020 with production capacity of 50,000 kg. The Company’s sales strategy is direct to retailer for the recreational market as well as B2B wholesale, for both international medical markets as well as the domestic medical market.”
As it “continues to execute on its cost take-out strategies,” Citi analyst Geoffrey Small hiked his financial expectations and target price for Home Depot Inc. (HD-N).
Pointing to the home improvement retailer’s better-than-anticipated second-quarter results, management commentary and updated guidance, Mr. Small increased his 2020 and 2021 earnings per share projections to US$10.16 and US$11.18, respectively, from US$10.14 and US$11.16. He also introduced a 2022 estimate of US$12.41.
With a “buy” rating (unchanged), he raised his target to US$246 from US$218. The average on the Street is US$222.21.
“We have a Buy rating on HD, as management’s operational execution should drive ongoing SSS outperformance, the company’s expense discipline should drive modest margin expansion, and its robust FCF generation will allow for ongoing return of shareholder capital.”
In other analyst actions:
TD Securities analyst Vince Valentini cut Thomson Reuters Corp. (TRI-T) to “hold” from “buy” with a $94 target, rising from $92. The average is $91.42.
TD’s Daniel Earle raised Equinox Gold Corp. (EQX-X) to “buy” from “speculative buy” with a $12 target, up from $11.25. The average is $10.56.
National Bank Financial analyst Maxim Sytchev initiated coverage of Stella-Jones Inc. (SJ-T) with a “sector perform” rating and $43.50 target. The average on the Street is $50.50.