Inside the Market’s roundup of some of today’s key analyst actions
STEP Energy Services Ltd. (STEP-T) is “serving top-tier economic performance,” according to Raymond James analyst Andrew Bradford.
In a research note released Monday, he initiated coverage of the Calgary-based oilfield service company with a “strong buy” rating.
“STEP, and its acquired company Tucker, generate more EBITDA from their fracturing equipment than any of their respective Canadian or U.S. comparable companies,” said Mr. Bradford. “That is, both STEP and Tucker are demonstrably ‘best in class’ in terms of unit economics. We measure this as EBITDA per unit of both ‘fleet’ horsepower and activated or ‘crewed’ horsepower – though we prefer fleet horsepower as it is a more consistent/reliable figure.”
“By far, STEP produces best in class performance and margins from its Canadian coiled tubing business. STEP’s Canadian coiled tubing fleet is certainly the most modern, but is also the most concentrated high-spec fleet available. This has the effect of concentrating STEP’s coiled-tubing business on multi-well leases, which lends to higher average utilization, efficiency, and margins. Coiled tubing is STEP’s traditional core business, and as such, it has a dedicated marketing infrastructure for this service line that other fracturing companies have not replicated. We estimate STEP extracts margins that are as much as 3 times greater than comparatively-sized coil fleets.”
Mr. Bradford emphasized that the current illiquidity of STEP’s shares detract from its market value.
“STEP is just over 60 per cent owned by two of ARC Financial’s private equity funds; management owns another 1 per cent,” he said. “So while STEP has a $682-million market cap its float cap is only $266-million – and this is after giving effect to its recent $56-million equity issue. As a partial consequence, traditional institutional involvement in STEP is lower than for comparable companies – STEP’s top 5 institutional investors own 8 per cent of the company versus 21 per cent and 23 per cent for its comparative group. This could be a contributing factor in its low rate of float turnover – on average 1 per cent of STEP’s floating shares trade in a day versus 1.6 per cent for comparable companies. The ultimate consequence is that STEP’s daily volume is about $2.9-million compared to $16.5-million and $6.6-million for its direct Canadian comps.”
The analyst set a target price of $24 for STEP shares, easily exceeding the average target on the Street of $17.92, according to Bloomberg data.
“By almost every objective measure, STEP quantifiably screens as a top-tier operator in each basin in which it operates,” said Mr. Bradford. “In addition, it also screens as an extraordinarily value-priced investment, both on an absolute basis and relative to its Canadian and US-based peer groups. Accordingly, we are very comfortable in recommending STEP Energy Services to energy investors with a Strong Buy rating.”
“If STEP were to be priced at parity with its Canadian-listed peer group in terms market value per unit horsepower, EBITDA multiples, or ‘Free EBITDA’ multiples, its share price would be between $13.50 and $15.00, or somewhere between 30 per cent and 45 per cent higher than today. However, we recognize the market is applying a substantial liquidity discount to STEP’s shares (approximately 20 per cent to 25 per cent) owing to some combination of its low public float, low daily trading volumes, and a perceived ‘overhang’ from the combined 61-per-cent control blocks held in ARC Financial’s funds.”
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Industrial Alliance Securities analyst Elias Foscolos expects Superior Plus Corp.’s (SPB-T) US$900-million acquisition of NGL Propane LLC from NGL Energy Partners LP to close and be “materially accretive.”
Mr. Foscolos said Superior’s “solid” first-quarter financial perfomance and the diverstiture of a range of wholesale and retail distillate assets “set the stage” for the “transformative” acquisition, announced at the end of May.
“Ultimately, we believe this acquisition will add $1.50-$2 per share in value from synergies with further upside from tuck-in acquisitions,” the analyst said following the company’s June 14 Investor Day event in Toronto.
“We strongly believe that six to nine months from now, when SPB reports substantial year-over-year growth in EBITDA and AFFO [adjusted funds from operations] per share, investors will re-value the stock.”
That belief led Mr. Foscolos to raise his target price for Superior Plus shares to $15.50 from $15, which he emphasized results in a potential 29-per-cent one-year return. The average target on the Street is $14.67.
Keeping a “buy” rating for the stock, Mr. Foscolos said: “In the meantime, investors can pocket the 6-per-cent annualized dividend.”
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Allied Properties Real Estate Investment Trust’s decision (AP.UN-T) to allocate the proceeds from its “highly successful” $299-million equity offering to debt repayment is a “prudent move” given it’s in the early stages of “elevated” development capex, said Desjardins Securities analyst Michael Markidis upon resuming coverage of the stock.
“A substantial reduction in leverage (debt/EBITDA falls by more than one turn to 7.3 times) has been accompanied by only a minimal amount of dilution to our FFO outlook (1–2 per cent),” said Mr. Markidis.
“Including amounts incurred year-to-date, AP estimates that it will allocate $1.2-billion to complete eight urban development projects prior to the end of 2022. Although final cost/return expectations have not yet been disclosed, we believe 50 per cent of this amount relates to The Well (expected completion in 2021). Other comparatively large capital consumers include Adelaide & Duncan (2020), King & Spadina (2022) and 400 West Georgia (2020). We estimate the aggregate total cost of the eight projects to be in excess of $1.5-billion — a substantial figure relative to the size of AP’s asset base (IFRS carrying value of $6.0-billion at 1Q18).”
In reaction to the offer, Mr. Markidis lowered his 2018 and 2019 funds from operations per unit projections to $2.16 and $2.26, respectively, from $2.18 and $2.20.
He kept a “buy” rating and $46 target, exceeding the consensus of $44.56.
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Desjardins Securities analyst Bill Cabel sees an “attractive risk-reward opportunity” in Northland Power Inc. (NPI-T) stemming from the potential upside of its offshore wind projects in Taiwan and its “solid” operating base.
On June 22, the Toronto-based company announced that the Taiwan Bureau of Energy has awarded 232 megawatts to the Hai Long 2 offshore wind farm and 512 MW to the Hai Long 3 offshore wind farm under the country’s offshore wind auction program.
Northland and its partner Yushan Energy Co. Ltd own 60 per cent and 40 per cent, respectively, of Hai Long 2 and Hai Long 3.
“We expect the portfolio of assets to receive very favourable 20- year PPAs, which is much longer than previous offshore wind contracts received by NPI. Additionally, the expected weighted average PPA price is NT$3,402/MWh (C$145/ MWh or ~EUR96/MWh), which we estimate could generate a low to mid-teen IRR,” said Mr. Cabel.
“Overall, we believe that NPI has been very successful in Taiwan by using an overall portfolio approach, which enabled it to achieve favourable returns on projects with a much larger scope.”
Maintaining a “buy” rating for Northland Power stock, Mr. Cabel raised his target to $28 from $27.50. The average target is $26.46.
“NPI is our only company under coverage with a tangible robust development pipeline in the 2024–25 timeframe. The 2024–25 COD could enable significant cost reductions for NPI as turbine costs are expected to decline and efficiencies increase over this time period.”
Elsewhere, CIBC World Markets’ Mark Jarvi raised his target to $27.50 from $26.50 with an “outperformer” rating (unchanged).
Mr. Jarvi said: “While contracts, project costs/economics and funding need to be finalized, we estimate solid combined project returns. Driven by the additional growth, we are raising our price target.”
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Strong fundamentals support a re-rating of U.S. railway companies, according to Citi analyst Christian Wetherbee, who called the group a “must own sub-sector.”
“We are raising 2Q and 2018 EPS estimates for the rails by 360 basis points and 110 bps, as volumes are up 4.5 per cent quarter-to-date, above our previous target of 2.3 per cent,” he said. “We are also increasing 2019 EPS by 160 bps. Intermodal and petroleum products have driven the volume upside and we are increasing 2Q estimates the most for Canadian National, followed by Norfolk Southern and Union Pacific. Our estimates fall for only Canadian Pacific (strike related) and Kansas City Southern, marginally.”
In a research note previewing the sector’s second quarter, Mr. Wetherbee raised his rating for Norfolk Southern Corp. (NSC-N) to “buy” from “neutral,” seeing “solid” upside to consensus estimates and “the potential for multiple appreciation based on sustainably better FCF.”
“We acknowledge NS’s service issues, which have kept us on the sidelines previously, but volume and pricing trends have been better than expected and we want to take advantage of the modest pause in shares recently to get more constructive,” said Mr. Wetherbee.
He raised his target for Norfolk Southern shares to US$176 from US$161, exceeding the consensus of US$158.17.
Mr. Wetherbee also raised his target for CSX Corp. (CSX-Q) shares to US$75 from US$61, keeping a “buy” rating.
“With the meaningful change in FCF generation at the U.S. rails post tax reform, which is coupling with cyclically lower capex and the expiration of regulatory capex to produce sustainably higher FCF conversions (from mid-60 per cent to 90 per cent), we are applying structurally higher PE multiples, which conform to 4-5-per-cent FCF yields,” he said. “These target yields are actually cheaper than the historical FCF valuation rails have traded at, supporting the PE upside case. As we believe capex is sustainable at current levels, we think valuation can drift higher over time.”
“We continue to rank CSX at the top of our rail preference list, followed by Union Pacific (where we’ve outlined a bull case to $200). That said, Norfolk Southern now rounds out the top 3. We could become more constructive on Norfolk Southern if service metrics improve, but poor service coupled with less ambitious OR targets and a relatively elevated reliance on export coal keeps us a bit more muted vs. US peers. Nevertheless, our upgrade expresses our enthusiasm for the group as a whole, as a must own sub-sector within Transportation.”
His targets for both Canadian National Railway Co. (CNI-N, CNR-T) and Canadian Pacific Railway (CP-N, CP-T) were left unchanged at US$85 and US$215, respectively.
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Calling it a “fast-growing consolidator in the death care industry,” Canaccord Genuity analyst Raveel Afzaal assumed coverage of Park Lawn Corp. (PLC-T) with a “buy” rating, believing it’s well-positioned to growth south of the border.
“The $240-million worth of acquisitions this year in the U.S. have provided PLC with a foothold in an $18-billion market, nine times the size of the Canadian market,” he said. “Furthermore, the U.S. market is equally fragmented (80-85-per-cent market owned by smaller players) with aging business owners considering their exit options. The company continues to have less than 1-per-cent market share in North America, which provides it with plenty of room to grow.”
Believing its share price will remain range-bound in the near term and recommending the stock for those with a longer-term investment horizon, Mr. Afzaal set a target of $29, up a loonie for the firm’s previous target. It’s 56 cents less than the average on the Street.
″We expect acquisitive growth to slow down until early 2019 as PLC integrates recently completed/announced transformative acquisitions,” he said. “Secondly, we estimate PLC is fairly valued assuming no new acquisitions. We expect improving profitability margins to provide support to the current share price in the interim.”
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In other analyst actions:
Scotia Capital analyst Orest Wowkodaw upgraded First Quantum Minerals Ltd. (FM-T) to “focus stock” from “sector outperform” with a target of $27, rising from $25. The average is $22.97.
Mr. Wowkodaw downgraded Hudbay Minerals Inc. (HBM-T, HBM-N) to “sector outperform” from “focus stock” and lowered his target to $11.50 from $13. The average target is $12.83.
Raymond James analyst Steven Hansen upgraded Nutrien Ltd. (NTR-N, NTR-T) to “strong buy” from “outperform” and raised his target to US$65 from US$60. The average is US$57.32.
Nomura Instinet analyst Romit Shah downgraded Intel Corp. (INTC-Q) to “neutral” from “buy” and lowered his target to US$55 from US$60. The average is US$60.09.
David Leeder