Jim Wilson
Inside the Market's roundup of some of today's key analyst actions. This file will be updated often during the trading day so check back for new details.
In reaction to reduced industry forecasts, RBC Dominion Securities analyst Dan MacDonald expects Trican Well Services Ltd. (TCW-T) to breach its revised debt covenants.
Accordingly, Mr. MacDonald lowered his rating for the stock from "outperform" to "sector perform."
"We expect ongoing headwinds for the stock until investors have a clearer picture of the longer term solution for its covenant challenges, with significant downside risk remaining," he said.
The analyst has reduced his forecasted activity level projections for North America, resulting in the reduction of both revenue and margin progressions through 2016. Those changes caused earnings before interest, taxes, depreciation and amortization estimates to fall in 2015, 2016 and 2017 by 12 per cent, 24 per cent and 12 per cent, respectively.
"The binary outcome is now more skewed to the downside for equity investors as our softening outlook for U.S. activity levels through 2016 has led to our revised outlook that TCW will fall short of its revised covenants," he said. "Specifically, our revised forecast leads to TCW falling short of the required $50-million in cumulative EBITDA (from the third quarter of 2015 through the first quarter of 2016). As well, our revised forecasts now point to the need for as much as $200- to $220-million in required capital injection by mid-2016 to meet debt/EBITDA requirements.
He did note that if Trican overcomes its "near-term hurdles" without dilution in equity, there is an upside of $2.30 to $5.75 per share. He called that "the best relative opportunity in our Canadian coverage universe." He did caution that "sizable downside" does remain, however.
He added: "We see the potential for the third quarter to be a positive catalyst, given our expectations for TCW's Canadian pumping margins to be the best pumping margins for North American public fracturing companies. While street consensus has increased significantly, suggesting this is well disseminated, TCW's ability to make its Canadian business work at current depressed pricing demand levels, is a positive sign in our view."
Mr. MacDonald reduced his price target for the stock to $1 (Canadian) from $3. The analyst consensus is $1.85, according to Thomson Reuters.
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Shares of Gibson Energy Inc. (GEI-T) are reaching the floor of its valuation, according to Raymond James analyst Chris Cox, and, therefore, they are "a much better risk/reward opportunity" for investors.
Mr. Cox upgraded his rating for the stock to "outperform" from "market perform."
"Supported by highly visible and contracted growth out of the terminals and pipelines business segment, our analysis would suggest that, even in the event of further sustained pressure on Gibson's more services-oriented business segments, the broader company as a whole should still be able to generate modest EBITDA growth into next year and for the remainder of the decade," said Mr. Cox. Furthermore, we believe the current dividend (7.3-per-cent yield) is secure, while our stress test points to a peak net debt to EBITDA of 3.5 times in a 'worst case' scenario."
He said his rating change came on the basis of his stress test analysis of Gibson, using what he views as "fairly draconian assumptions."
"This analysis reflects the hypothetical scenario of a prolonged period of sub-$50 (U.S.)/barrel of oil, an investment climate that is unlikely to see any pick-up of industry activity, and consequently, an investment climate that is unlikely to see any growth capital from Gibson beyond what is already committed to the terminals and pipelines segment," he said.
He added: "What was most telling from our stress test of the company was the security of the current dividend and the balance sheet, even in a period of sustained pressure on the company's more services oriented business segments. Notably, we believe Gibson would still deliver modest growth in corporate EBITDA over the balance of the decade, owing to heavily contracted growth in the company's terminals and pipelines segment."
Mr. Cox also raised his price target for the shares to $23 (Canadian) from $21. Consensus is $25.38.
"Beyond just the security of the current dividend and balance sheet, we believe there is limited downside to street estimates, relative to our 'worst case' scenario," he said. "Furthermore, with the stock now trading at its lowest multiple since its IPO in 2011, we believe there is sufficient valuation support from current levels (especially considering the safety of the dividend)."
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RBC Dominion Securities analyst Wes Golladay does not see another compelling offer coming forth for Strategic Hotels & Resorts Inc. (BEE-N) to compete with the $6-billion (U.S.) offer from Blackstone Group LP (BX-N).
Mr. Golladay expects the deal, for $14.25 per share in cash, to close. In reaction to the acquisition, he downgraded his rating for Strategic to "sector perform" from "outperform."
"We also have a constructive near-term view for lodging as the industry transitions from a heavier leisure period (August to early September) to a business-oriented travel season (late September to early November)," the analyst said. "With BEE shares likely to be more defensive in nature, we believe an outperform rating is no longer warranted."
He lowered his price target to the agreed-upon take-out price of $14.25 from $15, adding: "we believe Strategic will perform in line with the peer group." Consensus is $15.42.
"Based on our [2015] outlook, BEE currently trades at an [enterprise value to adjusted EBITDA] multiple of 16.3 times, which is in line with the upper-upscale/luxury sub-sector median of 12.1 times, while we calculate that the shares are trading at an EV/Adjusted Hotel EBITDA multiple of 15.3 times compared to the upper-upscale/luxury sub-sector median of 11.3 times," he explained. "The large premium to the group is due to the pending acquisition of all BEE shares by Blackstone."
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Taking a positive view of OceanaGold Corp.'s (OGC-T) recent $850-million acquisition of Romarco Minerals Inc. (R-T), Raymond James analyst Chris Thompson initiated coverage of the stock with an "outperform" rating.
"We view the recent acquisition … favourably, as it provides OGC with a fully permitted, fully funded, top quartile development stage project (Haile) located in a favourable jurisdiction (USA)," said Mr. Thompson. "OGC has a track record of operational success, in construction (building, ramp-up) at its Didipio Au/Cu mine in the Philippines and more recently successfully optimizing its NZ mines [aided by the weakness of the New Zealand dollar]. This success, we feel, reflects the expertise needed to unlock Haile's development upside. In addition, OGC recently bolstered its production base by acquiring the Waihi mine in NZ which boosts near term free cash flow and lowers costs."
Though the analyst noted Haile will "soak up" the company's near-term free cash flow, he did note OGC has emerged as "a significant free cash flow generator" despite recent weak metal prices.
"OGC has displayed prudency in deploying FCF generated from its operations to pay down debt, and pay an annual dividend of $0.02/share (yielding approximately 1.4 per cent)," he said. "OGC also has a strong and flexible balance sheet. …. Supported by a strong operational base, OGC generated $105-million in FCF in 2014 and is set to generate a further $55-million in FCF in 2015 … while FCF will pause in 2016E (with Haile construction)."
He set a price target of $3.50 (Canadian) per share. Consensus is $3.38.
Meanwhile, BMO Nesbitt Burns analyst Brian Quast took a negative view of the deal.
"The acquisition of Romarco is dilutive to OGC once the current OGC management plans (more conservative than the prior Haile Gold Mine estimates) are incorporated," said Mr. Quast. "The acquisition of the Haile Gold Mine should not lead to any further financing requirements, and the commissioning of this mine goes some way to ameliorating the production losses from New Zealand. The Haile Gold Mine is also a low-cost producer with total cash costs below $500/oz in the first five years, and a LOM average total cash cost of $617/oz. Despite this, the amount of share dilution in the Romarco acquisition, combined with more conservative Haile Gold Mine estimates ensures that this acquisition was dilutive on both an NPV and a 2016E CFPS basis."
Maintaining his "underperform" rating for OceanaGold, he reduced his price target to $2 from $2.75.
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Applied Materials Inc. (AMAT-Q) is likely to underperform its peers given its large exposure to the memory chip segment of its business, said RBC Dominion Securities analyst Mahesh Sanganeria.
He downgraded his rating of the tech stock to "underperform" from "sector perform."
"While we maintain our positive secular view on the semicap sector driven by increasing capital intensity, in the near term, we expect [2016 calendar year] capex to be down 13 per cent year over year driven mostly by a decline in memory [a decline of 38 per cent for dynamic random-access memory and a decline of 17 per cent for negative-AND memory] and flattish foundry/IDM spending," he said.
He added: "We believe AMAT is overly optimistic on [2016 calendar year Wafer Fab Equipment]. During the [July quarterly] earnings call, management expected DRAM spending to be down 10 per cent and NAND to remain at a high level driven by continued 3D NAND investment in calendar year16. Additionally, the company expects big 10nm foundry spending. Earlier, during the July analyst day, the company also expected to increase market share to 21.9 per cent driven by inflection technologies. We believe the WFE market share is very sticky and unlikely to change quickly due to the process complexity."
He lowered his price target to $12 (U.S.) from $16. Consensus is $21.94.
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In other analyst actions:
AutoZone Inc (AZO-N) was raised to "outperform" from "market perform" at Oppenheimer by equity analyst Brian Nagel. The 18-month target price is $850 (U.S.) per share.
Boston Scientific Corp (BSX-N) was raised to "strong buy" from "outperform" at Raymond James by equity analyst Jayson Bedford. The 12-month target price is $21 (U.S.) per share.
Cal-Maine Foods Inc (CALM-Q) was downgraded to "hold" from "buy" at BB&T Capital by equity analyst Brett Hundley.
Calfrac Well Services Ltd (CFW-T) was downgraded to "sector perform" from "outperform" at RBC Capital by equity analyst Dan Macdonald. The 12-month target price is $4 (Canadian) per share.
FireEye Inc (FEYE-Q) was downgraded to "neutral" from "overweight" at Piper Jaffray by equity analyst Andrew Nowinski. The 12-month target price is $37 (U.S.) per share.
Juniper Networks Inc (JNPR-N) was raised to "buy" from "hold" at Stifel by equity analyst Sanjiv Wadhwani. The 12-month target price is $32 (U.S.) per share.
Lazard Ltd (LAZ-N) was raised to "positive" from "neutral" at Susquehanna by equity analyst Douglas Sipkin. The 12-month target price is $53 (U.S.) per share.
OceanaGold Corp (OGC-T) was rated new "outperform" at Raymond James by equity analyst Chris Thompson. The 12-month target price is $3.50 (Canadian) per share.
Snap-on Inc (SNA-N) was raised to "buy" from "neutral" at Longbow Research by equity analyst David Macgregor. The 12-month target price is $184 (U.S.) per share.
TransGlobe Energy Corp (TGL-T) was raised to "buy" from "hold" at Paradigm Capital by equity analyst Ian Macqueen. The target price is $4.75 (Canadian) per share.
TMAC Resources Inc (TMR-T) was rated new "speculative buy" at TD Securities by equity analyst Steven Green. The 12-month target price is $9.50 (Canadian) per share.
Toll Brothers Inc (TOL-N) was raised to "positive" from "neutral" at Susquehanna by equity analyst Jack Micenko. The 12-month target price is $42 (U.S.) per share.
Twitter Inc (TWTR-N) was raised to "buy" from "hold" at Axiom Capital by equity analyst Victor Anthony. The target price is $37 (U.S.) per share.
Touchstone Exploration Inc (TXP-T) was downgraded to "hold" from "buy" at Paradigm Capital by equity analyst Ian Macqueen. The target price is 30 cents (Canadian) per share.
With files from Bloomberg News
David Leeder