Inside the Market’s roundup of some of today’s key analyst actions
Canadian Natural Resources Ltd. (CNQ-T, CNQ-N) and Cenovus Energy Inc. (CVE-T, CVE-N) should be the largest beneficiaries of the mandatory oil production cuts implemented by the Alberta government in early December, according to Credit Suisse analyst Manav Gupta, who said the move “split the Canadian Energy space into ‘haves’ and ‘have nots.’”
“The haves (CNQ and CVE) are upstream not fully nonintegrated companies that were already forced to cut production as wider diffs lowered netbacks,” he said. “The have nots (IMO) are integrated companies whose downstream earnings experienced a material tailwind from wider diffs, insulating them against Canadian crude discounts. Production cuts have forced a $20 per barrel compression in diffs, initiating a wealth transfer from the have nots to the haves.”
In a research report released Monday, Mr. Gupta initiated coverage of Canadian integrated oil companies, emphasizing a “constructive” view of the sector and a preference for “higher beta crude stocks that benefit from mandated production cuts versus others that offer more dividend security in a lower commodity price environment.”
Mr. Gupta initiated coverage of the following stocks:
Canadian Natural Resources Ltd. (CNQ-T, CNQ-N) with an “outperform” rating and target price of $48 per share. The average on the Street is $33.92, according to Bloomberg data.
The analyst said: “In our view, CNQ offers the best growth profile among Canadian upstream producers. The company is in a position to double its oil sands production at favorable economics. We estimate CNQ will generate $3.4-billion in cash in 2019 after paying a dividend (up 10 per cent year-over-year), which will likely be used for buybacks (stock support) and further debt reduction.”
Cenovus Energy Inc. (CVE-T, CVE-N) with an “outperform” rating and $15 target. The average is $10.26.
Mr. Gupta: “In our view, CVE offers one of the best-levered plays to a crude price rebound, with oil making up 85 per cent of the total volumes. We believe the Alberta production cuts together with the OPEC production cuts will drive tighter crude fundamentals in 1H19. Crude beta rebound companies with higher leverage tend to outperform names with better balance sheets (SU and IMO), which makes CVE even more attractive.”
Suncor Energy Inc. (SU-T, SU-N) with a “neutral” rating and $48 target. The average is $39.84.
Mr. Gupta: “Given the quality of assets and the management team, we believe the 2.0-times valuation premium is justified. We are not on the sidelines owing to the valuation but because we believe there will be a crude beta rebound in which peers CVE and CNQ would outperform the more diversified and stable SU.”
Imperial Oil Ltd. (IMO-T) with an “underperform” rating and $38 target. The average is $30.72.
Mr. Gupta: “IMO is in the ‘have-nots’ bucket when it comes to Alberta-mandated production cuts. Unlike peers CNQ and CVE, IMO was running all out in 4Q18 and would see the highest negative rate of change to comply with mandated volume cuts. In contrast to its integrated peers SU and HSE, IMO has no international or out-of-province production. As a result, Imperial’s quarter-over-quarter volumes could be down more than 10 per cent. In 4Q18, IMO was the biggest beneficiary of the widening light-light spread owing to its refining feed slate. However, WTI-Syncrude has narrowed by $19 per barrel since the announcement of production cuts, and this represents a $1.5-billion earnings headwind (annualized) versus 4Q18.”
Husky Energy Inc. (HSE-T) with an “outperform” rating and $24 target. The average is $14.28.
Mr. Gupta: “HSE is one of the lowest-cost thermal producers that offers insulation from both a heavy and light diffs blowout owing to downstream integration, and yet it currently trades at a 2.0 times discount to peers. The company is in the ‘have-nots’ bucket when it comes to Alberta-mandated production cuts; however, we still initiate at Outperform given we expect HSE will reverse recent underperformance as the market recognizes that it made a smart decision by walking away from the MEG deal and did not double down on its mistake.”
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Premium Brands Holdings Corp.’s (PBH-T) “robust” balance sheet and free cash flow generation supports dividend increases “without sacrifice,” according to Industrial Alliance Securities analyst Neil Linsdell, who sees future M&A activity complementing organic growth.
He initiated coverage of the Richmond, B.C.-based specialty food manufacturing and distribution company with a “buy” rating.
“PBH has invested heavily in production capacity, namely by implementing a number of initiatives (including accelerated investments in automation and robotics) that are producing operational efficiencies that will result in future margin expansion,” said Mr. Linsdell in a research report released Monday. “Given recent capacity expansion projects, we expect a greater focus on profitability to result in a higher ROIC [return on invested capital] (improving to 10 per cent by 2024).
“Acquisition activity has been accelerating as PBH continues to see a robust pipeline of opportunities, with $740-million worth of deals in 2018, driving our estimate of total revenue growth of 37 per cent into 2018 and 21 per cent in 2019, with adjusted EBITDA growth rates of 35 per cent and 25 per cent, respectfully. Management is very selective in its acquisitions and targets an IRR of at least 15 per cent unlevered and after-tax over a 10-year horizon. We believe that PBH’s strong balance sheet (with $238-million of available credit capacity) can support a continuation of its aggressive acquisition strategy.”
Though he called its sandwich production a “significant driver” going forward, remaining its single largest product category and bolstered by a recent US$29-million investment in a new Arizona plant, Mr. Linsdell sees growth opportunities in its seafood segment south of the border.
“The Ready Seafood acquisition (Sept. 2018) supports PBH’s agenda to expand its rapidly growing seafood segment, as well as leverage the strengths of Ready’s management team to accelerate the platform’s U.S. strategy,” he said. “Post-acquisition, seafood sales will have a run rate of $400-million with Ready contributing US$129-million, making this segment the second largest product category at PBH and the largest within the Premium Food Distribution segment.”
Mr. Linsdell thinks Premium Brands should be able to deliver “some tasty returns” for investors seeking both long-term capital and dividend hikes as it continues to execute on its growth strategy. He set a price target of $95 per share, which exceeds the current average on the Street of $93.25.
“Since 2015, the payout ratio (dividend/FCF) has been below 50 per cent, even with PBH announcing annual dividend increases,” he said. “In March 2018, the company increased its quarterly dividend by 13% to $0.475 per share per quarter ($1.90 per share annually). Going forward, we are forecasting annual dividend increases of 10 per cent due to strong FCF growth, while maintaining a payout ratio (to FCF) of less than 40 per cent. PBH’s 2.4-per-cent dividend yield is relatively in line with the specialty foods peer group median of 2.3 per cent, and the food distribution comps of 2.1 per cent. Finally, given recent acquisitions and capacity expansion projects, we expect a greater focus on profitability to result in a higher ROIC (improving from 6 per cent in 2018 to 10 per cent by 2024).”
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Desjardins Securities analyst Maher Yaghi is expecting to see signs of “sustained improvement” in organic growth when CGI Group Inc. (GIB.A-T, GIB-N) releases its first-quarter 2019 financial results on Wednesday.
With revenue growth and an improved margin outlook for this fiscal year, he thinks CGI stock will be positioned “for continued upward momentum in the medium to long term.”
“Given our view that past bookings strength has not been fully reflected in revenue growth in the past few quarters, we expect organic growth to accelerate sequentially in 1Q FY19,” said Mr. Yaghi. “However, we highlight that revenue growth stemming from M&A should be weaker in the quarter as several acquisitions were lapped, affecting revenue growth. However, FX should boost revenue growth by about 0.9 per cent in the quarter. We also highlight that we expect lighter bookings (though still decent) vs last quarter, possibly due to the US government shutdown and continued political turmoil in the UK.
“While we are not certain if CGI is planning to initiate a dividend policy, the company’s solid balance sheet and cash flow generation, combined with the fact that the vast majority of its peers now pay a dividend, could be solid arguments in support of a dividend.”
Believing current fluctuations should provide a “tailwind for top-line growth,” Mr. Yaghi made modest increases to his revenue projections for both fiscal 2019 and 2020, while he kept a “buy” rating and $94.50 target for its stock. The average is $89.50.
“While we have seen better entry points in the name and while the current valuation leaves less potential upside, we expect CGI’s top-line and margin prospects will continue to improve, thus supporting our long-term Buy recommendation,” he said.
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Bank of America Merrill Lynch analyst Ebrahim Poonawala downgraded Bank of Montreal (BMO-T, BMO-N) to “underperform” from “neutral” with the view “investors may be underestimating the revenue risk from slowing GDP growth.”
Mr. Poonawala also sees “ongoing margin challenges given a competitive pricing environment” on both sides of the border.”
After cutting his 2019 and 2020 earnings expectations, he lowered his target for BMO shares to $98 from $104, which falls below the current average of $108.14.
“With capital markets business contributing 19 per cent of earnings we see potential for heightened EPS volatility that could serve as a headwind to mgmt’s operating leverage target,” he said.
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Though he called it a “clear bright spot for performance over the last quarter” among Canadian infrastructure companies, Credit Suisse analyst Andrew Kuske downgraded Canadian Utilities Ltd. (CU-T) to “neutral” from “outperform” based on “limited excess potential return” to his $36 target. The average target on the Street is $34.67.
“With recent market movements, we believe Brookfield Business Partners (BBU) offers compelling value given concerns largely from the loan market and ability to exit certain investments,” he said. “With rates moves, we view Pembina Pipelines (PPL) and Brookfield Infrastructure Partners (BIP) as offering excellent risk adjusted growth at positive valuations. Among the pure Energy Infrastructure names, we see tactical positioning with Gibson Energy (GEI) and value in TransCanada (TRP) on a fundamental basis.”
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Alacer Gold Corp. (ASR-T) is “set to fire up the free cash flow,” said RBC Dominion Securities analyst Mark Mihaljevic, who raised his target price for shares of the Denver-based miner following last week’s release of a stronger-than-anticipated 2019 outlook.
“We believe Alacer is well positioned to deliver strong free cash flow starting in mid-2019 driven by contribution from the Sulfides project, supplemented with incremental cash flow from the oxide operation,” he said. “At spot prices, we estimate average annual FCF (after minority interest dividends) of $140-million (47 cents per share) from 2019-21 implying a yield of 20 per cent. We expect the primary focus in 2019 to be on reducing the company’s debt position (currently $350-million) as well as continuing to invest in exploration and brownfield oxide opportunities. Starting in 2020, we believe the company will be in a position to consider returning capital to shareholders.”
“Beyond the Sulfides project, we believe ongoing oxide exploration success around Copler can help drive incremental high-return, near-term cash flow given the potential to leverage existing infrastructure. We expect the market to gradually attribute more value to the Oxide potential as (i) the Çakmaktepe deposit starts contributing in H1/19, (ii) resource growth at Ardich is delivered, (iii) additional details on the longer-term processing plan are provided, and (iv) ramp-up of the Sulfides project progresses.”
Mr. Mihaljevic raised his 2019 and 2020 earnings per share estimates to 17 cents and 21 cents, respectively, from 13 cents and 18 cents.
Maintaining an “outperform” rating for the stock, he moved his target to $4 from $3.75. The average is $3.51.
“Alacer is one of our preferred Junior gold producers for 2019,” the analyst said. “We expect the company’s shares to outpace peers over the coming year as the Copler Sulfides project ramps-up, the company’s free cash flow potential is demonstrated, and additional upside at the Oxides is outlined.”
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Desjardins Securities analyst David Newman expects “soft” fourth-quarter financial results from Chemtrade Logistics Income Fund (CHE.UN-T), pointing to weakness in its key chlor-alkali chemicals.
“We expect the quarter to be driven by: (1) continued weakness in NE Asia caustic soda prices and a slowdown in HCl due to lower oil prices, compounded by seasonally lower demand and potentially modest rail congestion issues; (2) a recovery in SPPC (reduced sulphur by-product supply, offset by price increases); and (3) improvement in WSSC (a recovery in municipal contract pricing to gradually offset higher raw material costs),” said Mr. Newman, reducing his EBITDA projection for the quarter to $74-million from $77-million.
Mr. Newman did, however, emphasize that the “sky is not falling” for the Toronto-based company, noting: “2018 was a transitional year for CHE, which faced several operational challenges. While the market may be pricing in a potential distribution cut, balance sheet challenges, a deceleration in economic growth and lingering operational issues, we believe the company should gradually regain its footing with expected stronger operational execution and continued strong demand for many of its chemicals.”
With a “buy” rating, Mr. Newman’s target for Chemtrade shares dipped to $14 from $15.50. The average is now $16.
“Our constructive outlook on CHE is premised on: (1) an expected operational recovery, (2) a solid outlook for most of CHE’s key chemicals, and (3) an attractive 12-per-cent distribution yield, with no anticipated changes in the distribution,” he said. “With the stock regaining its footing, our work would suggest an increasingly asymmetric return.”
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Calling it “faster, better and more profitable,” RBC Dominion Securities analyst Amit Daryanani initiated coverage of Dell Technologies Inc. (DELL-N) with an “outperform” rating on Monday.
“Our bullish bias is driven by the combination of Dell’s attractive enterprise portfolio across Core, Edge, and Cloud coupled with attractive valuation (core Dell),” he said. “This is partially offset by concerns around slowing IT spend, heavy leverage, and conglomerate discount. We expect the stock to drift higher due to a confluence of: a) margin expansion, b) better sales growth driven by share gains and resolving their storage centric challenges, and c) deleverage contributing to EPS growth. Valuation should improve as investors get comfort around governance and conglomerate operations.”
Mr. Daryanani set a target price of US$56 per share, which falls 10 US cents below the average.
“We see a path towards $10+ EPS over the next few years that should, in an upside narrative, take the stock towards $70, though should risks around leverage and recession occur simultaneously, we see downside towards $30,” he said. “Overall, risk/reward is attractive.”
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Morgan Stanley analyst Piyush Sood upgraded United States Steel Corp. (X-N), believing the near-term steel price outlook is improving and seeing limited downside.
“We think the market has sufficiently priced in operational/pricing concerns," he said.
Moving the stock to “equal weight” from “underweight,” Mr. Sood cut his target to US$21 from US$30. The average is US$29.67.
“While the stock could rally near term on improving price/macro outlook, we’ll look to fade it on a 12 month view,” the analyst said.
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In other analyst actions:
Haywood Securities analyst Pierre Vaillancourt downgraded Falco Resources Ltd. (FPC-X) to “hold” from “buy” with a target of 40 cents. The average is 98 cents.
“We remain positive on the potential for Horne 5, and are confident in the abilities of management to advance the project, but we also recognize that the process leading to the redevelopment of the mine may extend beyond the original timeline,” he said. “Accordingly, we are downgrading our rating.”
Macquarie analyst Michael Siperco upgraded Barrick Gold Corp. (ABX-T, ABX-N) to “outperform” from “neutral.”
GMP initiated coverage of Gran Colombia Gold Corp. (GCM-T) with a “buy” rating and $6 target.
With files from Bloomberg News
David Leeder