Skip to main content

Getty Images/iStockphoto

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

The recent underperformance of Quebecor Inc.'s (QBR.B-T) stock has led to an improved upside-downside ratio, according to Desjardins Securities analyst Maher Yaghi, prompting him to upgrade his rating to "buy" from "hold."

Mr. Yaghi noted Quebecor has fallen 5.1 per cent since he lowered his rating to "hold" in response to the release of its third-quarter financial results on Nov. 9. Meanwhile, the TSX has gained 0.3 per cent during that span, and the telecom sector declined a mere 0.2 per cent.

"The current stock price now provides investors with a 15-per-cent potential return (0.5-per-cent dividend yield) on our one-year target price," he said. "The stock currently trades at 7.3 times enterprise value/following fiscal year EBITDA, which represents a discount to the sector's 8.1 times valuation. Moreover, we note that Quebecor currently has the lowest ratio of EV/EBITDA to EBITDA growth in the industry (1.4 times versus industry 1.8 times), indicating that future EBITDA is cheap.

"While one could argue that the recent rise in interest rates has put pressure on share prices, we note that the credit spread between smaller companies such as Quebecor and larger ones such as BCE has tightened recently, indicating that the discount rate on Quebecor should have increased at a slower rate than for BCE."

In a research note released late Wednesday, Mr. Yaghi also pointed a trio of factors supporting his rating change for the Montreal-based telecommunications and media company, noting: "Firstly, as Shaw tries to gain wireless share in Ontario, Alberta and B.C., we believe any price wars with incumbents in those provinces are unlikely to spill over into Quebec. Secondly, we expect Quebecor to continue to post strong results; our 2018 EBITDA growth forecast is 6 per cent, the strongest organic growth among Canadian telecom companies. This growth is driven by its improved margin and pricing position in telecom, specifically wireless. Thirdly, Quebecor's balance sheet has significantly improved in recent quarters thanks to the sale of spectrum to Shaw and Rogers. This enables the company to ramp up its stock buyback program in addition to opening the way for a favourable resolution on the buyback of the CDPQ position in QMI. We view any transaction amounting to $1.6-billion or less for that stake to be a win-win for both parties. Finally, on a valuation basis, the stock is currently trading at a 0.8 times discount to peers, leaving ample room for multiple expansion in the event of a full buyback of QMI."

Mr. Yaghi maintained his 12-month target price for the stock of $27. The analyst average target price is currently $27.32, according to Thomson Reuters data.

"We believe management is responding well to the strong competitive threat from BCE by focusing on product differentiation and customer service rather than on maintaining market share at all costs," he said. "Our view is that the shares are attractive at these levels as they trade at a discount to peers even though the company delivers above-average EBITDA growth."

=====

RBC Dominion Securities analyst Steve Arthur sees Uni-Select Inc. (UNS-T) continuing to deliver both revenue and earnings growth across its diversified geographic base in the near term, while expecting acquisitions to build and further diversify its business.

In the wake of a dip in share price following the release of its third-quarter results in early November, Mr. Arthur said the Boucherville, Que.-based auto parts manufacturer's stock now possesses "attractive" value at 8.2 times estimated 2019 enterprise value to EBITDA. Accordingly, he initiated coverage with an "outperform" rating.

Mr. Arthur projects Uni-Select to build "steady" top-line and earnings growth in the mid-single-digits from its top-two position in three different and "distinct" markets. The company operates FinishMaster, an automotive refinish paint distributor in the U.S., Uni-Select Canada, an after-market automotive parts aftermarket distributor, and Parts Alliance in the United Kingdom.

"Uni-Select's Canadian and UK businesses have very similar business models, with both distributing automotive aftermarket parts across their respective countries," said Mr. Arthur. "We believe there is opportunity to recognize operational efficiencies by sharing best practices, software management systems, etc. beyond the base integration efforts. Likely to be a more significant driver is the company's opportunity to leverage its FinishMaster brand in markets outside of the U.S. UNS has begun to do this in Canada, and we expect this will continue."

The analyst said that growth is "supported by an increase in vehicles in operation, an aging vehicle fleet, more vehicles in the prime aftermarket (6+ years old), and an increase in miles driven."

"Our base case forecast reflects roughly 3-per-cent organic revenue growth 2018 to 2020, with some expected margin improvement from\ the Canadian Automotive and Parts Alliance segments driving 4-per-cent EBITDA growth," said Mr. Arthur. "This drives 10-per-cent EPS growth through 2020 as UNS benefits from lower interest expenses (on lower debt) and a slightly lower tax rate. We believe that our relatively conservative set of assumptions provide a solid base for business growth and investor expectations in the coming years. 5-year earnings and share price scenarios point to $50 share price potential 3-4 years out: We assess longer-term revenue and margin scenarios, and with plausible assumptions see UNS reaching the $44-50 range on our 5-year earnings outlook."

Mr. Arthur set a price target of $33 for Uni-Select shares. The average target is $32.17.

"[Its] discounted valuation relative to peers, which should narrow as integration continues and leverage is reduced: UNS currently trades at 8.2 times 2019 EBITDA, materially below the peer group average of 9.8 times," he said. "UNS does have higher leverage at this stage (3.8 times versus 2.0 times), but an earnings growth outlook that is higher than most. We forecast leverage to decline to 2.5-times trailing net debt/EBITDA by year-end 2018, a comfortable level."

=====

Bonterra Energy Corp.'s (BNE-T) sale of a 2-per-cent light oil gross overriding royalty (GORR) agreement in the Pembina Cardium pool with Freehold Royalties Ltd. (FRU-T) reduces near-term uncertainty, said AltaCorp Capital analyst Thomas Matthews, leading him to raise his rating for its stock to "outperform" from "sector perform."

"With the GORR arrangement, Bonterra has eliminated the uncertainty surrounding an expected leverage-induced corporate event through year-end," said Mr. Matthews. "Of the options available, we believe that the GORR was the best outcome as it is a) non-dilutive, b) easy for investors to understand, c) brings leverage back in line with its yield paying peers and d) does not make a material change to Bonterra's competitive full-cycle margins going forward. Without the leverage overhang, investors can once again focus on Bonterra's low decline (20 per cent) production profile which can deliver annual 3-5-per-cent PPS [production per share] growth within cashflow due to its strong full-cycle business model. We suspect that investment will return to the name to normalize its current 8.2-per-cent yield via share price appreciation as we do not envision a dividend cut unless WTI deteriorates to the low $50's per barrel (which would result in a small cut to about 8 cents per month to maintain its growth within cashflow)."

Bonterra announced the $52-million agreement with Freehold on Monday with the release of its 2018 budget. The Pembina Cardium pool represents approximately 90 percent of its current petroleum and natural gas sales.

"The agreement implies 14 times 2018 cashflow ($57/bbl WTI, $1.75/mcf AECO, $0.78 FX) and is accretive to cashflow considering a current 2018 enterprise value-to-debt-adjusted cash (EV/DACF) valuation of 6.4 times," said Mr. Matthews. "The deal also included transfer of 2.5 net sections of land to Bonterra which includes 10 wells currently shut-in that if reactivated would produce 115 barrels of oil equivalent per day and generate $1-million  in annual cashflow. We are unclear as to the cost of reactivating the wells and as such we have not included value for the production in our NAV."

Mr. Matthews raised his target for Bonterra shares to $18.75 from $18. The average is $20.60.

=====

Andrew Peller Ltd.'s (ADW.A-T) recent acquisitions place it in a position to grow in a "more aggressive manner," said Echelon Wealth Partners analyst Amr Ezzat.

Believing it presents investors with an "attractive" risk-reward at its current level, Mr. Ezzat initiated coverage of the Grimsby, Ont.-based wine maker with a "buy" rating.

Mr. Ezzat said Andrew Peller's acquisition of Gray Monk Cellars Ltd., Tinhorn Creek Vineyards Ltd., and Black Hills Estate Winery in October for approximately $94.8-million is likely to drive significant growth and margin expansion, paving the way for a $1-billion valuation.

"On the one hand, the recent acquisitions enable ADW to grow top line at a faster pace (acquired brands will grow at 6-7-per-cent compound annual growth rate versus ADW's historical 4-per-cent CAGR), and on the other, the acquisitions provide an immediate boost to margins on a normalized basis (33.5-per-cent EBITDA margin versus ADW's 13.2 per cent in F2017)," he said.

"Excluding any other acquisitions (which is unlikely), we believe ADW can grow its pro forma EBITDA to over $83-million by F2023, at which point, we believe the company's equity value would be worth $1-billion."

The analyst believes the company benefits from a "sustainable" competitive advantage due to size and "unique" positioning in the industry through its retail locations and growing number of wineries.

"We believe these factors, together with an evolving regulatory environment, provide the Company with more wiggle room than smaller peers to drive better product mix and sell through higher-margin distribution channels," said Mr. Ezzat. "As such, we see substantial running ground for ADW to defend and grow its margins. Namely, we forecast EBITDA margins to grow from 13.2 per cent in fiscal 2017 to 17.8 per cent in F2021, driving 13.9-per-cent EBITDA CAGR over the same period.

"Our forecast for capital expenditures reflects our expectation of increased intensity as the company embarks on a front-end weighted five-year $25-million capital program centred on increasing both capacity and efficiency. We estimate a 50/50 split between growth/maintenance capex over the next 2 years. Despite the increased capex intensity over the next couple of years, we see ROIC [return on invested capital] improving from the current 10 per cent to 14 per cent due to the aforementioned margin expansion profile."

Despite a recent strong run by its stock, Mr. Ezzat still believes it presents an attractive valuation, setting a price target of $17. The analyst average target on the Street is currently $15.92.

"Our Buy rating is supported by a discounted cash flow (DCF) analysis, and further corroborated by a comparable multiples analysis," he said. "In short, we believe the company's fundamentals are not reflected in current valuation levels. ADW currently trades at a staggering 32-per-cent discount to peers on an NTM [next 12 month] EBITDA basis. We derive our $17.00 per share target price using a DCF analysis with an 8.0-per-cent discount rate and a 3.0-per-cent perpetual growth rate. Our $17.00 target price implies a 14.0 times NTM Adjusted EBITDA multiple, a discount to the company's peers."

=====

BlackBerry Ltd.'s (BB-N, BB-T) valuation continues to be reset higher to reflect its design win momentum in automotive, said RBC Dominion Securities analyst Paul Treiber in reaction to the release of the tech company's third-quarter financial results.

On Wednesday, Waterloo, Ont.-based BlackBerry reported third-quarter non-GAAP revenue of $235-million (U.S.), a drop of 22 per cent year over year but ahead of the projections of both Mr. Treiber ($222-million) and the Street ($215-million). Adjusted earnings per share of 3 cents also topped expectations (both estimated nil).

"The beat stems from several unusuals, including higher IP licensing, SAF and handset revenue," the analyst said. "IP revenue was $50-millon, above RBC [estimate of] $41-million, on an earlier than expected license deal. SAF and handsets have nominal impact on valuation, since both are ultimately declining to zero. GAAP EPS was [a loss of] 52 cents on the $149-million Nokia contract dispute settlement."

Though core software results missed expectations and he expects organic growth to remain slow, Mr. Arthur said the company enjoyed to "solid" QNX automotive design wins.

"BlackBerry indicated that it secured 10 design wins with automotive suppliers Q3," he said. "The company now partners with the top three automotive tier ones: Bosch, Denso and Magna. The company expects BTS / QNX automotive revenue to ramp 2H/FY19 when previous design wins are expected to start contributing to revenue. In regards to BlackBerry Radar, management commented that the company has 80 customers in its pipeline (up from 60 opportunities in its pipeline Q2) and that the company signed 4 deals in the quarter. 'Company total' software and services revenue climbed to 85 per cent of total company revenue Q3."

Despite the ramp-up in its automotive work, Mr. Treiber said growth is needed elsewhere in order to justify its stock valuation.

"Over the last year, BlackBerry's valuation has increased from 2.8 times forward 12 month enterprise value-to-sales to 5.2 times currently, above enterprise security software peers at 3.4 times (EMM comparable MobileIron at 1.6 times)," he said. "Design win momentum is positive, though visibility to revenue is limited and appears to be priced into the stock. We believe core software revenue growth needs to accelerate or visibility improve to justify further upside for the stock."

He maintained a "sector perform" rating, raising his target to $11 (U.S.) from $10.50. The average is $10.91.

Elsewhere, CIBC World Markets analyst Todd Coupland raised his target to $13 (U.S.) from $11 with a "neutral" rating (unchanged).

"Higher enterprise software for regulated users led to the strong results," said Mr. Coupland. "We think investors should hold their shares. ... We view BlackBerry shares as close to fair value (at 4.7 times 2019 estimated revenue and 26-times EBITDA and cash per share of $3.18)."

Raymond James analyst Steven Li maintained a "market perform" rating and $11 target.

Mr. Li said: "Despite lackluster growth in Enterprise Software and QNX, BlackBerry shares ran up 12 per cent [Wednesday] on the back of a solid F3Q (versus 0.2 per cent for the TSX). It's clear to us the market is willing to pay up for QNX and its market position in future automotive platforms."

=====

Seeing signs of improvement, RBC Dominion Securities analyst Nik Modi upgraded Coty Inc. (COTY-N), a New York-based a beauty products manufacturer, to "outperform" from "sector perform."

"Since our Sector Perform launch in 2014 we have been skeptical around the company's innovation pipeline, spending levels, profit goals and prior management's acquisition track record," said Mr. Modi. "After meeting with Coty's current CEO/CFO and speaking with industry contacts, we believe calendar year 2018 could mark an inflection in the Coty story. We expect top-line momentum in its luxury and professional businesses (due in part to category growth) to continue. We also expect stabilization in the Coty's consumer business (the biggest swing factor for CY18) due in part to the Covergirl re-launch in 2HFY18 and new Clairol innovation.

"An early scan of consumer reviews were encouraging on Coty's brands, particularly Clairol Professional, Wella, Philosophy and Calvin Klein. Feedback from industry contacts has also been particularly positive on the Younique business, where Coty will not only benefit from the business's double-digit top-line momentum but leverage Younique's talent, e-commerce and social media capabilities across the rest of the business."

Calling is current valuation "compelling" and seeing its shares as undervalued relative to its peers, Mr. Modi increased his target to $23 (U.S.) from $18. The average target is $19.18.

"We expect top line to gradually improve and margins to expand on the back of productivity efforts and synergies from the P&G acquisition," he said.

=====

Desjardins Securities analyst Gary Ho resumed coverage of Fiera Capital Corp. (FSZ-T) following Thursday's announcement of the completion of its bought deal public offerings of approximately $169-million in total gross proceeds.

Mr. Ho maintained a "buy" rating and $16 target. The average is $16.46.

He said: "Our positive view is based on: (1) management's ability to acquire accretively and integrate successfully (key driver in its $200-billion AUM target); (2) it has grown revenue organically by 6 per cent over the past few years; (3) we like its expansion into alt assets; (4) we foresee margin expansion to mid-30 per cent over time; (5) FSZ's business model is largely insulated from regulatory concerns facing its peers; and (6) FSZ has a history of steady dividend increases."

=====

In other analyst actions:

TD Securities analyst Vince Valentini upgraded Cogeco Communications Inc. (CCA-T) to "hold" from "reduce" with an $87 target (unchanged). The average is $92.82.

Dream Office Real Estate Investment Trust (D.UN-T) was lowered to "hold" from "buy" by TD Securities analyst Samuel Damiani. He maintained a $24 target, while the average on the Street is $23.17.

RBC Dominion Securities cut Western Energy Services Corp. (WRG-T) to "sector perform" from "outperform" with a target of $1.25, down from $2. The average is $1.56.

Discovery Communications Inc. (DISCA-Q) was raised to "buy" from "neutral" by Bank of America Merrill Lynch with a target of $30 (U.S.), up from $26. The average is $22.19.

MORE TO COME

Follow related authors and topics

Authors and topics you follow will be added to your personal news feed in Following.

Interact with The Globe