Inside the Market’s roundup of some of today’s key analyst actions
Ahead of the start of second-quarter earnings season for the forestry sector, CIBC World Markets analyst Hamir Patel expects most companies to continue a streak of disappointing results.
"Similar to the set-up into the prior two quarters, we believe Street estimates for wood products names heading into Q2 reporting are overly optimistic," he said. "Our estimates for the quarter on lumber/OSB companies are on average 45 per cent below consensus. Recall last quarter, even our below-consensus forecasts proved too high with Canfor coming in 70 per cent below Street expectations, West Fraser missing by 40 per cent and Interfor printing results over 25 per cent lower than consensus.
“In addition to weaker lumber prices in Q2 (down 10 per cent quarter-over-quarter for SPF and 5 per cent lower for the SYP Composite), many producers also contended with lower pulp prices (NBSK down $60 per ton or 8 per cent quarter-over-quarter in China) and higher costs associated with market-related downtime. Disclosed temporary curtailments totaled 1.8 Bbf/yr in Q2, well above the 1.1 Bbf/yr of temporary curtailments taken in Q1. We are also tracking an additional 2.0 Bbf/yr of permanent capacity curtailments announced for 2019. Preliminary figures from the Canadian government suggest B.C. Interior lumber shipments to the U.S. fell 11 per cent year-over-year in Q2 (worse than the 3-per-cent decline for all of Canada).”
In a research note released Friday, Mr. Patel downgraded Mercer International Inc. (MERC-Q) after reducing his 2019 and 2020 EBITDA estimates, which now sit 21 per cent and 17 per cent lower, respectively, than the consensus.
"We now see the shares being range-bound until expectations are reset lower and pulp sentiment improves," said Mr. Patel, lowering his rating to "neutral" from "outperformer" in order to place it in line with his ratings for its pulp peers.
“Most producer contacts we have spoken to in recent days are increasingly bearish on the outlook for pulp prices over the remainder of 2019 given relatively robust production globally, high global inventories and disappointing shipment volumes to China (-3.9% 5-Mo YTD),” he said.
Mr. Patel reduced his target price for Mercer shares to US$17 from US$22. The average target on the Street is US$24.83, according to Thomson Reuters Eikon data.
He also reduced his target for the following companies:
Canfor Pulp Products Inc. (CFX-T, “neutral”) to $13 from $15. Average: $17.20.
Domtar Corp. (UFS-N/UFS-T, “neutral”) to US$45 from US$48. Average: US$51.25.
Hardwood Distributions Inc. (HDI-T, “outperformer”) to $15 from $16. Average: $17.20.
He raised his target for Norbord Inc. (OSB-T) to $35 from $31. Average: $37.28.
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The Street’s focus will be on operational progress rather than simply earnings when Alimentation Couche-Tard Inc. (ATD.B-T) reports fourth-quarter results after the close on July 9, according to analyst Keith Howlett of Desjardins Securities.
“Investors have looked through a recent wave of downward 4Q earnings revisions, with the shares of Couche-Tard trading at close to all-time peak levels,” said Mr. Howlett in a research note released Friday. “Investors appear to be buying into management’s objective to double the company in five years. To achieve this objective, it will be necessary to find a growth formula for foodservice, ride the wave of nicotine delivery products, establish a compelling loyalty program, build the Circle K fuel brand, drive unique national promotions and limited-time exclusive offers, speed service at the pumps and in the stores, and connect digitally with a new generation of consumers. Acquisitions, potentially in new geographies, will also be an important part of the agenda. Investors will be looking for a progress report on these key initiatives on the 4Q conference call.”
Mr. Howlett expects the Quebec-based convenience store operator to deliver earnings per share growth for fiscal 2019 of 29 per cent, pointing to "strong" fuel margins in the United States, synergies from acquisitions and "solid" same-store sales growth.
Though he expects fourth-quarter results to be “far weaker” than year-to-date numbers, Mr. Howlett said the first quarter of fiscal 2020 is “off to a very strong start with robust U.S. fuel margin.”
For the fourth quarter, he lowered his earnings per share projection to 57 US cents from 64 US cents, which exceeds the consensus on the Street by a penny but represents a drop of 2 US cents from the same period a year ago.
“The transition of the Circle K trademark to a major national brand in the U.S., with a growing global footprint, is in the early stages,” he said. “The brand attributes and consumer touchpoints are still in process. Harnessing the scale of the business to the benefit of consumer goods companies, customers and shareholders is a multi-year journey. Nearterm, we want to see sustained momentum in foodservice.”
Mr. Howlett maintained a "buy" rating and $80 target for Couche-Tard shares. The average on the Street is $87.84.
“Couche-Tard has superior financial performance and a longer track record than its peer group yet continues to trade at a discount to them,” the analyst said. “The company is at the beginning of a transition from an extremely well-run collection of retail assets to a globally branded and unified convenience/fuel chain. Management’s plan is to double the business in five years through an equal combination of internal growth and acquisitions. The balance sheet is once again capable of financing a major acquisition. Our inference is that recent internal initiatives in foodservice in the U.S. are, for the first time, eliciting the desired response. There appears to be room to increase our target price, based on the probability of future acquisitions, and potentially, higher internal growth.”
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Fiera Capital Corp.'s (FSZ-T) recently completed $100-million debenture offering provides additional flexibility and removes an equity issue overhang on the stock, said Desjardins Securities analyst Gary Ho upon resuming coverage.
“The issuance removes any equity issue overhang and reduces net funded debt to EBITDA from 3.7 times to 3.1 times (vs a covenant maximum of 4.0 times),” he said. "This ratio excludes the senior subordinated unsecured debentures and convertible debt outstanding. In addition, it gives FSZ more room to manoeuvre if EBITDA decreases due to a market correction. Lastly, the transaction provides financial flexibility for future M&A—of the proceeds of $96-million, $70-million will be used to fund recently announced acquisitions.
“Overall, the capital structure does not change (issuing debt to repay its credit facility). In addition, the coupon on the debenture of 5.6 per cent is 90 basis points higher than the 4.7-per-cent interest cost of the credit facility; this has an immaterial $0.9-million pre-tax impact on an annualized basis.”
Mr. Ho maintained a “buy” rating and $13.75 target for Fiera shares. The average is $14.28.
“Our positive view is based on the following: (1) management’s ability to acquire accretively and integrate successfully; (2) FSZ has grown revenue organically by 6 per cent over the past few years; (3) we like its expansion into alt assets; (4) we see margin expansion to 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 and the shares currently provide an attractive 7-per-cent yield," the analyst said.
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BMO Nesbitt Burns initiated coverage of a group of TSX-listed mining companies on Friday.
They include:
Capstone Mining Corp. (CS-T) with a “market perform” rating and 65-cent target. The average target is $1.17.
Taseko Mines Ltd. (TKO-T) with an “outpeform” rating and $1 target. Average: $1.70.
Copper Mountain Mining Corp. (CMMC-T) with an “outperform” rating and $1.30 target. Average: $1.17.
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On the heels of a 117-per-cent jump in revenue in the last quarter, Haywood Securities analyst Neal Gilmer expects Organigram Holdings Inc. (OGI-X) to see more “modest” growth when it reports third-quarter results on July 15.
“Based on our view of sales trends across the provinces that have not demonstrated the growth that was initially expected we have lowered our Q3 revenue estimate to $28.5-million representing 6-per-cent growth over the prior quarter.,” he said in a research note. “We have also made some small tweaks to our model that drives our EBITDA estimate for the quarter at $11.1-million.”
Mr. Gilmer maintained a “buy” rating and $13.50 target for Organigram shares. The average on the Street is $11.98.
“We reiterate Organigram as our top pick in the cannabis sector as the Company continues to execute on its strategic vision,” he said. “We have made some small revisions to our estimates for Q3 and Q4 of Organigram’s fiscal 2019. We have modestly lowered our revenues to reflect our expectations of sales trends and timing of when provinces are ordering additional products. We expect the Company will continue to demonstrate solid operating metrics that should be viewed positively by investors.”
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In other analyst actions:
National Bank Financial analyst Vishal Shreedhar initiated coverage of Mty Food Group Inc. (MTY-T) with a “sector perform” rating and $70 target. The average on the Street is $61.30.
David Leeder