Inside the Market’s roundup of some of today’s key analyst actions
Industrial Alliance Securities analyst Elias Foscolos said the unexpected 9.7-per-cent drop in share price for Mullen Group Ltd. (MTL-T) on Thursday following the release of its quarterly results left him “perplexed.”
“Despite an anticipated slowdown in OFS [oilfield services] activity projected in H1/19, MTL is well diversified and capitalized to modestly grow,” he said.
In reaction to that share price drop versus his unchanged target price for Aecon shares of $17.25, which sits a penny below the average on the Street, Mr. Linsdell upgraded his rating for Aecon to “strong buy” from “buy” with a one-year total projected return of almost 27 per cent.
On Thursday, the Alberta-based supplier of trucking and logistics services reported third-quarter revenue of $340-million, exceeding Mr. Foscolos’s $323-million forecast and up 20 per cent year-over-tear. Adjusted EBITDA of $55-million also beat his projections ($53-million).
“On the revenue side, the T&L [Trucking/Logistics] segment continued to outperform, reaching another record and contributing 67 per cent of total revenues (Q3/17: 67 per cent, Q2/18: 74 per cent),” he said. “The OFS segment achieved a 22-per-cent year-over-year boost in revenue due to acquisition of AECOM, while drilling related revenues declined by $2.9-million. Apart from an unexpected distribution of revenue, MTL’s operational results were more or less in line with expectations.”
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Seeing “lingering uncertainty” following the initial public offering of AltaGas Canada Inc., which was completed Thursday, CIBC’s Robert Catellier downgraded AltaGas Ltd. (ALA-T) to “neutral” from “outperformer” after coming off research restriction.
“Following the IPO, the company is still relatively levered (debt/EBITDA of 6.2 times in 2019), with a high dividend yield and premium DRIP, not to mention a robust capital plan,” said Mr. Catellier. "This tells us that funding questions remain. We do not expect these issues to be clarified with the Q3 call next week and the outcome may hinge on discussions with debt rating agencies as we believe the company is motivated to retain its investment grade rating. (S&P BBB/Negative outlook).
“We expect the company to cut the dividend 40 per cent (to $1.32/share annualized) rather than pay out a yield of over 10 per cent while running a premium DRIP, even though we can see the existing dividend reaching the company’s targeted 50-60-per-cent FFO range. It doesn’t make sense to raise equity through the premium DRIP at a cost that’s higher than what the company earns on new investments.”
The analyst dropped his target to $24 from $30. The average is $26.50.
“Lingering uncertainty has us on the sidelines until there is more clarity on reducing leverage and related implications for the capital plan,” he said.
Elsewhere, TD Securities' Linda Ezergailis resumed coverage of AltaGas with a “buy” rating and $25 target.
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After Thursday’s release of “solid” third-quarter results and possessing a record backlog and new “permanent” management, Aecon Group Inc. (ARE-T) was upgraded to “strong buy” from “buy” by Industrial Alliance Securities analyst Neil Linsdell.
The Calgary-based construction and infrastructure development company reported revenue of $1.091-billion for the quarter, a jump of 34.2 per cent year-over-year and exceeding the projections of both Mr. Linsdell ($869.4-million) and the Street ($845.3-million). Earnings per share of 60 cents jumped from 37 cents a year ago and also exceeded expectations (43 cents and 48 cents, respectively).
Aecon also reported a record backlog of $7-billion, versus $4.3-billion a year ago and up from the previous high of $6.4-billion in the second quarter. The jump was due largely to major projects in its Infrastructure segment.
"Aecon continues to capture its fair share of large, complex projects," said Mr. Linsdell. "The outlook for Q4 and into 2019 remains positive with areas of strength in Aecon's infrastructure segment and higher margin nuclear business expected to outweigh the impact of a weaker environment for new large commodity and oil related projects (in the Industrial segment). All segments continue to bud on opportunities that should grow the backlog, with the goal of improving profitability, with submissions for RFPs and RFQs for projects worth $8-billion and $20-billion, respectively. We also believe the recent appointment of Jean-Louis Servranckx as President should enhance Aecon's partnerships with international partners."
With the results, the analyst raised his 2018, 2019 and 2020 EPS projections to $1.06, $1.24 and $1.31, respectively, from 85 cents, $1.09 and $1.20.
His target for Aecon shares jumped to $23 from $19.50. The average on the Street is $20.70.
“With the recent sale of the capital-intensive and non-core Contract Mining business (expected to close in Q4/18, we see Aecon strengthening its balance sheet and freeing up resources to execute on its Infrastructure and Industrial opportunities,” said Mr. Linsdell.
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Calling the market reaction to its quarterly results “overdone,” BMO Nesbitt Burns analyst Andrew Kaip upgraded Goldcorp Inc. (GG-N, G-T) to “outperform” from “market perform."
“·While we expect skepticism to linger, we are reasonably comfortable with Q4 guidance of 620,000 ounces at AISC [all-in sustaining costs] of $850 per ounce,” he said.
Mr. Kaip’s target for Goldcorp shares sits at US$13. The average is US$14.79.
“We think shares of Goldcorp have an asymmetric risk profile with a bias to the upside, particularly if you consider the outlook for 2019,” he said.
Meanwhie, CIBC World Markets analyst David Haughton lowered his target to US$15 from US$18 to reflect prevailing spot prices. He maintained an "outperformer" rating.
Mr. Haughton said: “Goldcorp had another bumpy quarter that marks the trough for the year, as Q4 output is expected to be significantly better. Overall, Goldcorp’s turnaround remains intact with the annual cost saving target at $350-million (up from $250-million) by end of 2019. The corporate goal remains unchanged with 20-per-cent production growth, 20-per-cent reserve growth and 20-per-cent lower AISC by 2021, mainly through organic growth.”
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CIBC World Market analyst Jacob Bout upgraded Methanex Corp. (MEOH-Q, MX-T) to “outperformer” from “neutral, citing a “solid” outlook and free cash flow expectations in an “elevated” methanol price environment.
“MEOH indicates that it continues to see robust growth in traditional derivatives as well as energy-related methanol demand (including MTO),” said Mr. Bout. “Despite the production issues that impacted higher-margin produced sales in Q3/18, the majority of these production issues are behind the company for Q4/18. In 2019, MEOH should see produced volumes grow with the ramp-up of Chile IV and increased availability of Argentinean gas (Geismar III long term). We expect a $10/t price increase for the November APAC and North American methanol contract. At current methanol price forecasts, we expect solid FCF generation in 2018 and 2019 (FCF yields of ~15%) and expect the firm to continue returning cash via share repurchases and dividend increases. Where we would be wrong is if there is a global recession and/or retraction in current oil prices.”
Mr. Bout maintained a US$80 target, which sits 6 US cents below the consensus.
Elsewhere, TD Securities' Cherilyn Radbourne upgraded Methanex stock to “buy” from “hold” with a US$77 target.
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Following a third consecutive “solid” quarterly report, BMO Nesbitt Burns analyst Michael Mazar raised Calfrac Well Services Ltd. (CFW-T) to “outperform” from “market perform.”
“The [third-quarter] results were, in many ways, counter to well-documented market headwinds and demonstrate CFW’s continued ability to manage the challenges of the N.A. market more effectively than many of its peers," he said.
Mr. Mazar has a $6.50 target for Calfrac shares, which sits below the consensus of $7.46.
“The consistently solid operational performance coupled with an attractive valuation in light of share price weakness so far in 2018, have led us to be more constructive on the CFW story and, accordingly, we are upgrading the shares to Outperform," he said.
Meanwhile, Cormark Securities resumed coverage of Calfrac with a “buy” rating and target price of $7.50.
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In the wake of a 28-per-cent drop in share price since the end of the third-quarter, RBC Dominion Securities analyst Sam Crittenden raised his rating for Lundin Mining Corp. (LUN-T), citing its “compelling” valuation.
"Lundin ... is now trading at 0.5 times NAVPS [net asset value per share] versus peers at 0.8 times and 3.4 times 2019 estimated EBITDA versus peers at 5.6 times and the 66-per-cent implied return to our $8.00 target price supports our Outperform rating," he said. "The copper market could remain volatile over the next several months as China decelerates although we believe the current price of $2.75 is justified by fundamentals and forecast rising prices through 2019 and into 2020."
Mr. Crittenden also expects to see “steady” improvements stemming from Lundin’s organic projects, projecting its $1.3-billion investment in its Candelaria Copper Mining Complex in Chile over three years will bring significant production growth.
"We were impressed with the progress after the recent site tour and the new mine plan in later November could be a positive catalyst," he said. "The Eagle East development and Zinc Expansion Project at Neves- Corvo provide further growth. These investments limit FCF in 2018/19 but we see this increasing in 2020 and we estimate $0.59/share FCF in 2020 (implying a 16-per-cent yield)."
He added: “Lundin has $1.4-billion cash ($1.0-billion net cash) to deploy on growth opportunities. The company remains in active discussions but not surprisingly, proven, producing assets are commanding fair prices making it hard to add value. Management noted something in the third quartile on the cost curve where there are potential for improvements could be an option. From our own work on copper projects, we believe there are assets available although the best quality projects are spoken for. We also think there could be a case for a merger with another public company at the right time.”
Moving the stock to "outperform" from "sector perform," Mr. Crittenden maintained an $8 target, which sits below the average of $9.06.
Elsewhere, Raymond James' Farooq Hamed raised his target to $9 from $8.50, keeping a "market perform" rating.
Mr. Hamed said: “Overall, we continue to believe that M&A dominates investor focus on LUN given its large cash balance and expect that to be the next catalyst for the stock as operations return to steady performance.”
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Believing its “growth [is] under pressure” following the release of its third-quarter results, CIBC’s Scott Fromson cut Winpak Ltd. (WPK-T) to “neutral” from “outperformer” with a target of $51, down from $54. The current average is $52.33.
“While Winpak hit our Q3/18 EBITDA and EPS estimates, revenues came in light, highlighting continued tough competition,” he said. "Raw material costs, namely resin, were relatively stable in the quarter and pass-throughs (covering 70 per cent of revenues) appear to be taking hold. Volumes were the issue, down 0.7 per cent year-over-year,, and management also speaks of continuing pricing pressure. We are adjusting our forecasts down slightly and are taking down our price target.
“Winpak has held up well in the current market sell-off compared to other packaging names. We like Winpak’s long-term business model and management, but see limited catalysts over the near to medium term. At the current 10% total implied return to our price target, we are lowering our rating.”
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Shares of American Airlines Group Inc. (AAL-Q) may be for the “daring” contrarian right now, said Citi analyst Kevin Crissey, who expects the company to “come back into the sun and for investors to rotate back into the name.”
“We don’t think there are many questions to ask regarding owning AAL right now,” said Mr. Crissey. “If you think we are at the end of the economic cycle, you shouldn’t own AAL (or probably any airline stock). However, if we aren’t, the stock will probably work over time, in our view.”
"We find contrarian investing in the airline sector works over time and AAL may be the most contrarian pick in the group right now. Investors have shunned its leverage, recent unit revenue underperformance – with unique exposure to South America, continued cost challenges, and EPS guidance misses. Other names have been steady performers or recovery stories while AAL has faded."
Maintaining a "buy" rating for the stock, he increased his target to US$52 from US$50. The average is US$47.94.
In a separate note, Mr. Crissey lowered his estimates and target price for Southwest Airlines Co. (LUV-N), calling its 2019 cost guidance “ugly” and believing it “clubs the bulls.”
"The cold water poured on investors [Thursday] came from Southwest’s sobering unit cost guidance for 2019," he said. "Management expects CASM-ex fuel to rise at least 3% next year. Based on our forecasts, 3-per-cent non-fuel unit cost inflation next year would be more than double the next highest competitor. We hoped for an explanation on the conference call indicating the number was conservative and/or had one-off drivers that are unlikely to persist, but we didn’t hear that. We instead heard an emphasis on the 'at least' language."
With a “buy” rating (unchanged), Mr. Crissey dropped his target to US$59 from US$65, which sits below the average of US$66.86.
"Today’s cost guidance has us, and likely many investors, questioning the 'L' in Southwest’s long-term LCC [low-cost carrier] model," he said. "We think valuation has fallen to near floor levels (now at just 10 times our new 2020 estimated EPS versus a 13-times historical multiple) and domestic pricing strength should be enough to offset cost inflation next year, but bulls are definitely licking their wounds."
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It’s “not quite the same old story” for Vermilion Energy Inc. (VET-T) following its acquisition of assets in Wyoming, said Canaccord Genuity analyst Dennis Fong.
“Vermilion has traditionally been viewed as a method for Canadian investors to gain exposure to globally linked commodities (specifically Brent and European gas),” said Mr. Fong. "When we initiated coverage on Vermilion, we cited that the company had a distinct advantage in acquiring European assets given its relationships with local governments and the super majors (which it still has). Given the recent string of acquisitions, we feel as though the company has shed some of this image through the increase in its North American exposure. That being said, the increase in North American exposure has not significantly impacted the company’s balance sheet strength nor has it reduced the sustainability of the dividend.
“Given the timing and magnitude for production growth out of Europe and the lower than expected production from Vermilion’s pre-acquisition production base, we are maintaining our BUY recommendation but lowering our price target.”
On Thursday, with its third-quarter results, the Calgary-based company announced $186-million acquisition of assets in the Powder River Basin in Wyoming.
“Longer term, we expect that the Powder River Basin has the potential to contribute towards production growth; but is still relatively early-stage in the mindset of Canadian investors and could have caused some confusion around the reasons for the acquisition,” he said. “We estimate that the U.S. business unit could now be an increased focus for the company and will likely compete for capital especially given the favourable regulatory environment in Wyoming (as compared to other areas of Europe).”
With his “buy” rating, Mr. Fong’s target fell to $55 from $60. The average is $53.67.
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In other analyst actions:
TD Securities analyst Linda Ezergailis upgraded Canadian Utilities Ltd. (CU-T) to “buy” from “hold” with a $35 target, which exceeds the average of $34.13.
TD Securities initiated coverage of Park Lawn Corp. (PLC-T) with a “buy” rating and $32 target. The average target is $29.94.
David Leeder