Inside the Market’s roundup of some of today’s key analyst actions
Though he raised his earnings expectations for Loblaw Companies Ltd. (L-T) in reaction to Thursday’s release of in-line fourth-quarter results, Desjardins Securities analyst Keith Howlett lowered his rating for its stock based on recent share price appreciation.
Before market open, the retailer reported adjusted diluted earnings per share for the quarter of $1.03, topping Mr. Howlett's projection by 2 cents but missing the consensus on the Street by 2 cents. It was the first quarter since spinning out Choice REIT.
“For the full year, adjusted net earnings were flat, with EPS increasing by 5 per cent due to share buybacks,” said the analyst. “This was in line with management’s plan, as the company faced $450-million (pre-tax) of headwinds related to healthcare and the minimum wage. The company will fully cycle those headwinds in April 2019.”
In reaction to the results, Mr. Howlett increased his 2019 EPS projection to $4.40 from $4.19, and he introduced a 2020 estimate of $4.99.
“It is a new era of capital and operating discipline at Loblaw,” he said. “While it is still early days, shareholders appear to be the beneficiary of more focused and measured spending on growth initiatives, complemented by the return of excess capital through share buybacks. The approach is supported by investment in technologies which facilitate improved decision-making, and by adoption of rigorous, yet simplified, business processes.”
However, noting Loblaw shares have had "a strong run" over the past four months, Mr. Howlett moved his rating to "hold" from "buy" while increasing his target to $70 from $66. The average target on the Street is now $70.75, according to Thomson Reuters Eikon data.
Elsewhere, Raymond James' Kenric Tyghe raised his target to $71 from $66, maintaining an "outperform" rating.
Mr. Tyghe said: "We believe that on a refined general merchandise strategy, continued (and accelerating) traction of digital food initiatives, and a Food CPI tailwind dovetailing with continued efficiency (and data analytics) initiatives, that Loblaw is well positioned through our forecast window."
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Believing its risk/reward proposition is “coming into balance,” BMO Nesbitt Burns analyst Devin Dodge downgraded Finning International Inc. (FTT-T) to “market perform” from “outperform.”
“Against the backdrop of elevated macro concerns, heavy equipment demand growth in Finning’s territories appears to be moderating,” he said.
"Market conditions in Western Canada remain solid, but the near-term upside appears to be limited. In Chile, the recovery remains at an early stage, but there is growing uncertainty about the timing of the cyclical upside."
His target for Finning is $27, which sits below the consensus of $30.33.
“We have lowered our rating to Market Perform but would consider a more constructive view should visibility into demand conditions improve,” said Mr. Dodge.
Elsewhere, TD Securities analyst Cherilyn Radbourne cut to “hold” from “buy” with a $28 target, down from $31.
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Valener Inc.'s (VNR-T) recent share price appreciation “warrants a pause,” according to Industrial Alliance Securities analyst Jeremy Rosenfield, who moved his rating for the stock to “hold” from “buy” to take a “more neutral stance.”
"VNR’s shares have outperformed peers in Canada (18 per cent year-to-date versus 6 per cent for the Canadian regulated utility sector, on average;and are now trading in line with our fundamental price target," he said.
"Despite our change in rating, we continue to see VNR’s fundamentals as healthy. VNR continues to generate underlying stable earnings and cash flows from its investments in regulated utilities, coupled with non-regulated investments in renewable power generation. We consider the risks to the core business as relatively low at this time, with rate base growth expected to drive healthy EPS and dividend growth over the medium term (3-5 per cent per year, on average for each, through fiscal 2023)."
Mr. Rosenfield maintained a $23 target for shares of the Montreal-based energy company, which exceeds the consensus target of $22.42.
"We continue to see VNR as a solid defensive investment in the Canadian utility sector, predicated on (1) stable earnings and cash flows from regulated utility and contracted power investments, (2) healthy EPS growth (3-5 per cent per year, CAGR fiscal 2018-23), (3) sustainable dividends with modest growth (6-per-cent yield, roughly 85-95-per-cent payout and 4 per cent per year dividend growth through F2022), and (4) potential upside from regulated system expansions and investments in additional non-regulated renewable power," the analyst said. "However, with the recent share price performance and appreciation to our price target, we are taking a more neutral stance at the current time."
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After a “weak" fourth quarter and “uncertain” 2019 growth forecast, CIBC World Markets analyst Stephanie Price lowered Altus Group Ltd. (AIF-T) to “underperformer” from “neutral” and dropped her target to $23 from $30. The average is $34.11.
“With weak top-line growth and margins impacted by reinvestments, we see better opportunities in other names under our coverage,” she said.
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Seeing its “strong fundamental outlook already reflected in solid unit price performance,” CIBC’s Christopher Couprie cut Summit Industrial Income REIT (SMU-UN-T) to “neutral” from “outperformer” and raised his target by a loonie to $11. The average is $10.69.
“Summit is sitting in the catbird seat with respect to industrial real estate fundamentals, owing to its high degree of exposure to the Greater Toronto Area and Greater Montreal Area (70 per cent of industrial gross leasable area) where markets are tight and rents are growing,” he said. "The leasing success of 2018 (9.5-per-cent spreads) and 2019 (up 11.9 per cent year-to-date), and the lease-up of formerly vacant properties should drive organic growth in 2019 that exceeds the 1.4 per cent of 2018. We believe there is a 10-per-cent-plus gap between in-place rents and current market rents, and market rent trajectory should still be higher. The unveiling of the REIT’s emerging development potential opens another avenue of growth that complements the REIT’s existing acquisition strategy, and the data centre opportunity is still on the table.
“The market has rewarded the REIT with a total return of 38 per cent in 2018 and 15 per cent year-to-date. We are very positive about the operating environment for Summit, and acknowledge that the narrative around industrial real estate is strong. With limited options in the public markets, valuations can remain elevated.”
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Seeing “tremendous organic and M&A runway over the near to medium term,” Desjardins Securities analyst Gary Ho initiated coverage of People Corp. (PEO-X) with a “buy” rating.
In a research report released Friday on the Toronto-based employee benefit, pension and human resource consulting company, Mr. Ho said: "We are positive on the PEO story for several reasons: (1) 3–5-per-cent annual growth in industry premiums have contributed to the firm’s steady 10-per-cent organic growth—a trend we expect to continue. (2) From FY14–18, PEO’s revenue tripled to $130.5-million, with 60 per cent of this growth attributable to acquisitions. The group benefits broker/TPA market remains highly fragmented and the M&A pipeline is robust. Using its full $57-million available capacity for acquisitions would result in an increase to our target price by 91 cents, or 10 per cent. (3) PEO’s TPA platform presents a unique value proposition as a comprehensive end-to-end solution with flexible and personalized individual plan options. (4) Over the medium to long term, we view PEO as a likely takeout candidate.
“That said, the potential for the unemployment rate to tick up, increased M&A competition from Hub driving up valuation, potential regulatory changes and various technological innovation disruptors are key concerns worth monitoring.”
Emphasizing "favourable" industry tailwinds and its "proven acquisition history with a robust pipeline," Mr. Ho set a target price of $9.50 for its shares. The average on the Street is 6 cents higher.
“PEO currently trades at 13.8 times our FY19 EBITDA estimates vs the average for Canadian peers of 20.5 times (skewed by Solium Capital, which was recently acquired by Morgan Stanley) and larger international peers of 13.3 times,” he said. “If we assume PEO uses its available debt capacity for acquisitions, this should result in an increase to our target price.”
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Touting its position in the “highly attractive” Massachusetts and Nevada markets, Canaccord Genuity analyst Bobby Burleson initiated coverage of CLS Holdings USA Inc. (CLSH-U-CN), a Miami-based cannabis producer and retailer, with a “speculative buy” rating.
"CLSH is a multi-state cannabis operator with planned operations in the legal recreational and medical Massachusetts (MA) and Nevada (NV) cannabis markets," he said. "Upon closing key acquisitions, we believe CLSH will be positioned to capitalize on growing demand for legal cannabis in the US through vertical operation including production and dispensaries that are well placed in MA and NV, which we see as two of the more substantial emerging U.S. recreational markets."
“With dispensary and production operations planned in both states, CLSH is exposed to what we estimate will be a combined $1.1B retail market in 2019; we conservatively expect the market to grow to $2.1B in 2022, as we look for both states to benefit from cannabis tourism (Massachusetts should attract visitors as the only New England state where recreational marijuana is legal). We believe CLSH’s medical dispensary in MA (In Good Health) appears better positioned to capitalize on the transition to recreational sales compared to recent licensees, given its location close to Boston, parking for 225 cars, and existing cultivation and processing capacity. We expect a recreational license to be awarded to In Good Health in 1H19. In NV, CLSH’s Oasis dispensary is located just off the Strip, accessing tourist and residential foot traffic, with cultivation and processing capacity poised to supply an increasing share of the dispensary’s shelf space.”
Mr. Burleson said the company’s current “rock-bottom” valuation emphasizes the need to raise additional capital, noting: “CLSH is currently trading at 1.1 times EV/EBITDA based on our 2020 estimates. This is substantially below 9.9 times for the US peer group. While we expect some multiple expansion for CLSH, especially upon a recreational license award in MA, we are setting a price target multiple of 5.2 times EBITDA, well below the peer group average, given CLSH’s need to raise $56-million to close outstanding acquisitions and help fund CAPEX and working capital (roughly 92 million in share issuance). Our share issuance assumption utilizes an 80-cent price and anticipates 54-per-cent dilution. We note that dilution could be greater if shares are issued at a lower price. However, even if we assume share issuance at the current price our valuation analysis yields a 92-cent target, which is a significant premium to current levels.”
Currently the lone analyst covering the stock, he set a target price of $1.50 per share.
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In other analyst actions:
National Bank Financial analyst Patrick Kenny downgraded Hydro One Ltd. (H-T) to “underperform” from “sector perform” with a target of $19, down from $23. The average target on the Street is $20.50.
TD Securities analyst Steven Green lowered Kirkland Lake Gold Ltd. (KL-T) to “hold” from “buy” with a target of $55, rising from $52. The average is $45.09.
David Leeder