Inside the Market’s roundup of some of today’s key analyst actions
A group of equity analysts on the Street downgraded Aurora Cannabis Inc. (ACB-T) on Friday, seeing increased uncertainty in both the company and the industry following its announcement of 500 layoffs and the retirement of chief executive officer Terry Booth.
Shares of the Edmonton-based producer were halted on Thursday afternoon prior to the after-market announcement, which also included amendments to its credit facility as well as its plan to take a $740-million to $775-million writedown on goodwill, and an impairment charge of between $190-million and $225-million.
"Aurora announced sweeping and transformational changes across the company," said Desjardins Securities' John Chu. "In addition to seeking new leadership, it announced writedowns, a cost rationalization and amendments to its credit facilities with a focus toward reaching positive EBITDA. Management’s guidance for the upcoming quarters also suggests underwhelming sales growth, which is concerning given continued strong industry sales growth."
Mr. Chu moved his rating for Aurora shares to "hold" from "buy," calling it a "show-me story."
"We have adjusted our net revenue forecast to reflect management’s 2Q guidance and factored in more modest growth for the next few quarters thereafter. We maintained our overall growth outlook for the company for FY22 and FY23, but with a lower sales base in FY20 our revenue projections are considerably lower. We also assumed higher SG&A-related expenses than management’s target of $40–45-million until we see more evidence of management executing this strategy. Our FY21 EBITDA estimate of $45-million remains below Aurora’s covenant of$51-million for now until we see more evidence the company can reach this target."
Mr. Chu lowered his target for Aurora shares to $3.25 from $6.50. The average target on the Street is $4.40, according to Thomson Reuters Eikon data.
“A potential upside of 22 per cent for the fast-growing cannabis sectors warrants a Hold rating at this time,” he said.
Elsewhere,Canaccord Genuity analyst Matt Bottomley moved Aurora to “hold” from “speculative buy” with a $3 target, falling from $6.
“Although we don’t view the departure of Mr. Booth in isolation to be a concern, after disappointing FQ1 results, increasing industry headwinds and now surprisingly muted expectations for Aurora’s remaining FY20, we have made substantial downward revisions to our model,” he said. “We have lowered our near-term domestic top-line forecasts to align with management’s guided ranges and removed all growth from our near-term international estimates. Although we recognize that the expected international impairments are non-cash in nature, their magnitude suggests significant growth headwinds. Further, after increasing the discount rates by 200 basis points for each of our SOTP [sum-of-the-parts] valuations, the net impact results in a reduction in our forward valuation of ACB.”
Laurentian Bank Securities analyst Chris Blake cut Aurora to "hold" from "buy" with a target of $2.50, down from $4.75.
Eight Capital’s Graeme Kreindler moved the stock to “neutral” from “buy” with a $2 target, falling from $6.
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Ahead of the release of its fourth-quarter 2019 financial results on Feb. 25 before the bell, RBC Dominion Securities analyst Drew McReynolds is “taking a breather” on Thomson Reuters Corp. (TRI-N, TRI-T) following a period of “significant” share price appreciation.
Though he lowered his rating to “sector perform” from “outperform,” Mr. McReynolds emphasized that he would be buyer of “any meaningful pullback in the stock,” pointing to what he sees as an “attractive fundamental set-up for the company looking into 2021.”
“This set-up reflects the combination of accelerating organic revenue growth, margin expansion with positive operating leverage kicking in, rising FCF [free cash flow] conversion, and an attractive capital return program characterized by dividend growth, prudent tuck-in acquisitions, and share repurchases,” the analsyt said. “In addition, we believe Thomson Reuters offers investors a reasonably unique combination of both growth and defensive characteristics within the S&P/TSX 60 given a cyclically resilient asset mix.”
Mr. McReynolds maintained a US$82 target for Thomson Reuters shares, which exceeds the consensus target on the Street of US$72.90.
“We believe the upward re-rating of TRI over the last year is fundamentally justified by the company’s higher organic revenue growth, improving FCF conversion, and in our view an exceptionally low risk profile (earnings visibility and stability, balance sheet) — all against the backdrop of a favourable macro environment (interest rates, economy),” he said. “While current valuation relative to select software companies still leaves room for a further re-rating of the stock, we believe additional progress is required on two fronts: (i) a higher consolidated revenue contribution from software and services from an estimated 36 per cent currently (or 46 per cent excluding print and Reuters News); and (ii) greater visibility on more than 5-per-cent organic revenue growth, more than 35-per-cent EBITDA margins, and/or less-than 7.5-per-cent capex intensity. Therefore, we will look for more attractive and/or timely accumulation points in the name.”
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CIBC World Markets analyst Paul Holden raised Brookfield Business Partners LP (BEP-N, BBU-UN-T) to “outperformer” from “neutral.”
“Our change in rating is based on execution versus EBITDA objectives, demonstrated value creation on recent monetizations, reduced concentration risk and the outlook for growth over the next two years,” he said.
His target increased to US$51 from US$47, which exceeds the current consensus of US$50.67.
“The implied return to target of 14 per cent compares favourably to most of our coverage universe,” said Mr. Holden.
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Saputo Inc. (SAP-T) continued to display “improving” fundamentals with its “solid” third-quarter financial results, said Desjardins Securities analyst Chris Li.
On Thursday, the Montreal-based company reported adjusted earnings per share of 50 cents, exceeding the consensus expectation on the Street by 2 cents.
The analyst said the results are a "clear sign" that industry conditions are improving, and that Saputo is "executing well and controlling the controllable."
"The beat came from International while the other geographies were largely in-line/slightly lower than expected. We believe the solid results are a clear sign that industry conditions are improving and SAP is doing a good job controlling the controllable," said Mr. Li. "In Canada, competitive conditions continue to ease as key players behave more rationally and SAP is able to recapture profitable sales volume. In the U.S., slowing growth in milk production and declining inventories should support cheese prices. Ingredient prices are expected to remain volatile over the next 6–9 months. For International, measures implemented to compensate for increased competition and lower raw milk production in Australia are working with capacity utilization expected to be in the high 90-per-cent level. A well-balanced global dairy market should support a positive outlook for commodity pricing.
"While dairy is still a viable business, SAP is wisely capitalizing on the growing consumer demand, and leveraging its manufacturing expertise and asset base to co-pack for non-dairy beverage companies on a long-term partnership basis (North America and Australia). SAP has named a senior VP to lead this initiative. At this stage, the focus is on co-packing for third-party brands with M&A opportunities over the longer term."
Mr. Li raised his 2020 and 2021 EPS estimates to $1.79 and $1.96, respectively, from $1.76 and $1.93.
That led him to increase his target for the stock to $45 from $43 with a “hold” rating (unchanged). The average on the Street is $45.06.
“At 21 times forward P/E and 10-per-cent EPS growth, we believe current valuation largely reflects improving industry fundamentals with M&A the key long-term value driver,” he said. “All else equal, we will wait for the stock to get closer to $39 (20 times forward P/E) before potentially becoming more positive.”
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Credit Suisse initiated coverage of Canadian large-cap life insurances companies with a cautiously optimistic view of the sector on Friday.
The firm gave Sun Life Financial Inc. (SLF-T) an “outperform” rating and $71 target. The average on the Street is $65.35.
It gave Great-West Lifeco Inc. (GWO-T) a “neutral” rating and $37 target (versus a $34.10 average).
Manulife Financial Corp. (MFC-T) also received a “neutral” rating with a $29 target (versus $31.25).
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After reporting a “healthy” operating performance in the fourth quarter, Canaccord Genuity analyst Mark Rothschild thinks Allied Properties Real Estate Investment Trust (AP.UN-T) should like see “strong” net asset value growth through a combination of strengthening office fundamentals in its core markets and “large” number of value-creation opportunities.
"Over the past year, the REIT raised a substantial amount of new equity to fund growth, reduce leverage, and fund its large value-creation pipeline," he said. "While this equity is dilutive in the near term, it reduces Allied’s risk profile materially, and provides it the capital to fund its near-term development pipeline."
Following Wednesday's release of better-than-anticipated quarterly results, Mr. Rothschild raised his funds from operations expectations for both 2020 and 2021.
That prompted him to increase his target price for Allied units to $59 from $55 with a “hold” rating (unchanged). The average on the Street is $58.27.
“The REIT is well positioned to continue to produce both cash flow and NAV growth for several years,” the analyst said. “Of note, with a large footprint in downtown Toronto, many of its properties can be redeveloped to take advantage of rising land values. For this reason, valuing the current portfolio is extremely difficult and likely to understate the true value of the REIT. Currently, Allied has approximately 1.9 million sf of GLA under development, and has received zoning approval for a number of redevelopment projects which will likely be initiated in the coming years”
Elsewhere, Industrial Alliance Securities' Brad Sturges maintained a "buy" rating and $60.50 target for Allied.
Mr. Sturges said: “Allied may be well positioned to deliver solid NAV/unit and AFFO/unit growth year-over-year (YoY) in the next few years, driven by: 1) mid-single digit Canadian urban office organic growth YoY; 2) rising UDC NOI YoY, augmented by a growing ancillary revenue stream; and 3) NAV accretion prospects from the REIT’s development and intensification plans that may further unlock underlying urban land value.”
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Several equity analysts lowered their financial expectations and target prices for shares of Yangarra Resources Ltd. (YGR-T) after its preliminary production results for the fourth quarter fell short of expectations.
On Thursday, Calgary-based Yangarra reported average production for the quarter of 12,000 barrels of oil equivalent per day, missing the Street's expectation of 13,917 boe/d.
In response, Raymond James analyst Jeremy McCrea downgraded Yangarra to “outperform” from “strong buy” with a $2.50 target, down from $3 and below the $2.65 average on the Street.
“We think it’s hard to find many companies that have grown as successfully and with as much profitability as Yangarra,” he said. "Unfortunately, investors wouldn’t know it by looking at the current share price that has now fallen to levels not seen since September 2016, when 3Q16 production was 2,600 boe/d and funds flow was 4 cents per share. Combined with improvements in both drilling and fracking designs, a new core area that shows tremendous potential, and the current valuation (regardless of methodology) that would screen very attractive (i.e., 2.6x 2020E EV/DACF; 0.7x PDP blow-down NAV/sh); we believe there is still much to like.
“As investor appetite for smaller cap names has eroded in the past year, execution has been all that more critical. Unfortunately, despite the Company’s more profitable wells in its new core area at Chedderville, headline production figures show the company more gassier with little growth in oil volumes/reserves year-over-year. Although recent frac designs with 20T per stage are looking encouraging, we believe more results are required to convince investors that the $31-million in land/infrastructure spent in 2019 (as of 3Q) was worth the investment. Unfortunately, we think the increasing gas weighting which has now flowed through to the reserve report will cause investors to take a wait and see approach until production results are seen from more wells.”
Other changes included:
Canaccord Genuity’s Anthony Petrucci lowered his target to $2 from $2.25 with a “buy” rating.
Mr. Petrucci said: “Overall 2019 was a challenging year for Yangarra. The switch to 15 stage fracs did not provide the improvement in capital efficiencies hoped for, and the large infrastructure spend forced an increase in budget. However, YGR now has significant running room in the Chedderville area (both in land and facilities), and has fine-tuned its completion methods. In our view, this has positioned YGR for a rebound in 2020.”
Acumen Capital's Trevor Reynolds to $2.75 from $3 with a "buy" rating.
Laurentian Bank Securities' Jonathan Tempro to $2.25 from $3 with a "buy" rating.
Industrial Alliance Securities’ Michael Charlton to $3.50 from $3.75 with a “buy” rating.
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Though its fourth-quarter results and 2020 guidance met expectations, Desjardins Securities analyst Maher Yaghi trimmed his target for BCE Inc. (BCE-T) to $66.50 from $67, keeping a “hold” rating. The average target is currently $64.46.
“Management has decided to go ahead with other suppliers than Huawei for 5G, which we view positively, as waiting for a government decision could have delayed an eventual launch,” said Mr. Yaghi. “Overall, management is doing a good job extracting value from previous investments, but future regulatory certainty in wireless is needed to improve overall investor confidence in future results and help improve valuations in the sector.”
Conversely, RBC Dominion Secuerities analyst Drew McReynolds raised his target by a loonie to $64 with a “sector perform” rating.
Mr. McReynolds said: “Q4/19 results and 2020 guidance were largely in-line with our expectations while management reiterated a commitment to sustained annual dividend growth. Following the recent CEO transition and despite the migration to unlimited plans/EIPs, we believe it is ‘business as usual’ with BCE delivering predictable growth, capital protection and an attractive dividend yield. Following upward revisions to margin assumptions, our target price increases."
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In other analyst actions:
* BMO Nesbitt Burns analyst Tom MacKinnon cut Genworth MI Canada Inc. (MIC-T) to “market perform” from “outperform” with a $61 target, down from $62. The average on the Street is $59.83.
“MIC is transitioning from a growth/EPS beat story to a special dividend story as it redeploys organically generated capital and optimizes its balance sheet,” he said. "But organic capital redeployment in 2021 will be 25 per cent lower than 2020, and the balance sheet optimization has already occurred.
“While 2020 guidance of $400-$500 million in yet to be redeployed capital ($4.65 per share - $5.81 per share, largely special dividends) provides good yield support in 2020, we see this declining in 2021 and onward, with limited BVPS [book value per share] and multiple upside, if any.”
* Following a “strong” second-quarter beat, PI Financial analyst David Kwan raised Vecima Networks Inc. (VCM-T) to “buy” from “neutral” with a $12.50 target, up from $10.20. The consensus is $10.60.
“After several tough years, we can finally see light at the end of the tunnel, with VCM set to see a significant acceleration in growth and profitability in the coming years, driven by the game changing Entra along with expected strong contributions from CD&S and TerraceIQ that should ultimately drive outperformance in the share price," said Mr. Kwan.
* Raymond James analyst Ben Cherniavsky raised his target for shares of Héroux-Devtek Inc. (HRX-T) to $22.50 from $19.50 after its third-quarter results fell in-line with his expectations. The average on the Street is $23.93.
“With EPS that matched our forecasts (and fell shy of consensus by a penny), long-range revenue guidance that remains unchanged, and a stock that continues to trade at elevated multiples, we have no reason to revise our investment thesis on Héroux,” he said. “In short, we like the company’s management team and growth prospects but believe that these factors are largely priced into the shares, leaving no margin of safety around execution, cyclical, or financial risks. We will continue to monitor the stock for a more attractive entry point. In the meantime, we remain Market Perform.”
* A day after its stock fell over 13 per cent on weaker-than-anticipated results, Raymond James’ Steven Li hiked his target for Lightspeed POS Inc. (LSPD-T) to $44 from $39, keeping a “market perform” rating. The average on the Street is $48.67.
“3Q20 organic growth trends were slightly slower this quarter (Software revenues, merchants locations) and F4Q20 guidance showed some conservatism,” said Mr. Li. “While LSPD’s growth prospects are undoubtedly strong (vast market still underserved by cloud, new geos to penetrate), we believe current valuation (12.4 times calendar 2021 adjusted revenue vs SQ at 11.7 times, 9.9 times 2021 Gross revenues vs SHOP at 19.0 times) has already baked in Square-like execution and market disruption.”
David Leeder