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Inside the Market’s roundup of some of today’s key analyst actions

Following a fourth-quarter earnings miss and “muted” outlook, CIBC World Markets analyst Scott Fromson said he’s “pressing pause” on Winpak Ltd. (WPK-T).

He lowered the Winnipeg-based company to “neutral” from “outperformer.”

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“Over the longer term, we remain positive on Winpak’s products, assets, management and growth outlook,” the analyst said. “Its ever-expanding cash position (now $397-million) should provide an ‘option-value’ floor to the stock. M&A may be a positive catalyst when packaging multiples recede as debt becomes more expensive; however, we don’t expect near-term deals as management will be occupied in FY/20 with developing new business, integrating Control Group, ramping up new internal capacity and developing sustainable products/R&D projects.”

Mr. Fromson dropped his target price for Winpak shares to $55 from $49. The average on the Street is $49.67.

“We expect Winpak’s share price to soften on Q4/19 results that fell short of our estimates and consensus,” he said. “The share price has held up remarkably well in the midst of coronavirus, down only 3 per cent since February 20. However, the FY/20 outlook is muted due to continued high competition (both pricing and volumes) and lower hot beverage pod sales. In light of this diminished outlook, we expect Winpak shares to be range-bound.”


Seeing a “brightened” outlook, Desjardins Securities analyst David Newman sees Pinnacle Renewable Energy Inc. (PL-T) “slowly moving back on track in 2020 with a ‘High Level’ of incremental production.”

On Monday after the bell, the Prince George-based company reported fourth-quarter adjusted EBITDA of $11-million, matching Mr. Newman's expectation but falling $4-million shot of the consensus estimate on the Street.

“2019 results reaffirmed our view that 2018–19 represented a period of heavy investment (capacity expansion, Aliceville acquisition, backlog accumulation in Asia), with PL poised to break through in 2020–22,” he said. “Despite the operational headwinds faced in 2019 (Entwistle fire, fibre supply constraints in BC and CN Rail strike), we believe PL is effectively tackling the issues through increased expansion and production, geographical diversification, a shift in customer mix toward Asia and improving margins. At the end of 2019, PL’s backlog stood at $7.0-billion, with 99 per cent of its capacity fully contracted through 2026.”

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In the wake of the headwinds of last year and the first quarter of 2020, Mr. Newman sees Pinnacle benefiting from continued investment in a group facilities which are poised to come onstream, as well as “a robust pipeline of new offtake contracts in Japan and South Korea, a recovery in the BC lumber industry, and PL’s increased capability to process non-traditional forest residuals.”

He added: “We also believe PL may announce a greenfield/brownfield capacity expansion of 300,000–350,000MTPA (capital cost of $90–110-million) this year to satisfy the surge in demand expected in 2021–23.”

Despite this optimism, Mr. Newman narrowly trimmed his 2020 and 2021 financial expectations due to the impact of the CN blockade and various capex commitments.

That led him to lower his target for Pinnacle shares to $12.50 from $13, keeping a “buy” rating. The average on the Street is $12.16.

“In the case of a global economic slowdown, being in the power and utilities space, PL could see power consumption, and in turn industrial wood pellet demand, impacted by subdued industrial and manufacturing activities (in its key markets, Asia and Europe). The sawmill curtailments experienced in BC and ongoing fibre supply constraints could also be prolonged due to reduced operating rates by sawmills and other forestry companies (lumber demand). On the other hand, it may benefit from lower shipping costs (truck, rail, river and ocean, given a likely decline in fuel prices) and lower interest rates on its capital projects. We expect that in a potential downturn, PL could be buffered by its long-term supply and logistics contracts, which are matched with its long-term take-or-pay offtake agreements with credit-worthy global utility customers.”


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After better-than-anticipated fourth-quarter financial results, Great Canadian Gaming Corp. (GC-T) is heading into an important stretch as it launches its first major redevelopment project within its GTA bundle, said Canaccord Genuity analyst Derek Dley.

"Great Canadian ended the year on a high note, with the Ontario properties positing strong growth following recent expansion and redevelopment initiatives," he said. "Importantly, looking ahead, Great Canadian remains on track to open Casino Pickering by the end of Q1/20, with the corresponding hotel and entertainment venue set to open by the end of 2020. This is the first large scale redevelopment project within the GTA bundle and will be a focus for many over the next couple quarters, in our view.

"While we believe Casino Pickering will drive robust growth in the back half of the year, our estimates remain admittedly conservative until we gain better visibility into the potential contribution from new gaming and ancillary amenities."

After raising his earnings per share estimate for 2020 to $2.24 from $1.60 “following better than expected growth from the Ontario properties,” Mr. Dley increased his Street-high target for Great Canadian shares by a loonie to $59, keeping a “buy” rating. The average is $47.75.

“We believe Great Canadian can drive incremental EBITDA out of the Ontario bundles through its robust development plans and historically attractive return on capital,” he said. “Meanwhile, the company boasts a collection of well positioned, highly profitable casino properties, which are likely to demonstrate stable revenue and EBITDA growth that can be accelerated through renovation and expansion initiatives over the course of our forecast period.”


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Calling it “a story with considerable operating momentum,” Desjardins Securities analyst Michael Markidis raised his financial expectations for InterRent Real Estate Investment Trust (IIP.UN-T) following fourth-quarter results that displayed “impressive” topiline growth."

“The same-property portfolio represented 85 per cent of total NOI [net operating income] in 4Q19,” he said. “Same-property AMR [average monthly rent] increased 1.0 per cent sequentially and 6.8 per cent year-over-year. The latter, which was augmented by a modest contribution from higher economic occupancy (up 60 basis points year-over-year), was the primary driver behind IIP’s impressive same-property revenue growth of 7.6 per cent.”

“2019 was management’s single biggest year on the acquisition front, with investment volume coming in at $308-million (vs $178-million in 2018). Competition for assets has arguably intensified; however, management seems optimistic that the amount of capital allocated in 2020 will be commensurate with that last year. IIP has not shied away from bidding on assets that are subject to a competitive auction. That said, we believe off-market opportunities in IIP’s three core markets (GTHA, Ottawa and Montréal) and other gateway cities in Canada are being emphasized.”

Calling it “one of our best ideas,” Mr. Markidis raised his target for InterRent units to $19 from $17.50, mintaining a “buy” rating. The average is $18.45.

Elsewhere, Industrial Alliance Securities' Brad Sturges increased his target to $19 from $17 with a "hold" rating.

Mr. Sturges said: “Strong underlying Ontario and Quebec multifamily property fundamentals and the REIT’s non-stabilized assets (36 per cent of InterRent’s suites) provide the potential for significant NAV/unit and AFFO/unit upside through increasing SP-NOI in part by realizing higher AMRs upon suite turnover. However, after another year of sizeable P/AFFO multiple expansion experienced by InterRent, we believe much of the REIT’ssignificant near-term NAV/unit growth prospects are fairly reflected in InterRent’s premium relative valuation at current levels.”

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Though he sees near-term uncertainty for Morgan Stanley (MS-N), Citi analyst Keith Horowitz recommends investors with a longer term focus should use recent share price depreciation as an opportunity to build positions.

In a research note released Wednesday, Mr. Horowitz raised his rating for the New York-based bank's stock to "buy" from "neutral."

"We believe the recent 15 per cent pullback in the bank stocks since Feb 20 is warranted given our view that the business models for many banks are likely to be impaired from prolonged low rates," he said. "MS is down a similar amount to other regionals, yet we believe the impact to longer term returns is slightly less than 100 basis points versus 200bp or more at other banks which are more dependent on low cost deposits. MS is now trading at just 1.1 times TBV [tangible book value] despite our view of a 15 per cent plus ROTE [return on tangible equity] outlook in this environment (versus 13 per cent in 2019), creating a very attractive entry point for a high quality franchise."

After updating his financial model to account for "the new rate environment," Mr. Horowitz's earnings per share projection fell by 25 US cents in 2020 to US$5.05, while his 2021 and 2022 estimate slipped by 50 US cents to US$5.40 and US$6.30.

"The larger decline in 2021 is due in part to a full year impact of lower rates, reinvestment risk and lower assumed net interest revenue from the E-Trade acquisition," he said.

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His target for Morgan Stanley shares fell to US$57 from US$60. The average is US$60.05.

“We believe MS has the potential to realize market share gains in both its institutional and retail franchises,” he said. “Additionally, we prefer banks less rate sensitive given a more challenging rate environment, and MS has relatively low net interest revenue exposure. Longer term, we see the potential for MS to achieve their targeted ROTCE of 15-17 per cent, and think the stock looks relatively attractive at current levels given its return profile.”


Target Corp. (TGT-N) is now “back on track,” according to Citi analyst Paul Lejuez, who called it a “retail winner.”

He made the comments following the company’s webcast to discuss its fourth-quarter financial results and answer questions for analysts. Originally, the Minneapolis retailer had planned a traditional Investor Day in New York, but it cancelled the event on Monday amid concerns about the spread of COVID-19.

"Though TGT’s top-line was not as strong as it had been earlier in F19, 4Q results were solid," said Mr. Lejuez. "And it is good news that trends quarter-to-date have bounced back to more typical levels and we expect the company to beat its 1Q comp and EPS expectations. We believe TGT’s relevance with consumers will enable it to continue to perform well in good times and bad. In the current uncertain (COVID-19 affected) environment, we believe TGT remains top of mind for consumers as they think about their various needs. Longer term, we believe TGT’s continuing relevance with consumers means more brands want to sell there, which leads to more consumers wanting to shop there. This virtuous circle that we have written about in the past underlies our belief that TGT is a winner in the retail landscape."

Though he kept his fiscal 2020 earnings per share projection at US$7.17, Mr. Lejuez raised his 2021 and 2022 estimates to US$8.08 and US$9.13, respectively, from US$8.02 and US$8.99.

He maintained a “buy” rating and US$150 target for Target shares. The average is US$130.75.

"TGT is one of the few retailers driving positive store level comps, a sign that their bricks and mortar locations are important to customers," he said. "We had been concerned in the past about never-ending investments to drive that sales growth, but there is an end in sight to these investments as capex is expected to moderate significantly in F21 and beyond."

In separate research notes following a busy earnings release stretch for U.S. retailers, Mr. Lejuez made the following changes:

Nordstrom Inc. (JWN-N, “buy”) to US$33 from US$36. Average: US$36.25.

Analyst: “JWN’s market strategy seems like a good idea but it hasn’t moved the dial overall, and we believe it may prove more costly than initially anticipated. Overall, JWN is in a difficult spot trying to drive traffic to its bricks and mortar stores, which we believe is key to meaningfully improving profitability.”

Kohl’s Corp. (KSS-N, “neutral”) to US$35 from US$49. Average: US$44.25.

Analyst: “Although EPS beat consensus in 4Q, guidance for F20 is soft and it doesn’t seem like the company has experienced much improvement in trends in February. Looking at the current environment, we expect the company may continue to be challenged to drive traffic. While KSS has many initiatives including AMZN returns and side-by-side partnerships with other types of businesses (such as ALDI and Planet Fitness), so far they haven’t been able to drive an improvement in results. We believe the company is doing the right thing with trying new initiatives but they just aren’t working at this point. And F20 is likely to be choppy, in our view, as we believe the COVID-19 situation will weigh on discretionary purchases at KSS this year (more than what mgmt built into guidance).”

Urban Outfitters Inc. (URBN-Q, “neutral”) to US$24 from US$27. Average: US$26.75.

Analyst: [Quarter-to-date] comps are running high mid single-digits and management said they are seeing good reception to early spring fashion at all 3 brands. However, it is still early in the quarter (Feb is easiest comparison in 1Q) and the potential negative impact from COVID-19 is a big risk to comps. And while management sounds optimistic, SG&A is expected to be 9 per cent in 2020 due to investments behind initiatives like Nuuly, which is expected to lose $36-million in 2020. Given these concerns and despite a reasonable valuation (F20E EV/EBITDA 5.0 times), we will remain on the sidelines."

He maintained a US$120 target for Ross Stores Inc. (ROST-Q, “neutral”). The average is US$121.04.

He said: “ROST posted good 4Q results, with comps and EPS both above consensus. But merch margins fell slightly (the first decline since 1Q14) leading to a deceleration in GP$ on a two year stacked basis (up 8 per cent in 4Q vs 16 per cent each quarter in 1Q-3Q). Guidance for F20 is below consensus, though mgmt is typically conservative and we expect them to be able to beat it (we do not anticipate a falloff in business tied to COVID-19 fears). Although we believe there is upside to guidance and think ROST is well positioned in the current uncertain environment, the stock is trading above TJX.”


Pattern Energy Group Inc.'s (PEGI-Q, PEGI-T) fourth-quarter were essentially a “non-event,” according to Raymond James analyst David Quezada, noting its outlook hangs on the proposed acquisition by the Canada Pension Plan.

“With shares of many of Pattern’s peers moving materially higher since the announcement of the company’s proposed acquisition by the Canada Pension Plan at $26.75/share, claims have surfaced (by Water Island Capital) that shareholders are not sufficiently compensated by the proposed takeout price,” he said. “This argument may have some merit as the average IPP in our coverage universe is up 17 per cent year-to-date, while Pattern has appreciated 2.1 per cent (vs. the TSX up 4.5 per cent). That said, we also note that multiples in the sector moved roughly 2.5 times higher between Jan-19 and current levels. We also note that Pattern’s multiple has appreciated close to this level with its multiple rising 2.2x over this period. Meanwhile, as detailed in PEGI’s response to Water Island, the company’s independent committee reached out to 16 logical strategic parties as part of the go-shop period, which is in addition to 10 parties contacted prior to CPP’s bid emerging. As such, we see limited potential for a competing bid to emerge.”

Though he narrowly raised his 2020 and 2021 earnings per share projections, Mr. Quezada kept a "market peform" rating and US$26.75 target, matching the consensus.

“While year-to-date performance would appear to support the argument that CPP’s takeout price for PEGI is on the low side, we note that fueled by this takeout, the stock had outperformed up to that point rising 19 per cent (vs. the TSX up 6 per cent) from when the rumours of a takeout emerged in Aug-19 and the end of 2019. Further, we note that Pattern’s takeout price was within the range of historical precedent transactions with an implied CAFD yield of 7.6 per cent compared to the historical range of 6.6 per cent to 8.8 per cent. Finally, in light of PEGI’s relatively elevated payout ratio and potential need to for equity to fuel further growth, we believe the contention that the takeout price is light is far from a slam dunk.”


In other analyst actions:

* After the company announced the early redemption of its 5.5-per-cent convertible debentures, Canaccord Genuity analyst Yuri Lynk lowered his target for North American Construction Group Ltd. (NOA-T) to $25 from $28 with a “buy” rating (unchanged). The average on the Street is $23.58.

“Notwithstanding the 10-per-cent EPS dilution, we view the early redemption of $39-million principal amount 5.5-per-cent convertible debentures due March 31, 2024 as prudent," he said. "The additional equity improves NACG’s leverage profile at a time when macro uncertainty has increased significantly. Net debt at the end of 2019 stood at $410-million or 2.4 times EBITDA (TTM). Pro forma the redemption, net debt drops to $371 million or 2.1 times EBITDA (TTM). On management’s 2020 EBITDA guidance range of $190 million to $215-million, the company’s leverage ratio post redemption is between 1.7 times and 2.0 times. In short, this company boasts a strong balance sheet.”

* Seeing it burdened by both lower oil prices and weaker refining macro environment, JP Morgan analyst Phil Gresh cut Cenovus Energy Inc. (CVE-T) to “neutral” from “overweight” with a $12 target, down from $15. The average on the Street is $14.93.

* London-based Peel Hunt initiated coverage of Gran Tierra Energy Inc. (GTE-T) with a “buy” rating.

* BofA Securities raised Eldorado Gold Corp. (EGO-N, ELD-T) to “buy” from “underperform” witha US$13 target, up from US$7.75. The average is US$10.91.

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