Inside the Market’s roundup of some of today’s key analyst actions
Equity analysts at TD Securities made a number of changes to their ratings for Canadian stocks on Monday.
Their moves were:
Jonathan Kelcher raised Canadian Apartment Properties Real Estate Investment Trust (CAR.UN-T) to “buy” from “hold” with a target of $52, up a loonie and above the average of $49.93.
Mr. Kelcher lowered Morguard North American Residential Real Estate Investment Trust (MRT.UN-T) to “hold” from “buy” with a target of $18.50. The average is $18.
Aaron Bilkoski cut Cardinal Energy Ltd. (CJ-T) to “hold” from “buy” with a reduced target of $2.75 (from $4.75). The average is $4.54.
Sean Steuart lowered Cascades Inc. (CAS-T) to “hold” from “buy” with a $12 target, down from $14. The average is $14.21.
Juan Jarrah raised Crew Energy Inc. (CR-T) to “buy” from “hold” with a target of $1.90, increasing from $1.40. The average is $2.39.
Mr. Jarrah also upgraded Crescent Point Energy Corp. (CPG-T) to “buy” from “hold” with a target of $7.50, down from $8. The average is $9.75.
Michael Tupholme lowered Stuart Olson Inc. (SOX-T) to “hold” from “buy” with a $5.50 target, down from $7. The average is $6.83.
Aaron MacNeil upgraded Shawcor Ltd. (SCL-T) to “buy” from “hold,” but his target was dropped to $24 from $27. The average is $28.70.
Mr. MacNeil downgraded Total Energy Inc. (TOT-T) to “hold” from “buy” with a $12 target, falling from $15.50. The average is $14.03.
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AltaCorp Capital analysts lowered their ratings for five stocks while upgrading another in response to changes to the firm's commodity price deck.
“Our 2019 oil price forecast uses the forward strip pricing for the first two quarters of the year, with a gradual improvement in the latter half of 2019 to reflect our revised 2020 assumption,” the analysts said in a research report. “This leads to the lowering of our WTI crude oil price forecast for 2019 to US$50.75/bbl from US$72.50/bbl, while lowering our 2020 expectation to US$60.00/bbl from US$72.50/bbl. Our 2019 WCS discount to WTI assumption is reduced from an average of US$26.50/bbl to US$18.75/bbl. Our 2020 differential for the grade is marginally changed at US$22.00/bbl. For Edmonton Par, our differential forecast narrows from US$11.65/bbl to US$9.10/bbl in 2019 and is modestly widened from US$9.30/bbl to US$10.00/bbl in 2020.”
With the changes, analyst Nick Lupick lowered Cenovus Energy (CVE-T, CVE-N) to “sector perform” from “outperform” with a target of $13.50 (from $18.50). The average on the Street is $14.23.
“We continue to believe that Cenovus’ leadership team is making all of the correct strategic decisions necessary to return the Company into a free cash flowing entity with a normalized capital structure,” he said. “Unfortunately, however, the 27-per-cent reduction in our target price resulting from the change in the ACC Price Deck has removed enough target price upside that it no longer warrants an Outperform rating. We add that we continue to believe that Cenovus remains a strong holding for shareholders looking for leverage to a rising commodity price, given its industry leading oil sands portfolio and limited downstream refining integration.”
Mr. Lupick also downgraded Imperial Oil Ltd. (IMO-T) to “underperform” from “sector perform” with a target of $20.50 (from $22). The average is $42.78.
“While we acknowledge that Imperial has begun to see measurable operational improvements at its Kearl mine (which we include in our forecasts), given the stock’s relative outperformance during Q4/18 (falling 18 per cent vs its peers at down 27 per cent) and the 19-per-cent reduction in our price target resulting from our revised price deck, Imperial’s current share price relative to our target price no longer warrants it a Sector Perform rating," he said. "Investors seeking greater upside and a strong defence to the risk of widening domestic crude differentials, we recommend investment in Suncor.”
He moved Pengrowth Energy Corp. (PGF-T) to “underperform” from “sector perform” with a 75-cent target, down from $1.25 and below the 80-cent average.
“While we continue to believe that Lindbergh is among the best thermal heavy oil assets in the basin (competing with the economics of Husky’s Lloydminster assets), given the company’s leverage, the material reduction in our target price (of 40 per cent) resulting from our revised ACC Price Deck, the risk inherent with the capital structure and, the limited implied target price upside of 12 per cent, we no longer believe that a Sector Perform equity recommendation is warranted,” the analyst said.
Thomas Matthews dropped Bonavista Energy Corp. (BNP-T) to “underperform” from “sector perform” with a target price of 90 cents, falling from $1.75. The average is $1.50.
“Headed into 2019, we had always assumed Bonavista was going to maintain its core production base flat year-over-year, resulting in a spending profile that was less than cash flow with money left over to repair its balance sheet,” said Mr. Matthews. “We’ve maintained this view, however, our 2019 pricing assumptions do not allow this flat drilling program to meaningfully pay down debt, nor create meaningful PDP value given IRR’s are 10-35 per cent on a half cycle basis using our average type-curve assumptions. Bonavista may prudently elect to drill its best acreage, thus exceeding our type-curve assumptions to ensure any capital allocated meets return hurdles. However, although this may maintain production with improved capital efficiencies in the near-term, this approach is unlikely to result in growth of its underlying PDP asset value per share (net of debt), which we feel is the ultimate driver of share price performance, especially in light of reduced GLJ engineering pricing assumptions and an higher than average debt position. Given the commodity price headwinds foreseen in 2019 for producers with significant exposure to AECO pricing, we feel Bonavista will continue to fight corporate declines with a constrained cash flow neutral budget, and as such, have reduced our rating.”
Mr. Matthews also lowered Gear Energy Ltd. (GXE-T) to “sector perform” from “outperform” with a 75-cent target (from $1.35). The average is $1.29.
“Although we were champions of GXE in mid-2018 for their efficiency and PDP value creation (which was ultimately reflected in the share price), our view at the time considered WTI prices of more than $60 per barrel which our current forecasts don’t call for until year-end 2020,” he said. “For this reason, we are downgrading Gear.”
Patrick O’Rourke lowered Pine Cliff Energy Ltd. (PNE-T) to “underperform” from “sector perform” with a 20-cent target (from 40 cents). The average is 39 cents.
“Although management has done an excellent job in maximizing the value of the assets from an operational perspective, and has achieved some market diversification from AECO, with 49 per cent of gas priced outside of AECO in the near term, ultimately the limited liquids pricing exposure combined with high AECO exposure drove our reduced target price,” he said. “The low production declines and required reinvestment capital would see Pine Cliff as a top choice for outperformance in the case of a surprise recovery in AECO prices.”
Conversely, Mr. Lupick upgraded Encana Corp. (ECA-T, ECA-N) to “outperform” from “sector perform” with a US$10 target, down from US$13.50.
“While we continue to be uncertain as to what is ‘core’ to the Company having once again expanded its asset base (to five operating basins from four) the stock’s underperformance since the announcement of its acquisition of Newfield Exploration has been jarring,” he said. “Despite our punitive price target methodology (described next), Encana has the highest implied target upside of any large cap entity under coverage at 61 per cent, despite the reduction in our commodity price assumptions. Recall that we recently altered our price target methodology until further clarity on the Company’s strategy is outlined for investors (namely what assets are core, what is not and the pace of development for those which are core).”
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Canaccord Genuity analyst Doug Taylor lowered his rating for shares of Quarterhill Inc. (QTRH-T, QTRH-Q) in response to uncertainty surrounding the ongoing litigation involving its Wi-Lan business and Apple Inc. (AAPL-Q).
In a statement released Monday, Quarterhill said: “In a trial verdict rendered on August 1, 2018 in the United States District Court for the Southern District of California a jury awarded WiLAN $145.1 million in damages against Apple Inc. for infringement of WiLAN’s U.S. Patent Nos. 8,457,145 and 8,537,757. In a January 4, 2019 ruling, Judge Dana Sabraw upheld the jury verdict that Apple infringed the two WiLAN patents. The court did not lower the damages award but did grant WiLAN the option to accept either reduced damages in the amount of $10.0 million or a new trial limited to determining the amount of damages only. This ruling confirms infringement and the only issue between the parties remains damages.”
Prior to that announcement, Mr. Taylor moved the stock to “hold” from “speculative buy” based on the desire for more clarity and “the go-forward consolidation strategy for Quarterhill given increasingly unpredictable results for its existing business.”
“It was reported by Bloomberg on Friday that a Federal Judge has cut the damages awarded to Quarterhill’s Wi-LAN business in its suit against Apple to US$10M from US $145M,” he said. “While it remains to be seen how Wi-LAN will respond to this news (accept the new amount or refight the damages portion of the suit), we view this development as a slight negative despite a 9-per-cent rise in the shares Friday given renewed uncertainty in the amount and timing of collection. We had previously included a steeply discounted (50%) amount in our sum-of-the-parts valuation.”
His target fell to $1.50 from $2. The average is currently $2.27.
“The unpredictability of the Wi-LAN business remains extreme and was again evidenced in Friday’s news,” the analyst said. “While the company intends to improve quarterly financial predictability through additional acquisitions of more stable businesses, there has been no capital deployed to this end since April 2017.”
Elsewhere, Cormark Securities analyst Gavin Fairweather downgraded Quarterhill to “market perform” from “speculative buy” with a target of $1.80 (from $2.50).
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Scotia Capital analyst Trevor Turnbull updated his ratings for a group of gold equities on Monday.
He downgraded the following stocks:
Osisko Gold Royalties Ltd. (OR-T) to “sector perform” from “sector outperform” with a $16 target, falling from $18. The average is $15.82.
Detour Gold Corp. (DGC-T) to “sector perform” from “focus stock” with a $13 target, falling from $21. The average is $15.22.
Lundin Gold Inc. (LUG-T) to “sector perform” from “sector outperform” with a target price of $6, down from $7. The average is currently $7.35.
Sandstorm Gold Ltd. (SAND-N, SSL-T) to “sector perform” from “sector outperform” with a target of US$5.50, down from US$6 and below the average of US$5.90.
Mr. Turnbull upgraded these equities:
Centerra Gold Inc. (CG-T) to “sector outperform” from “sector perform” with a $9 target, up from $8 and above the consensus of $8.05.
Guyana Goldfields Inc. (GUY-T) to “sector perform” from “sector underperform” with a $2 target, rising by a loonie but below the average of $3.05.
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BSR Real Estate Investment Trust (HOM.U-T) is deploying its balance sheet capacity much more rapidly than expected, according to Industrial Alliance Securities analyst Brad Sturges, who now sees its financial leverage employed falling below its long-term target range.
Mr. Sturges made the comments in response to BSR’s US$42.5-million acquisition of a 334-unit multifamily apartment complex in Grand Prairie, Tex., which was announced on Dec. 20. The deal is to funded by utilizing the REIT’s revolving credit facility.
“Including Riverhill, BSR’s Texas multifamily portfolio now represents 54 per cent of pro forma NOI [net operating income], enhancing the REIT’s portfolio quality through increased portfolio exposure to larger US Sunbelt apartment markets such as Dallas Fort-Worth, TX (14 per cent of pro forma NOI). BSR foresees potential at Riverhill to generate both organic rent growth and further rental income (NOI) growth over time through moderate capital improvements such as suite upgrades and other property enhancements.”
He added: “The transaction was financed through the REIT’s revolving credit facility, increasing BSR’s debt to gross book value (GBV) assets ratio on an IFRS basis to 49 per cent on a pro forma basis, slightly below its long-term target range of 50 per cent to 55 per cent. Based on a 52.5-per-cent financial leverage ratio, the mid-point of the REIT’s long-term target range, BSR’s remaining acquisition capacity is estimated to be $75-million.”
Mr. Sturges thinks BSR now may consider selling assets that do not fall into its long-term investment criteria, which focuses on smaller secondary and tertiary multifamily property market.
“BSR’s Class B garden-style multifamily property portfolio in the U.S. provides investors with attractive exposure to an improving US apartment property sector,” he said. “BSR is expected to continue to benefit from favourable multifamily demand fundamentals in the US Sunbelt property markets that are supported by compelling demographic, population and job growth, which may support further increases in rental apartment demand. The REIT may generate above-average same-property revenue growth YoY that is mainly driven by rising AMRs year-over-year [YoY] and improving average occupancies YoY. Further execution of the REIT’s value creation strategies could augment NAV/unit and AFFO/unit growth prospects. Currently, we expect BSR to generate SP-NOI growth YoY of 3 per cent to 4 per cent in the next 12 months.
“From a trading perspective, we believe that the recent above-average sell-off in BSR’s units since its IPO in May 2018 is unwarranted given BSR’s attractive U.S. multifamily exposure, and the REIT’s early execution of its stated growth strategies. BSR’s units offer a compelling entry point and buying opportunity, reflecting: 1) its deep discount valuation; 2) its above-average NAV/unit and AFFO/unit growth prospects; and 3) possible portfolio enhancements through executed capital recycling activities.”
Keeping a “strong buy” rating for BSR units, he lowered his target to US$10.25 from US$11. The average on the Street is currently US$10.87.
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Industrial Alliance Securities analyst George Topping reduced his base metals estimates in a research note released Monday, citing “recent weak economic data signalling a near-term global slowdown.”
“The resolution of the trade war with a weaker U.S. dollar should be supportive,” he said. “ We remain positive on copper and zinc given the spate of recent M&A suggesting senior producers see a supply shortfall ahead.”
Conversely, Mr. Topping emphasized gold is “on a tear, finally,” and now sits in line with his expectations.
“With a more dovish interest rate outlook and a projected weaker US$ on fears of a recession, gold has commenced a bull run (up 7 per cent, US$85 per ounce since Nov/18),” he said. “Our gold forecast already projected a long-term rise from US$1,270/oz in 2018 to US$1,350 in 2019 and onward to US$1,500/oz by 2021, and thus remains unchanged. Slight impacts to our junior gold targets are due to recent dilutive financings (where applicable), updated cost projections, and a lower C$ assumption in 2019 of US$0.78/C$ (from US$0.80/C$).”
Mr. Topping raised his target price for shares of Wesdome Gold Mines Ltd. (WDO-T) after the Toronto-based company finished 2018 up 160 per cent off its lows and expecting a further rise this calendar year.
“Mining of the high grade 303 lens at Eagle should push production to 75-80,000 ounces of gold in 2019,” he said. “The initial resource at Kiena (340,000 ounces Au at 11g/t) was overly conservative and should reach 1 million ounces in 2019. These catalysts combined with a better market sentiment should allow WDO to appreciate further to our increased target of $6.20/share (from $5.50/share).”
He maintained a “strong buy” rating for the stock.
At the same time, the analyst dropped his target for First Quantum Minerals Ltd. (FM-T) to $15.50 from $20, pointing to significant build-up risks.
“With US$7-billion (US$10/share) in net debt and the do-or-die build up imminent at Cobre, we reiterate our Hold rating and are reining in our target price due to the high risk,” he said. “The risks of operating in Zambia (80 per cent of copper production) have been demonstrated with the new tax regime which went into effect on January 1.”
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Saying it currently possesses “compelling” value, BMO Nesbitt Burns analyst Randy Ollenberger upgraded his rating for shares of Encana Corp. (ECA-T, ECA-N) to “outperform” from “market perform” on Monday.
“We believe the sell-off in Encana shares following the proposed Newfield acquisition is overdone and that the shares offer compelling value,” he said. “In our opinion, Encana holds a strong portfolio of assets in the top resource plays in North America.
“We believe that the company is well positioned to exceed investor expectations regarding the operating and cash generation upside associated with the pending acquisition of Newfield Exploration.”
Mr. Ollenberger reduced his target by a loonie to $11. The average is currently $15.34.
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BMO’s Richard Carlson raised General Motors Co. (GM-N) to “outperform” from “market perform” with a target of US$41, up from $38. The average is US$44.57.
Mr. Carlson said: “The two key factors to our more constructive view are: 1) we expect a brighter spotlight to be placed on GM Cruise in 2019, leading to a more appropriate value for this business being priced into the shares; and 2) we believe restructuring efforts will drive better profitability and FCF, as well as improve cyclical resilience.”
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“Shedding [his] bear skin,” BMO’s Ambrish Srivastava raised Micron Technology Inc. (MU-Q) to “outperform” from “market perform.”
“We are reversing our bearish stance on Micron,” he said. “While fundamentals will likely get worse before they get better, we believe the shares have bottomed out and are hence upgrading the stock.”
“Our reversal in thinking is driven by a combination of the following two factors - valuation and a structurally more profitable company, which will lead to FCF generation even under rather dire scenarios that we are modeling for.”
Mr. Srivastava’s target jumped to US$50 from US$32, which exceeds the consensus of US$48.80.
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In other analyst actions:
RBC Dominion Securities analyst Greg Pardy lowered MEG Energy Corp. (MEG-T) to “sector perform” from “outperform” with a target of $8.15, falling from $12. The average is currently $9.62.
RBC’s Michael Harvey dropped Peyto Exploration & Development Corp. (PEY-T) to “sector perform” from “outperform” with a $9 target (from $12). The average is $11.57.
Wolfe Research analyst Alex Kania downgraded TransCanada Corp. (TRP-T) to “peer perform” from “outperform.”
Cormark Securities analyst Richard Gray upgraded Goldcorp Inc. (G-T, GG-N) to “buy” from “market perform.” He raised his target to $18.50 from $16.50. The average is $17.96.
David Leeder