Inside the Market’s roundup of some of today’s key analyst actions
Emphasizing “greater clarity is always a good thing,” Industrial Alliance Securities analyst Jeremy Rosenfield raised his rating for TransAlta Corp. (TA-T, TAC-N) following the release of largely in-line third-quarter financial results on Thursday.
Before the bell, the Calgary-based electricity power generator reported earnings before interest, taxes, depreciation and amortization of $249-million, exceeding both Mr. Rosenfield’s $229-million projection and the Street’s $221-million expectation. Adjusted funds from operations of 66 cents fell a penny short of the consensus but beat the analyst’s model by 3 cents.
With the results, TransAlta raised its guidance in a move Mr. Rosenfield feels reflects "strong" year-to-date results. It now projects free cash flow of $300-$340-million, rising from a previous estimate of $270-$330-million.
“As previously noted , on Oct. 29, the Government of Alberta (GoA) announced details of its proposed Technology Innovation and Emissions Reduction (TIER) system,” said Mr. Rosenfield. “The announcement provides greater market clarity, supporting TA’s CTG conversion initiative. On that vein, the following day, TA announced updates to its strategy, including the purchase of two turbines to underpin a planned Sundance unit 5 (Sun5) repowering in 2023, and the acquisition of long-term contracts in Alberta. Gradually and methodically, TA continues to de-risk its Alberta merchant business, which provides greater comfort to investors on the overall business outlook.”
The analyst maintained a $12 target for TransAlta shares, which exceeds the current consensus target of $10.75.
“TA offers investors (1) a balanced mix of contracted and merchant power exposure, (2) improving balance sheet and cash flow fundamentals, and (3) long-term upside to the Alberta power market,” said Mr. Rosenfield. “We continue to see the shares as undervalued, and with greater clarity on the overall outlook, we feel no more risky than the sector average. Thus, we are moving our rating.”
In the same note, Mr. Rosenfield maintained a “hold” rating and $15 target for shares TransAlta Renewables Inc. (RNW-T), which also reported results that met expectations. The consensus target is $14.31.
“We continue to like RNW’s profile, but see the shares as fairly valued at the current time (unchanged quarter-over-quarter),” he said.
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Separately, Mr. Rosenfield lowered Boralex Inc. (BLX-T) to “buy” from “strong buy” in response to a recent rise in recent share price.
On Thursday before the bell, the Kingsey Falls, Que.-based renewable power producer reported third-quarter results that fell short of Mr. Rosenfield's expectations, which he attributed largely to weak wind conditions in Canada.
Adjusted earnings before interest, taxes, depreciation and amortization of $70-million missed both the analyst's estimate ($78-million) and the consensus projection on the Street ($80-million). Adjusted funds from operations of a 9 cent loss also came in below Mr. Rosenfield's estimate (13-cent gain).
With the downgrade, Mr. Rosenfield maintained a $24 target for Boralex shares. The average on the Street is now $24.84.
“We continue to like BLX’s strong growth story, including its (1) highly contracted renewable power portfolio (2GW net in operation, 13-year weighted average contract term), (2) healthy FCF/share growth (more than 10 per cent per year, CAGR [compound annual growth rate 2018-23), driven by capacity additions in Canada and Europe, (3) potential upside associated with the Company’s large development pipeline (more than 1GW of prospects in France alone), and (4) potential for long-term dividend growth (3-per-cent yield, 40-60-per-cent FCF [free cash flow] payout target),” he said.
“BLX continues to execute on its organic growth strategy, with ongoing success in France’s renewable energy market. However, given recent share price appreciation (BLX is up 31 per cent year-to-date) and more limited expected return to our price target, we are revising our rating.”
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AltaCorp Capital analyst Chris Murray expects sentiment toward Stuart Olson Inc. (SOX-T) to remain bearish “for some time” following a quarter that “negatively” reduced expectations for the growth for the next year.
The release of weaker-than-anticipated third-quarter results and a "tempered outlook due to uncertainty in oil sands" before the bell on Thursday prompted a sell-off in the Calgary-based company's stock, resulting in a 38.7-per-cent share price drop.
It also led Mr. Murray downgraded Stuart Olson to "sector perform" from "outperform."
"The decline in our price target stems from applying lower forecast earnings alongside more conservative multiples reflecting the risks associated with higher leverage and lower returns on capital employed," he said. "With our reduced target, we believe the risk return trade-off moves against the Company, with expectations that it may take several quarters to see improvement and as a result we are moving to a Sector Perform rating."
For the quarter, the company reported revenue, EBITDA and adjusted fully diluted earnings per share of $243.1-million, $11.1-million and a 7-cent loss. All fell below Mr. Murray's projections ($281.7-million, $11.5-million and a 4-cent profit).
Based on the results and accompanying commentary, Mr. Murray reduced his 2019 EBITDA and EPS expectations to $34.9-million and a 25-cent loss, respectively, from $38.7-million and a 4-cent loss. His 2020 estimates fell to $35.6-million and a 9-cent profit from $45.5-million and 36 cents.
“Management provided an updated outlook, now guiding to flat consolidated contract revenue year-over-year and modestly lower Adjusted EBITDA and Adjusted EBITDA margin, primarily attributable to a challenging environment in Alberta’s oil sands due to a combination of curtailment and pipeline construction delays,” he said. “As a result, the Firm is seeing its integrated oil sands customers reduce capital spending and delay project announcements. On the Company’s conference call, management indicated that it expected 2020 results to be consistent with 2019 results.”
His target for Stuart Olson shares fell to $2 from $4.50. The average is $3.42.
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Industrial Alliance Securities analyst Elias Foscolos said he’s “moving to the sidelines” on STEP Energy Services Ltd. (STEP-T), pointing to its in “inability” to extract value from its operating income and “elevated” risk.
In a research note released late Thursday, he lowered the Calgary-based oilfield services company to "hold" on "speculative buy."
Before market open, STEP reported revenue for the third quarter of $179-million, down 4 per cent from the previous quarter and missing Mr. Foscolos's $191-million estimate. He pointed out the result came despite a seasonal uptick in Canadian completions activity.
Adjusted EBITDA of $23-million also fell short of his estimate ($27-million) and represented a 47-per-cent drop year-over-year.
"STEP’s Q3/19 results were below expectations, weighed down by a lack of contribution from the Company’s U.S. Frac assets," he said. "The outlook for this segments remains weak through 2020, and we have lowered our estimates accordingly."
After lowering his revenue and operating income expectations, Mr. Foscolos reduced his target for STEP shares to $2 from $2.25. The average is currently $2.60.
Meanwhile, Raymond James’ Andrew Bradford lowered his rating for STEP shares to “outperform” from “strong buy” with a $2 target, down from $4.50.
Mr. Bradford said: "STEP valuation has lagged its Canadian pressure pumping peers in 2019. The cause for this discount falls squarely onto STEP’s lack of liquidity and perceived overhang. Investors have clearly shown a preference to avoid low liquidity oilfield services stocks in an environment where estimates are more likely to see downward revisions than higher - a conclusion that is hard to refute.
“We believe its low multiple does give STEP more conceptual room to outperform, hence our rating. In addition, we do expect STEP will deliver $28-million in AFFO in 2020, implying a 36-per-cent free cash flow yield.”
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Stantec Inc. (STN-T) was upgraded by National Bank Financial analyst Maxim Sytchev late in Thursday trading as its stock rose almost 16 per cent to get back to its 200-day moving average.
Though he acknowledge upgrading on such a large one-day move “sounds silly” and reaching the 200-day mark is “hardly an accomplishment,” Mr. Sytchev moved the stock to “outperform” from “sector perform,” noting the “path of least resistance is to the upside.”
“In the past, STN shares peaked at $37.00, and that was inclusive of construction,” he said. “Now, it’s engineering only, we have visibility for at least six months of decent organic momentum and peers are trading at MUCH higher multiples (for the right reasons we might add, but still Tetra Tech Inc. (TTEK-Q) is at 15.6 times and WSP at 11.6 times)."
He hiked his target for the stock to $36 from $30.50, which falls 91 cents below the current consensus.
“We are ok to come in a bit later (but without having ridden the stock all the way down),” said Mr. Sytchev.
Elsewhere, Raymond James analyst Ben Cherniavsky upgraded the stock to "outperform" from "market perform" with a $37.50 target, jumping from $34.50.
“There is no denying that Stantec reported a solid print for 3Q19,” he said. “But was the market’s reaction to these results (up 15.7 per cent vs. 0 per cent for TSX) rational? Setting aside the debate over what exactly defines ‘rational’ these days, our short answer would be no! Three months of strong performance does not make up for more than three years of mishaps and disappointments. That said, there is an argument that expectations on Stantec were progressively lowered to the point where any good news was poised to have an outsized impact on the stock. Indeed, consensus EPS estimates have been in a tailspin for at least the past two years. Similarly, according to our CABGM model, the valuation risk on this underperforming stock was extremely low leading up to this event.”
“Regarding visibility and performance, there is still more work for management to do before they can claim that the 'gold STNard’ has been restored. As Buffett says, reputations take years to build and seconds to destroy. However, certain key metrics are generally moving in the right direction. If these trends continue, we believe there could be upward revisions to estimates and a re-rating of the stock. Since we want to be in front of that, we are upgrading our rating back to Outperform. In short, macro concerns aside, the risk-return on Stantec looks more attractive to us today than it did a year ago. While we wouldn’t be surprised to see the stock give back some of the big jump today, we would advise buyers to step-in if that happens."
Touting its “attractive” valuation, TD Securities’ Michael Tupholme raised the stock to “buy” from “hold” with a $39 target, up from $33.
Mr. Tupholme said: “We view Q3/19′s strong results as encouraging. Our confidence in our forecasts has increased post-quarter, and we are positive on Stantec’s near-to-medium-term outlook. Notwithstanding [Thursday’s] 16-per-cent increase in STN’s share price, we see the stock’s valuation as attractive (relative to both peers and historical levels) and having room to expand.”
CIBC World Markets' Jacob Bout moved Stantec to "outperformer" from "neutral" with a target of $40, up from $35.
Mr. Bout said: “STN reported a strong Q3/19 after a disappointing Q2/19. While we do not believe Q3/19 results will be the ‘new normal’ for the organic growth rate (organic growth of 7.4 per cent in Q3/19 vs. management’s 2020 expectations of low- to mid-single-digit organic growth), it’s clear to us the effects of restructuring and focus on engineering only (vs. inclusion of construction) are starting to take root.”
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Acumen Capital analyst Nick Corcoran downgraded Boston Pizza Royalties Income Fund (BPF.UN-T) following lower-than-anticipated third-quarter financial results, which were affected by “weak” same store sales growth.
“We view the Q3/19 results as negative,” he said. While the top-line nature of BPF.UN insulates it from short periods of flat to negative SSSG, the Boston Pizza network has had flat to negative SSSG for the last thirteen quarters (average down 0.9 per cent; range up 0.4 per cent to down 4.2 per cent). In our view, each subsequent quarter of flat to negative SSSG increases the risk of a dividend reduction to BPF.UN. We will look to the Q4/19 results (expected in mid-February 2020) for a recovery in SSSG and/or an extension of the bank line."
Moving the stock to “hold” from “speculative buy,” Mr. Corcoran dropped his target to $16 from $19. The average is $18.25.
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Telus Corp. (T-T) is “passing through the long-awaited inflection period,” said RBC Dominion Securities analyst Drew McReynolds, following the release of “much better than feared” quarterly results on Thursday.
Raising his target price for Telus shares, Mr. McReynolds touted its "attractive combination" of net asset value, free cash flow and dividend growth.
“We expect the stock to remain sensitive to changes in macro expectations (interest rates, economy), although less so relative to BCE which we believe remains the bond proxy within the group,” he said. “Fundamentally, we continue to believe TELUS represents the most attractive combination of NAV, FCF and dividend growth. Our preference for TELUS reflects: (i) an asset mix that favours wireless, TELUS Health and TELUS International, which is translating to the highest forecast NAV CAGR [compound annual growth rate] within the group; (ii) industry-leading 5G preparation given FTTH coverage (70 per cent by 2019 estimated) and the network sharing agreement with BCE; (iii) the potential to surprise to the upside on wireline EBITDA growth should wireline margins begin to lift towards management’s 35-per-cent medium-term target; (iv) a relatively price disciplined wireline competitive environment in Western Canada; and (v) commitment to high-single-digit annual dividend growth at minimum through 2022. While concerns (ARPU growth, Shaw/Freedom Mobile, a potential Huawei ban) are likely to linger over the near-term, we believe these concerns are reflected in relative valuation (7.8 times forward 12-month enterprise value to EBITDA).”
Also acknowledging its “impressive navigation of the early transition to unlimited” and called it a “robust FCF growth story,” he raised his target to $55 from $53 with an “outperform” rating. The average is $53.49.
Elsewhere, Citi analyst Adam Ilkowitz maintained a "neutral" rating and $52 target.
Mr. Ilkowitz said: “We think investors were reassured by the future capex guidance, which improves the outlook for free cash flow growth and the sustainability of the multi-year dividend growth model. We see OIBDA growth, lower capex, and lower cash taxes driving a material increase in Telus-defined FCF in 2020 despite a reduction in our wireless revenue growth outlook. Our enthusiasm for this growth is dampened by net debt leverage rising above 3.0 times pro forma for the ADT transaction and a concern about wireless growth in the near term."
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Paradigm Capital analyst Don Blyth downgraded Semafo Inc. (SMF-T) due to “rapidly deteriorating” security risks at its Boungou mine in Burkina Faso.
On Thursday, the Montreal-based gold miner halted operations at the mine, a day after insurgents ambushed a convoy carrying its employees to the mine site.
“There has always been geopolitical risk in Burkina Faso,” said Mr. Blyth. "Semafo is a well-respected company with a long history of social programs in the country through the Fondation Semafo which supports communities through the implementation of sustainable development projects aligned with the health, education and agriculture needs of their villages. It has earned its social license in the country and is rarely the target of any protests. The number and severity of attacks from armed groups (believed to be Islamist extremists that have migrated from bordering countries such as Mali and Niger) has increased immensely in the past few months, and this latest attack is simply horrendous.
“The Boungou mine is an important source of local jobs and a significant contributor (incl. taxes and royalties) to the GDP of Burkina Faso. The government will want to support the mine and help it return to “normal operations” as quickly as possible. But the fight against such terrorist groups is complex and can take a long time. The mine itself, which is surrounded by fencing and has its own security team, has not been attacked. But this latest attack shows that the attackers are becoming ore unpredictable. It is still unclear exactly what was the motive for the attack.”
Moving Semafo shares to “hold” from “speculative buy,” Mr. Blyth dropped his target to $4 from $6.25. The average is $6.84.
“We do not believe the mine is likely to be shut down entirely, but the cost of added security could be material,” he said. “Attracting the best workers may become more difficult, and the company could experience high turnover. We will review our rating and target when further guidance is provided as to the longer-term impact to the Boungou mine, or we see a marked improvement in the security situation in Burkina Faso.”
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Separately, Mr. Blyth also lowered Orezone Gold Corp. (ORE-X) to “hold” from “speculative buy” based on risks in Burkina Faso.
“Orezone’s Bomboré project is probably currently the best development project in the country,” he said. “It is located 85 km from the capital city of Ouagadougou, along a paved road with two security checkpoints and in what is considered the safest (lowest risk) part of the country. It should be noted that the attacks continue to be in the areas of the country identified as highest risk, and that Orezone (in the “Vigilance renforcée” or Strengthened Vigilance zone) has not directly experienced any material security issues. Orezone is currently engaged in ‘early works’ pre-development activities, such as building some roads and relocating affected villagers to newly constructed replacement homes. The company does have strong supportive shareholders (e.g., RCF with 19.7-per-cent interest and Sun Valley Gold with 12.3-per-cent interest), but the full funding for the project development has not been finalized.”
Mr. Blyth lowered his target to 80 cents from $1.20. The average is $1.43.
“Although we believe Orezone’s level of risk is much lower than Semafo (SMF-T) owing to the project location, we do fear that the whole country could be ‘painted with the same brush’ when it comes to investor risk assessment,” he said. “While this may not be accurate, it could be a challenge to demonstrate this and educate that not all parts of Burkina Faso are the same (much like there are ‘safe’ and ‘dangerous’ parts of Mexico, and even Toronto).”
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After “another clean quarter,” CIBC World Markets analyst Scott Fromson raised GDI Integrated Facility Services Inc. (GDI-T) to “outperformer” from “neutral.”
“GDI reported Q3/19 results that beat our estimates and consensus with solid organic growth of 5 per cent,” he said. "We maintain our thesis that GDI can grow at above-GDP rates, leveraging its leading position in Canadian janitorial services to continue expansion into more prospective markets."
Mr. Fromson hiked his target to $35 from $31 in order to reflect his "positive outlook on organic growth from U.S. Janitorial and acquisition growth in both Canadian and U.S. Janitorial services.” Consensus of $32.67.
“We are more confident that GDI can continue to produce consistent results and see potential for EBITDA margin expansion as the company builds scale,” he said.
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In other analyst actions:
* National Bank Financial analyst Maxim Sytchev lowered Ritchie Bros Auctioneers Inc. (RBA-N, RBA-T) to “underperform” from “sector perform” on Friday afternoon with a target of US$35, down from US$35.50. The consensus target on the Street is US$35.75.
“This is tactical positioning and not a reflection of what we think about the company’s underlying quality or management; the shares are simply ahead of themselves,” he said. “In a more “risk-on” world, investors are grappling for laggards and cyclical business models. RBA, to the contrary, provides excellent defensive qualities and technically benefits from dislocations such as the one ongoing in oil & gas at the moment (more bankruptcies = more asset dispositions volume for RBA). The company is also doing a fine job on controlling SG&A; however, with results not blowing out the doors on 28.9 times P/E (vs. long-term median of 24.0 times), we believe investors will have to reset their expectations to more realistic levels.”
* Raymond James analyst Frederic Bastien raised IBI Group Inc. (IBG-T) to “strong buy” from an “outperform” and raised his target by a loonie to $8.50. Consensus is $7.50.
“A solid 3Q19 print, to us, was further proof that IBI Group is successfully leveraging its differentiated service offering to drive profitable growth," he said. "Moreover, with its US and Canadian businesses in fine form, the firm looks poised to ride powerful urbanization tailwinds for years to come. An improved balance sheet should also yield management the flexibility to deploy capital on tuck-in acquisitions, reinstate a dividend, or do both in 2020. Since very little of this seems to be priced into the stock today, we are upgrading our recommendation.”
* CIBC World Markets analyst Robert Catellier lowered AltaGas Canada Inc. (ACI-T) to “neutral” from “outperformer" with a $33.50 target.
Mr. Catellier said: “Our reduced rating is all about the take-over offer, as the company’s operations continue to perform in line with expectations. EBITDA of $17.7-million was slightly ahead of our $17.4-million estimate, which drove an EPS beat of $0.09 vs. our estimate of $0.06. Year-over-year results were up for both operating divisions due to higher renewable power generation and utility rate base growth, partly offset by warmer weather. AFFO missed our estimate due to a timing variance between equity income and distributions from equity investments.”
* Mr. Catellier also downgraded Inter Pipeline Ltd. (IPL-T) to “neutral” from “outperformer” with a target price of $22, down from $24 and below the $25.37 consensus.
“While EBITDA met our estimate, we expect higher G&A going forward, combined with higher volatility in the NGL and Conventional Oil Pipeline segments, will pressure the stock,” he said. “This could pressure the funding outlook again, but an eventual sale of the Bulk Liquid segment is likely to relieve at least some of that concern.”
* National Bank Financial analyst Endri Leno cut Rogers Sugar Inc. (RSI-T) to “underperform” from “sector perform” with a $4.50 target, down from $5.25. The average is $5.35.
* Canaccord Genuity analyst Robert Young upgraded Optiva Inc. (OPT-T) to “hold” from “sell” with a $55 target, rising from $33. The average is $48.33.
David Leeder