Although its military division has seen declining sales, Héroux-Devtek’s can expect the rising commercial aviation market to keep its shares flying.
Inside the Market's roundup of some of today's key analyst actions
Acumen Capital boosted its target price for Calian Group Ltd. (CGY-T) after the company announced it has again won a Department of National Defence (DND) contract valued at up to $1-billion over the next 12 years, including contract extensions.
Management stated "it was still early on in respect to full revenue and margin impact, but we believe the additional Health Support Services (HSS) contracts awarded from the RCMP and VAC will add additional revenue in FY2H18 and beyond," said analyst Brian Pow.
"The DND contract typically sees fluctuations in annual revenue from the fee for service type contract. With the contracts coming into effect April 2018 (CGY's Q3FY18) we are bumping up our revenue contribution from the RCMP and VAC contracts for our FY2H18 and full-year FY19 estimates and beyond," the analyst said. "With respect to the size and scope of the awarded contracts, CGY partnered with Bayshore Healthcare Ltd., another Canadian health services provider. Bayshore will assist in providing services across the three contracts with CGY acting as the main contractor."
"The DND contract is a significant source of Calian's revenue, and the renewal confirmation should eliminate any uncertainty towards the company's future outlook which is further strengthened by the addition of two new contracts with the RCMP and VAC. At FYQ317, the Business and Technology Services (BTS) contract backlog was $325-million (total company $401-million including Systems Engineering) with terms extending into 2021. All combined, the DND contracts will support growth and we expect management to update the full backlog in their FYE report in the coming weeks," the analyst said.
"The combined contracts recharge the contractual backlog and provide a realistic level of revenue assurance in the years ahead."
He kept his "buy" rating on the shares and raised his target price to $36 from $31. The consensus is $31.25, according to Thomson Reuters.
Desjardins Capital Market raised its target on Calian to $35 from $31 and maintained its "buy" rating.
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Desjardins Capital Markets upgraded Heroux-Devtek Inc. (HRX-T) and raised its target price after the company acquired CESA, " a leading European provider of mechanical and electromechanical systems in the aerospace industry," said analyst Benoit Poirier.
"We believe this acquisition provides HRX an excellent platform to grow with Airbus as well as expand its exposure to proprietary products and to the aftermarket segment," he said.
He boosted his rating to "buy" from "hold" and boosted its target to $18 from $15. The consensus is $14.67.
"This acquisition should strengthen HRX's reputation as a key supplier. CESA represents an excellent strategic fit for HRX given its strong exposure to Airbus (about 50 per cent of revenue), which should allow the company to expand its exposure to proprietary products and the aftermarket segment, which provides recurring revenue over a long-term period," he said.
The "transaction is accretive — the company still maintains a strong balance sheet. We derive a contribution of $16.5-million to our adjusted EBITDA [earnings before interest, taxes, depreciation and amortization] forecast in FY19 and $18.1-million in FY20, which reflects modest synergies and margin expansion opportunities at CESA. Bottom line, we derive EPS accretion of $0.06 in FY19 and $0.09 in FY20. We expect HRX's pro forma net debt to adjusted EBITDA to stand at 2.4 times (excluding government loans) and decline to 1.8 times 12 months after the closing."
"Our target is based on the average of three valuation methods: (1) a 19.0 times P/E multiple (was 17.0 times) on our FY19 adjusted EPS estimate, (2) a 10.0 times EV/EBITDA multiple (was 9.5 times) on our FY19 EBITDA estimate, and (3) a DCF value of $19.63 (was $16.95). Our increased multiples are justified by the stronger revenue diversification provided by Airbus, the exposure to proprietary products and recent M&A transactions," he said.
"Upgrading to Buy from Hold -- the stock is attractive and we expect the shares to be re-rated. We are very pleased with the transaction given (1) the exposure to Airbus provided by this transaction, (2) the significant potential for revenue synergies as both entities are complementary, (3) the little overlap in their respective portfolios of clients, which should enable further cross-selling opportunities, and (4) CESA's strong exposure to proprietary products. Given the strong rationale behind the transaction and potential return to our new target price, we are upgrading our rating to Buy," he said.
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Desjardins Capital Markets is positive on the deal for Metro Inc. (MRU-T) to acquire Jean Coutu Group, which is expected to close in the next six to nine months.
"We are positive on the transaction, although we are still seeking additional details on ROIC [return on invested capital]. Metro appears to be on course to swap some or all of its passive investment in Couche-Tard for control of a cash-generating business," said analyst Keith Howlett.
He maintained his "buy" target and his $50 target price. The consensus is $46.60.
"Metro appears on course to swap the equity-accounted earnings of its 5.7 per centshareholding in Couche-Tard for operational control of the pharmacy business of Jean Coutu Group. Sale of some or all of Couche-Tard shares will assist in financing the acquisition of PJC. Once Metro's shareholding in Couche-Tard falls below 5%, it will no longer equity-account for its share of earnings. Earnings from PJC will offset the loss of earnings from Couche-Tard. We are expecting Metro to time the two events to minimize any impact on reported EPS (adjusted for amortization of intangibles). If this is a correct interpretation of Metro's intentions, the first sale of shares in Couche-Tard will occur about the same time as the completion of the PJC acquisition," he said.
"There is no change at this time to our EPS estimates for FY17 and FY18, which reflect Metro's current operations only. The PJC acquisition will not close until 2Q or 3Q of FY18. Our target price remains based on 16 times FY18 EPS from food operations, the value of Couche-Tard shares owned and $2 in respect of the pending acquisition of PJC."
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CIBC resumed coverage of CI Financial Corp. (CIX-T) following the close of its acquisition of Sentry.
"The financial implications of the transaction are compelling as we estimate operating EPS accretion of 6 per cent in 2019. The strategic implications are less obvious, but at the end of the day we think increased scale can be used to drive competitive advantages. Sentry has been posting material net redemptions and that might be the biggest risk to the transaction. We have increased our price target from $32 to $34 to capture estimated EPS accretion, partly offset by a lower valuation multiple to capture net redemption risk. We don't think the market is rewarding CI for transaction accretion and reiterate our Outperformer rating," said analyst Paul Holden.
He raised his target to $34 from $32 and kept his "outperformer" rating. The consensus is $29.69.
"Earnings accretion will hinge on CI's ability to increase profit margins at Sentry. The target is to bring Sentry's margins in line with CI by the end of 2019, which is expected to result in mid- to high single digit EPS accretion. Based on limited disclosure we estimate that Sentry's EBITDA margin on a trailing basis is approximately 25 per cent versus CI at 44 per cent, which necessitates roughly about $72-million in cost synergies. CI's ability to utilize scale versus smaller competitors is what will matter over time. Based on the history of the company, we know that CI has been one of the most efficient operators, which has translated into lower costs for unitholders. CI will lean on scale to maximize investments in operations, product development and client services," he said.
"We think the muted market reaction to the transaction is partly attributable to the net outflows at Sentry. Sentry posted net redemptions of $1-billion in 2016 and YTD AUM growth implies a similar run-rate. Investors are looking for CI to improve its net flows after a terrible 2016 and at first glance Sentry does not look to be the solution. While we assume net redemptions continue in the near term, we think that can change over time given good fund performance at Sentry and access to distribution where CI has strong relationships. We assume combined net sales of $0.2-billion in 2018 and $2.4-billion in 2019."
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CIBC analyst Robert Catellier says Pembina Pipeline Corp.'s (PPL-T) acquisition of Veresen has made it stronger.
"The acquisition of Veresen enhances Pembina's core strengths while also providing compelling strategic benefits such as scale, diversification and enhanced exposure to the Montney," he said.
The analyst maintained his "outperformer" rating on the stock and increased his discounted-cash-flow price target to $50, up from $49. The consensus is $50.24.
"Veresen provides a number of important strategic benefits without changing the company's risk profile. The $9.7-billion enterprise value acquisition adds meaningful scale, without changing the character of its EBITDA [earnings before interest, taxes, depreciation and amortization] profile, which will improve modestly to 87 per cent fee-for-service (2018E-2022E). Enhanced exposure to the Montney integrates nicely with Pembina's assets and reduces long-term decline risk, in our opinion, while increased U.S. exposure could provide growth opportunities in the future," he said.
"The acquisition is neutral to our 2018 ACFFO/share estimates when using $75-million of synergies, but 2019E accretion of 4.8 per cent is more representative given the Veresen Midstream build-out. As with other Pembina acquisitions in the past, we expect the acquisition of Veresen to look increasingly attractive over time."
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