Tuesday’s analyst upgrades and downgrades

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

Pengrowth Energy Corp.'s (PGF-T, PGH-N) $180-million sale of a portion of its Swan Hill Assets in Alberta is not a "home run," according to RBC Dominion Securities analyst Shailender Randhawa.

However, he believes the deal with an undisclosed private company, announced Monday, buys time for the Calgary-based company as it works to repay 2017 debt maturities. Accordingly, he upgraded the Calgary-based company to "sector perform" from "underperform."

Pengrowth said the deal is in keeping with its strategy to de-lever its balance sheet, allowing it to "streamline and high-grade its remaining portfolio." The divested assets generated average daily production of 4,920 barrels of oil equivalent per day during the fourth quarter of 2016.

"Applying the proceeds to remaining 2017 debt maturities, and updating for the mid-point of Pengrowth's revised 47,000 to 49,000 production guidance range, we project the company to exit 2017 with $63-million of cash," said Mr. Randhawa. "We think the company has time to secure necessary covenant amendments while pursuing a high yield issuance to refinance $580-million in 2018 debt maturities, the largest of which is a $265-million (U.S.) note issue due in August."

Mr. Randhawa emphasized the company's need to "shrink to grow," noting its Lindbergh thermal project has posted "strong" initial rates and holds growth potential. However, he feels the company's debt-load is too high and "limits" funding capacity.

"We believe accretive asset sales are key to right-sizing the balance sheet. Lindbergh Phase II development provides upside to our target but requires funding visibility, with approximately $900 million of term-debt maturities in 2017–18 adding complexity," he said.

"We believe Pengrowth's conventional assets provide a harvest/monetize option to right-size its balance sheet. Pengrowth is part way through its $600-million disposition goal. We think sales metrics above $40,000/flowing boe/d and neutral to existing conventional netbacks would be positive. Additional asset sales are a moving target tied to commodity prices, but we believe a smaller, high-graded conventional unit and Lindbergh Phase I could support roughly $600 million of debt at $65 (U.S.) per barrel WTI."

Mr. Randhawa maintained his price target of $1.75 for Pengrowth shares. The analyst consensus price target is $1.97, according to Thomson Reuters.

"Pengrowth trades at 2017 and 2018 estimated EV/DACF [enterprise value to debt-adjusted cash flow] multiples of 6.2 times and 6.0 times excluding realized hedges (versus oil-weighted peers at 6.1 times and 4.8 times) and a P/NAV [price to net asset value] ratio of 1.2 times (versus peers at 1.0 times) at RBC's price deck," he said. "Pengrowth's proven FDC [future development costs] of $2.0-billion maps to 13.0 times its 2017 cash flow at our $56 (U.S.) per barrel WTI price."

"Our 12-month price target and rating reflect Pengrowth's above-average resource exposure but higher financial leverage and lack of funding visibility around phase II expansion. Our price target reflects a 1.0 times multiple of the $1.79 per share sum of our adjusted base NAV of $1.14 plus $0.92 from risked development."

Elsewhere, Raymond James analyst Chris Cox said the sale brings "much needed pressure relief" for Pengrowth. He lowered his target to $1.75 from $2 with an unchanged "market perform" rating.

"While the asset sale brings certainty to the repayment of the 2017 debt maturities, the company remains an over-leveraged entity in need of covenant relief over the near-term, funding certainty for 2018 debt maturities over the medium-term, and over the long-term, the need for more meaningful reduction in debt levels to rightsize the balance sheet relative to what will likely be an even lower production base and the prospect of persistently low oil prices," said Mr. Cox. "That said, the actions taken thus far should give investors comfort that management will see the company through this de-leveraging period, but the uncertainty with respect to future balance sheet cures is too great to justify a more constructive outlook at this time."

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Expecting upside to its 3-year outlook, RBC Dominion Securities analyst Mark Mihaljevic upgraded Pan American Silver Corp. (PAAS-Q, PAAS-T) to "outperform" from "sector perform."

"Having delivered better results than budgeted in 2016, we believe the company's 2017-19 outlook could also prove conservative given (1) assumed by-product base metals prices are 5-10 per cent below spot levels, (2) development of Joaquin is not included in current outlook, (3) likelihood company used conservative assumptions heading into two ramp-ups, and (4) potential for better than expected output from La Colorada," said Mr. Mihaljevic.

He said the Vancouver-based company's shares now possess an "attractive" valuation to investors, citing a 14-per-cent discount on near-term cash flow.

"From a valuation standpoint, Pan American's shares are attractively valued relative to its precious metals peers with the company's shares trading at a 14-per-cent discount (9.2 times versus 10.7 times) relative to its peers on EV/AdjCF [enterprise value to adjusted cash flow], our preferred cash flow metric," said Mr. Mihaljevic. "We prefer this metric over conventional P/CF [price to cash flow] as the multiple better reflects the value being applied to a company's productive assets by adjusting for balance sheet items and taking into account sustaining/ongoing capital expenditures which are not picked up by traditional cash flow/earnings based metrics.

"Assuming flat silver and gold prices of $19.25 (U.S.) per ounce and $1,300 per ounce, we estimate Pan American currently trades at a P/NAV [price to net asset value] multiple of 1.18 times which is in-line with its peers at 1.15 times."

Mr. Mihaljevic expects expansions to its La Colorada and Dolores mines in Mexico to drive "strong" margin expansions over the next several years, projecting sustaining free cash flow margins to increase to 20 per cent in 2020 at spot prices from 15 per cent in 2017.

"Not only is Pan American's silver production profile forecast to demonstrate solid near-term growth (3-year compound annual growth rate of 5 per cent through 2020), the company's all-in sustaining costs (AISC) are expected to improve by 25 per cent (at spot prices) over this timeframe," he said. "The improved operating outlook is driven by brownfields expansion at its flagship La Colorada and Dolores mines in Mexico replacing higher cost production from Alamo Dorado, an asset at the end of its mine life. In our view, development of the recently acquired Joaquin satellite deposit at the Manantial Espejo mine is likely to see the asset's life extended, which would benefit company-wide production and cash flow, but skew average AISC modestly higher (greater contribution from a relatively higher cost asset)."

He maintained a target price of $22 (U.S.) for the stock. Consensus is $20.35.

"We expect the company's shares to outpace peers as it (1) brings two significant brownfield expansion projects on-line, (2) advances Joaquin and La Negra, (3) continues to deliver steady operating results with potential upside to current guidance and (4) our Outperform rating is supported by attractive valuation relative to its peers," he said.

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After outperforming the S&P/TSX Capped REIT Index since the start of 2016, Industrial Alliance Securities analyst Brad Sturges downgraded Pure Industrial Real Estate Trust (AAR.UN-T)  to "buy" from "strong buy" based on valuation.

"PIRET has achieved a total return of 51 per cent since the start of 2016 versus a 20-per-cent total return for the S&P/TSX Capped REIT Index," said Mr. Sturges.

"We believe that PIRET's relative premium P/AFFO [price to adjusted funds from operations] multiple valuation to its Canadian-listed industrial REIT peers is warranted, given its: 1) attractive exposure to improving Ontario, BC, and U.S. industrial property markets; 2) institutional-quality portfolio weighted towards distribution/warehouse and logistics facilities (over 70 per cent the REIT's net operating income); 3) fully internalized asset and property managed trust structure; 4) greater unit liquidity; and 5) above-average NAV and AFFO growth prospects driven by improving rental income in 2017, and continued execution of acquisition, value creation and capital recycling activities in the next 12 months, and beyond. As such, PIRET's fully diluted AFFO per unit is expected to achieve an 8-per-cent compound annual growth rate (CAGR) from 2016 to 2018 estimated, above the 4-per-cent forecasted CAGR  for the REIT's Canadian-listed industrial REIT peers."

Mr. Sturges said the REIT provides investors with "attractive" exposure to both the Ontario and British Columbia industrial property markets.

"PIRET is anticipated to benefit from positive North American industrial property fundamentals in most major property markets outside of Alberta in the next 12 months, reflecting improving Canadian and U.S. economies, increasing local population in key property markets, and continued e-commerce growth that supports rising demand for distribution and logistics space in the REIT's major distribution markets," he said. "PIRET's long-term leasing strategies offer investors greater cash flow stability and moderate income growth over time. We expect PIRET to generate moderate SP-NOI [same property net operating income] growth in 2017 of 2 per cent to 3 per cent year over year (excluding expansion activities), in line with management's expectations, and reflecting improving average same-property occupancy year over year, positive spreads on executed lease renewals, and contractual rent escalation clauses."

He maintained his target price of $6.50. Consensus is $6.34.

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Expressing "increased confidence" in its growth profile, Canaccord Genuity analyst Yuri Lynk raised his target price for shares of Badger Daylighting Ltd. (BAD-T) in reaction to its fourth-quarter financial results.

"Having already doubled the U..S hydrovac truck fleet between 2012 and 2015 management's goal is to double it again over the next three to five years," said Mr. Lynk. "This, combined with [approximately] 10-per-cent per annum revenue growth in Canada, should lead to a near doubling of EBITDA over the same time period, representing material upside risk to our estimates. We view the U.S. market has being significantly under penetrated when it comes to hydrovac usage and note management's proven track record of fostering growth in non-traditional markets."

On Monday, the Calgary-based provider of non-destructive excavating services reported revenue of $111-million, a rise of 10 per cent year over year. Adjusted earnings before interest, taxes, depreciation of $28.4-million represented a 9-per-cent annual jump.

"Management drove growth organically by repositioning 237 hydrovac units (23 per cent of the average truck count for the year) over the course of 2016; the truck count was essentially flat year over year," said the analyst. "By putting the hydrovacs to use in regions where demand was better, utilization improved such that the monthly average revenue per truck (RPT) increased 7 per cent year over year to $27,023, which we estimate equates to a utilization rate of 60 per cent to 70 per cent."

Mr. Lynk said the company's decision to increase its hydrovac truck building rate was the "key" takeaway of the quarter.

"For the last two years, the build rate has been approximately five hydrovac's per month but management has increased it to between six and eight (70 to 100 units for the year against 40 to 50 retirements)," he said. "On the call, management noted it was planning for continued RPT improvement and the fact lead times for key inputs, such as chassis, are longer than in the past. Therefore, we do not expect to see the build rate ramp until the second half of 2017."

"We see 9-per-cent top-line growth in 2017 being driven by (1) easier O&G comps as the rate of decline moderates, especially in the U.S., and (2) a continued recovery in Ontario, where management has taken significant steps to improve performance. All told, we forecast 2017 net fleet additions of 41 trucks (vs. 6 in 2016) and RPT of $26,660 (vs. $24,815 in 2016). This should drive a 2017 EBITDA margin of 27 per cent (24 per cent in 2016), $119-million in EBITDA, and EPS of $1.23. With $121-million available on its revolver and net debt of only $38-million (0.4x EBITDA), Badger has the ability to self-finance the truck build we forecast."

Keeping his "buy" rating for the stock, Mr. Lynk raised his target to $37 from $33. Consensus is $33.80.

"Badger shares trade at 26 times 2017 estimated EPS, which we view as reasonable in the context of the 58-per-cent year-over-year EPS growth we forecast," he said. "We are increasing our target price on a one-quarter roll forward to 2018 estimated EPS and an increase to our target valuation multiple to 25 times from 23 times to reflect our increased confidence in Badger's growth profile."

Elsewhere, Acumen Capital analyst Brian Pow did not adjust his "buy" rating and $35 target, noting "the company's high rates of return on invested capital and balance sheet strength as reasons why Badger should trade at a premium to the group."

"With each corporate update it is clear Management is making great strides to push the Company in the right direction," said Mr. Pow.

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Though furniture store sales for BMTC Group Inc. (GBT-T) in the fourth quarter were "positive," BMO Nesbitt Burns analyst Stephen MacLeod expressed caution about the retail market in Quebec based on modest housing growth and above-average unemployment.

"We believe achieving material earnings growth will be challenging in the current environment," he said.

On Monday, BMTC, which operates stores under the EconoMax and Brault & Martineau banners in the province, reported quarterly adjusted earnings per share of 39 cents, in line with Mr. MacLeod's projection and flat year over year. Sales rose 3.5 per cent to $197-million, also meeting his estimates.

"While same-store sales growth was solid (3 per cent versus 1 per cent forecasted), growth in the Quebec furniture market continues to lag Canada-wide trends (for the sixth year)," the analyst said. "We continue to have low visibility into traffic and sales trends, with consumer spending in the Quebec furniture market remaining choppy.

"BMTC reiterated its plans to close its six Montreal-area Sleep Gallery specialty mattress stores as their leases expire between 2016 and 2022 (immaterial financial impact). In Q4/16, two stores were closed; two more closures are slated for 2017. BMTC will continue to sell mattresses at its full-line Brault et Martineau stores, where it generates better returns."

With a "market perform" rating (unchanged), Mr. MacLeod lowered his target price for the stock to $13.50, which is also the consensus, from $14.50 "to reflect higher SG&A as the company deploys new 'prototype' store across the network.

"The target price is based on 7.4 times 2017 estimated EV/EBITDA [enterprise value to EBITDA] (from 8.0 times), and implies a target P/E [price-to-earnings] valuation of 13.5 times (from 14 times)," he said. "The current target valuation multiple is lower than Canadian publicly traded peers and higher than U.S. furniture & appliance manufacturers. Our target valuation multiple is in line with BMTC's historical average over the past four years."

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CIBC World Markets analyst Jacob Bout downgraded Cervus Equipment Corp. (CERV-T) to "neutral" from "outperformer" after lowering his financial estimates for 2018 to "reflect the risk of less cross-border transportation activity."

"While we remain bullish on the outlook for western Canadian agriculture (55 per cent of revenues), we expect continued pressure on new equipment sales in 2017," said Mr. Bout. "We have a more cautious outlook for Transportation given weak Q4/16 results and a flattish industry market outlook for 2017. The impact of potential Trump levies/tariffs (or further weakening of the Canadian dollar) on cross-border freight/demand remains unknown but could be a headwind. CERV's 2017 outlook for C&I [construction and industrial] remains cautious without a recovery in oil prices."

Mr. Bout dropped his 2017 and 2018 earnings before interest, taxes, depreciation and amortization projections to $49-million and $53-million, respectively, from $51-million and $57-million in order to "to reflect the risk associated with less cross-border transportation activity, slightly higher SG&A and weakness in the C&I segment."

His target price for the stock fell to $15 from $18. Consensus is $15.14.

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In other analyst actions:

Facebook Inc.(FB-N) was raised to "buy" from "neutral" at BTIG by analyst Richard Greenfield with a target of $175 (U.S.). The average is $158.67.

General Mills Inc. (GIS-N) was downgraded to "underperform" from "market perform" at Bernstein by analyst Alexia Howard with a target of $52 (U.S.), down from $61. The average is $61.43.

Ms. Howard also downgraded Kellogg Co. (K-N) to "underperform" from "market perform" with a target of $69 (U.S.), falling from $83. The average is $81.

Coca-Cola Co. (KO-N) was rated new "neutral" at JPMorgan by analyst Andrea Teixeira with a $43 (U.S.) target. The average is $43.35.

Ms. Teixeira rated PepsiCo Inc. (PEP-N) a new "overweight" with a $125 (U.S.) target. The average is $116.26.

Ms. Teixeira gave Procter & Gamble Co. (PG-N) a new "neutral" rating with a $98 (U.S.) target. The average is $91.58.

TAG Oil Ltd. (TAO-T) was raised to "buy" from "speculative buy" by TD Securities analyst Shahin Amini with a target of $1.35 (down from $1.55). The average is $1.55.

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