Inside the Market’s roundup of some of today’s key analyst actions
Dollarama Inc.'s (DOL-T) “weaker” same-store sales growth trends are likely to continue, according to Canaccord Genuity analyst Derek Dley, who lowered his target price for shares of the discount retailer ahead of Thursday’s release of its fourth-quarter results.
“We are forecasting same-store sales growth of 3.0 per cent during the quarter, which is ahead of the 2.8 per cent growth in same-store sales year-to-date,” he said. "We expect same-store sales growth to be driven by a combination of the shift in timing of Halloween into Q4/19, along with an increase in transaction size per basket. However, we believe the inflationary pricing environment remained benign in Q4/19, limiting price increases during the quarter.
“Furthermore, we are concerned that the extreme winter weather experienced in Eastern Canada likely impacted Dollarama in late Q4/19 and into Q1/F20. We estimate Dollarama opened 28 new stores during the quarter for a total of 60 new store openings in F2019.”
Maintaining a “buy” rating for the stock, Mr. Dley moved his target to $45 from $50. The average target on the Street is $41.58, according to Bloomberg data.
“We have lowered our target multiple due to our expectation of softer same-store sales in the near term compared to our prior expectations of 4.0 per cent,” he said. “We continue to believe Dollarama offers investors a strong earnings growth profile, and more normalized inflation would lead us to become more positive on the company. Additionally, with its robust network expansion ability, lack of meaningful competition, industry leading profitability and free cash flow generation, and healthy ROIC, we believe Dollarama is deserving of a premium valuation.”
Elsewhere, expecting to see a “good pickup” in fourth-quarter results, Industrial Alliance Securities analyst Neil Linsdell thinks Dollarama shares present a buying opportunity at current levels.
Mr. Linsdell said the focus on the Street remains squarely on the discount retailer’s same-store sales growth, given its decision “to minimize price hikes to preserve DOL’s value proposition to consumers.” That resulted in a reduction to the company’s guidance (to 2.5-3.5 per cent from 4-5 per cent in the second quarter). Mr. Linsdell is now projecting 3.5-per-cent growth in the quarter, versus a 3-per-cent consensus on the Street and up from 2.7 per cent for the first three quarters of the fiscal year.
The analyst is expecting revenue to increase 17 per cent year-over-year to $1.098-billion, exceeding the consensus of the $1.973-billion. He’s projecting earnings per share of 54 cents, a penny less than the consensus but up 6 cents from the same period a year ago.
“Q4 results will focus on initial guidance for F2020,” said Mr. Linsdell. “We expect a solid outlook for sales growth and store openings through F2020 to bring confidence back to DOL shares.”
He maintained a “buy” rating and $50 target.
“Dollarama has industry leading margins,” said Mr. Linsdell. “However ... we see that some concerns in F2019 relating to the outlook for SSSG and DOL’s ability to maintain its rate of expansion of net new store openings are behind the recent sell-off and multiple compression. In our view, given the market potential of dollar stores in Canada, we have confidence in Dollarama’s ability to achieve above-average organic growth and to sustain its best-in-class margins.”
=====
Citing “meager” demand and M3 delivery issues abroad, RBC Dominion Securities analyst Joseph Spak lowered his first-quarter deliveries forecast for Tesla Inc. (TSLA-Q) by almost 10 per cent.
His M3 delivery projection for the quarter fell to 52,500 units from 57,000 units, which falls below the consensus on the Street of 58,400.
“Regionally, we assume 21k units in Europe, 6-7k in China and the remainder in NA,” he said. “In Europe, it does appear that there has been an increase in March after delivery challenges hurt earlier in the quarter. However, stronger M3 has come at expense of S/X. Of note, it does appear that TSLA is pushing deliveries to Norway – a country we have previously highlighted as key to maintaining M3 margins in Europe. Long-term, though Norway is a key country for Tesla, it remains a relatively small market. In China, some deliveries were delayed because of a customs issue.”
For 2019, he now projects delivery of 261,000 M3 units, down from 268,000. His 2020 estimate remains 347,500.
"We also incorporated ASP [average sales price] changes based on recent announcements," said Mr. Spak. "Our 2019 M3 ASP is now $53.6k, down from $55.5k prior – still stronger in 1H as Tesla fulfills higher-end demand internationally before lower priced models (which carry lower gross margin) kick in. Our outer-year M3 ASPs reduced 4 per cent vs. prior. Our 2019 M3 gross margin forecast is now 17 per cent vs. 19.5 per cent prior. Meanwhile, our 1Q19 Model S/X estimate is now 19.2k from 22.5k and below consensus expectations of 20.7k units. We believe M3 has impacted demand internationally while the halving of the FIT credit in the U.S. has also weighed. For 2019, we are now looking for 86.4k Model S/X units vs. 92.8k prior, with an ASP of $95k vs. $98k prior and gross margins of 25.3 per cent vs. 28 per cent prior."
With the model changes, Mr. Spak's first-quarter non-GAAP earnings per share estimate fell to a loss of 64 US cents from a 68 US cent profit, which includes some one-time charges. His 2019 EPS forecast is now a loss of 33 US cents, falling from a US$4.43 gain.
Maintaining an "underperform" rating, his target for Tesla shares dropped to US$210 from US$245. The average on the Street is US$321.10.
"We continue to see downside pressure to TSLA shares," he said. "We see both 2019 and 2020 revenue as down vs. the 4Q18 run-rate and, given TSLA is priced for growth, believe the valuation will come in. The back-and-forth on strategy as well as potential legal overhangs are also impediments for incremental buyers of the stock, in our view."
=====
In the wake of the release of BRP Inc.'s (DOO-T) better-than-anticipated fourth-quarter results last week, Desjardins Securities analyst Benoit Poirier sees a “disconnect” between market sentiment and fundamentals, which he believes presents a buying opportunity for investors.
On Friday, the Valcourt, Que.-based recreational vehicle maker reported revenue and normalized earnings per share of $1.506-billion and 88 cents, respectively, exceeding Mr. Poirier's projections of $1.359-billion and 83 cents.
Mr. Poirier also deemed the company's fiscal 2020 guidance as "decent," despite an unexpected rise in expenses.
"We remain bullish on the name in light of its unmatched retail sales momentum, potential growth opportunity associated with the Ryker, proven track record of market share gains through innovation and attractive valuation," he said. "We expect that management will be active with its NCIB program to create value for long-term shareholders."
Mr. Poirier did modestly lower his revenue and earnings expectations for the coming fiscal year, pointing to "uncertain" economic conditions and IFRS 16 changes.
With a "buy" rating (unchanged), his target dipped to $65 from $74. The average is $57.62.
“Overall, while market sentiment for cyclical stocks continued to deteriorate recently, we believe that BRP’s solid retail sales momentum and track record of introducing innovative products will continue to support market share gains and generate solid financial results,” the analyst said. “We therefore believe investors should be opportunistic and buy the shares at an attractive level (DOO currently trades at a FCF yield of 7.3 per cent or at an EV/FY1 EBITDA of 6.1 times vs its five-year average of 8.8 times).”
Meanwhile, CIBC World Markets' Mark Petrie lowered his target by a loonie to $50 with an "outperformer" rating.
Mr. Petrie said: “BRP’s strong Q4 results and healthy F2020 outlook were no match for an inverted yield curve that re-ignited macro concerns and punished large swaths of the stock market, including DOO and its peers. While we recognize the risks to BRP at this point in the cycle, we believe it is well-positioned to outpace its industry and deliver healthy earnings growth in F2020.”
=====
An increased earnings contribution from Aecon Group Inc.'s (ARE-T) concessions segment is not currently captured in its share price, according to National Bank Financial analyst Maxim Sytchev.
"Investors are generally leery of construction and we understand why – it’s lumpy, can have potential cost over-runs and driven by backlog news flow, which can be sporadic in nature," he said. "Hence when investors casually glance at Aecon trading at 3.5 times 2019 estimated EV/EBITDA, they say it’s cheap but because it’s construction that’s where it should be (even though historically it has traded at north of 5.0 times).
"What we believe the market is missing now is on the back of Bermuda airport redevelopment and numerous P3 wins, concessions made up 38 per cent of 2018 EBITDA generation from the consolidated business, increasing to projected 41 per cent in 2019. Not only is concession EBITDA generation more predictable and higher margin in nature (33.0 per cent + vs. 5.0-6.0 per cent for core construction), it is also a part of the business that the market bestows a higher multiple to. In a nutshell, investors are now treating Aecon as a run of the mill construction business (same multiple as peers with no concessions exposure). To us, this spells an opportunity, especially as Q4/18 infrastructure hiccup does not appear to be spilling over into the rest of the year."
Giving “credit” for a shift in its EBITDA mix to “larger and more stable contributions through higher management fees on a growing portfolio of concessions,” Mr. Sytchev raised his target for Aecon shares to $24 from $21, keeping an “outperform” rating. The average target is $23.05.
"It is also important to mention that while historically Aecon had elected to divest its concession assets once the construction was completed (as was the case with Quito and Cross Israel Highway), the company feels compelled to now retain the assets (partly driven by a more favourable geographic skew of those concessions)," he said. "In time, creating a separate vehicle for the concession portfolio also might make sense."
=====
Canaccord Genuity analyst Dalton Baretto resumed coverage of a trio of miners in reports released on Monday.
He has a “buy" rating and $9 target for Centerra Gold Inc. (CG-T). The average target on the Street is $8.67.
“Our investment thesis for CG is a story of value accretion through diversification," he said. "Centerra currently trades at a meaningful discount to its peers, reflecting the geopolitical risk profile associated with the Kyrgyz Republic, from where the company currently derives the lion’s share of its cash flow.
“The flagship Kumtor mine in Kyrgyzstan is a world-class mine, producing 550,000 ounces of gold per annum at all-in sustaining costs (AISC) below $700/oz (which we would deem 1st quartile on the global cost curve). Unfortunately, the mine has a difficult address; similar to the Oyu Tolgoi mine in Mongolia, as the largest contributor to GDP in a poor country, the asset serves as a lightning rod for political rhetoric and a source of incremental funds for the cash-strapped fledgling post-Soviet democracy.”
Mr. Baretto has a “hold” rating and $1.15 target for New Gold Inc. (NGD-T). The average is $1.32.
“We believe NGD is fairly valued at current levels; however, the stock may be a good option for those investors looking for leverage to the gold price at a moderate valuation with low jurisdictional risk (BC, ON),” he said. "NGD is currently shrouded in uncertainty - a highly financially leveraged company with only one proven operating asset, essentially no free cash flow in the medium term, and successive major tranches of debt coming due beginning in August 2021.
“The company has now been through two years of turmoil beginning in early 2017, with a substantial capex over-run at Rainy River (we estimate 44%), subsequent ramp-up challenges that have not yet been resolved, significant turnover in the C-Suite (new Chairman, three different CEOs and two different CFOs, as well as multiple Board member changes) and multiple asset sales, culminating in a $458 million impairment charge at Rainy River in 4Q18.”
Mr. Baretto has a “buy” rating and $21.50 target for shares of SSR Mining Inc. (SSRM-T). The average is $20.87.
“We view SSRM as a well managed, multi-asset, low-cost gold producer poised at the start of a three-year grade-driven growth cycle,” he said. "The company’s cash flows are pre-dominantly derived from ‘safe’ jurisdictions - Nevada and Saskatchewan. SSRM boasts a very strong balance sheet - post the recent restructuring of the outstanding convertible notes, we forecast $514 million in cash and $154 million in net cash as at the end of 1Q19, with no maturities until 2033. We forecast SSRM to remain FCF-positive going forward and, as such, we expect the company’s net cash position to continue to grow (leading to some very interesting capital deployment questions).
“SSRM’s operating and financial metrics appear to have limited leverage to changes in the gold price, as the assets generate low operating costs and therefore strong operating margins. Given this relatively low commodity leverage, coupled with low geopolitical, financial and development risk, we view SSRM as an appropriate investment for defensive-minded investors looking for a lower-risk opportunity to buy growth exposure in the precious metals space.”
=====
In other analyst actions:
TD Securities analyst Graham Ryding downgraded Gluskin Sheff + Associates Inc. (GS-T) to “tender” from “hold.” Mr. Ryding raised his target to $14.25 from $12, which exceeds the current consensus of $13.35.
Eight Capital analyst Jenny Wang initiated coverage of Green Growth Brands Inc. (GGB-CN) with a “buy” rating and $8.50 target.
Cormark Securities analyst Jesse Pytlak upgraded the recommendation on MedMen Enterprises Inc. (MMEN-CN) to “speculative buy” from “market perform.”
Cormark’s Tania Gonsalves downgraded Biosyent Inc. (RX-X) to “market perform” from “buy” with a $9 target, down from $10 and below the average of $10.33.
David Leeder