Inside the Market’s roundup of some of today’s key analyst actions
Tim Hortons Canada’s same-store sales results are likely to be “negatively impacted” by the recent decline in brand perception, according to BMO Nesbitt Burns analyst Peter Sklar.
In response to a recent online survey on consumers’ perception toward Tim Hortons the firm conducted, Mr. Sklar downgraded his rating for its parent company, Restaurant Brands International Inc. (QSR-T, QSR-N), to “market perform” from “outperform.”
“Due to the ongoing negative press on Tim Hortons, and Restaurant Brands International (RBI), we believe it is warranted to consider whether the company’s traffic and SSS results will be impacted in the upcoming quarters,” he said.
Mr. Sklar dropped his target price for QSR shares to $56 from $70. The average target on the Street is currently $86.97, according to Bloomberg data.
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Stars Group Inc.’s (TSGI-T, TSG-Q) US$4.7-billlion acquisition of Sky Betting & Gaming is “transformative,” said Desjardins Securities analyst Maher Yaghi, who believes the deal has the potential for “significant significant cost and potentially even higher revenue synergies.”
On Saturday, the Toronto-based poker giant announced the deal with CVC Capital Partners and Sky Plc for Sky Betting, which currently possesses the U.K.’s largest active online poker player base while also offering sports gambling. Stars Group will pay US$3.6-billion in cash and 37.9 million newly issued common shares based on the closing price on April 20.
“While the multiple paid is 15.7 times EBITDA, after accounting for cost synergies the valuation drops to 12.8 times,” said Mr. Yaghi. “We believe this acquisition makes sense strategically, as it will enable TSGI to diversify its revenue base away from the low-growth poker business and gain an important foothold in the sports betting segment. In addition, the combination of the two companies is likely to lead to future revenue synergies, as customers on both sides are offered additional services, thus potentially increasing average customer yield.”
In response to the deal, Mr. Yaghi upgraded his rating for Stars Group to “buy” from “hold.”
“The transaction is transformative for TSGI since it significantly changes the proportion of revenue from the sportsbook segment and thus diversifies the company’s revenue away from poker,” he said. “Poker will still be the company’s largest revenue source at 37 per cent, slightly ahead of sportsbook at 34 per cent and casino at 26 per cent. While TSGI had already launched a sportsbook product, the company had not committed the resources required to make BetStars a world-class platform. We recognize that building a successful product is resource- and time-consuming, which explains management’s decision to buy an existing successful platform.
“Casino was still growing very quickly for TSGI, but revenue from the segment was mostly generated from existing poker players, thus potentially cannibalizing poker revenue. We believe that the acquisition of a company with revenue coming predominantly from other segments can provide an inverse path for money between segments in the new consolidated entity, as existing sportsbook-only players could be brought into poker, in our view. Moreover, the deal provides TSGI with an increased proportion of revenue from regulated markets. In our view, such markets are less volatile for the company as regulation is already in place.”
With the rating change, Mr. Yaghi hiked his target for Stars Group shares to $45 from $36. The average on the Street is currently $39.97.
“Overall, the deal — if approved by regulatory authorities — will create a global powerhouse in poker, sports betting and online gaming,” he said. “In our view, this should provide TSGI with sizeable cross-selling and revenue synergy opportunities.”
Elsewhere, Echelon Wealth Partners analyst Ralph Garcea raised his target to $55 from $44 with a “buy” rating (unchanged).
“This marks TSGI’s third acquisition in sportsbook thus far in 2018 (CrownBet, WMH Australia, SkyBet) – we believe the focus now turns to integration and synergies across all platforms and business units,” said Mr. Garcea. “TSGI estimates the transaction will be adjusted EPS neutral in the first full year with positive impacts thereafter.”
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TD Securities analyst Aaron MacNeil upgraded the recommendation on Trican Well Service Ltd. (TCW-T) to “buy” from “hold” ahead of the release of its first-quarter financial results on May 10, believing the company’s first-quarter challenges are “widely understood.”
Noting “persistent negativity” toward the oil services sector has created one of the best investment opportunities in “quite some time,” Mr. MacNeil raised his target for Trican shares to $4.25 from $3.50. The average target is $5.10.
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Teranga Gold Corp. (TGZ-T) is likely to draw increased investor attention in the near term as it transform itself from a single-asset junior producer into a diversified intermediate, according to Canaccord Genuity analyst Rahul Paul.
He initiated coverage of the Toronto-based company with a “buy” rating in a research note released Monday.
“Teranga Gold is currently a single asset junior gold producer expected to produce approximately 225,000 ounces in fiscal 2018 at AISC [all-in sustaining costs] of $991 per ounce from the Sabodala open-pit gold mine in Senegal,” said Mr. Paul. “Senegal has over the last few years established itself as one of the more stable post-colonial democracies in West Africa – Teranga has successfully operated in the country with no problems since 2010. While we view geopolitical risk as relatively low, we believe the combination of junior producer status and reliance on a single asset and on a single West African jurisdiction for cash flow typically comes with a material valuation discount in current market conditions, highlighted by relatively low risk tolerance among investors.
“With development set to commence on the fully funded Wahgnion open pit/CIL project in Burkina Faso (first production targeted by year-end 2019) and exploration efforts picking up pace at the Golden Hill property, also in Burkina Faso (initial resource expected year-end 2018, potential first production by 2023), we see the potential for production to grow by 140 per cent to 536,000 ounces in the next five years with a 17-per-cent decline in all-in sustaining costs to less-than $850 per ounce. At the same time, this should also diversify the company’s production base to three assets and from two operating jurisdictions. Execution on this strategy should transform Teranga into a diversified, low-cost intermediate producer, in turn substantially increasing investor appeal.”
Mr. Paul added Teranga appears on track to attain a valuation premium enjoyed by other low-cost diversified producers, noting: it now trades at 0.42 times price-to-net asset value multiple, or a 30-per-cent discount to the average among diversified intermediate producers.
“In particular, low-cost West Africa-focused diversified producers such as B2Gold (BTO-T, “buy” rating, $7 target) and Endeavour Mining (EDV-T, “buy” rating, $38.50 target), also trade at premiums to most single asset North American producers highlighting the impact that scale and geographic diversification can have perceived geopolitical risk and valuation multiples,” he said. “Pending execution on strategy over the next few years, we see the potential for Teranga’s current valuation discount to dissipate. Pending successful delivery on strategy and a lower quartile cost-profile, we would not rule out the potential for an eventual premium valuation.”
Adding offers above-average leverage to the price of gold, Mr. Paul set a price target of $8.50 for Teranga shares. The average is now $7.06.
“We believe the current share price represents a compelling entry point into a company with significant upside potential, which we believe is not currently reflected in the share price,” the analyst said. “For example, if we were to assume that the market was currently only giving value to the company’s flagship Sabodala mine, the current share price would itself represent a 13-per-cent IRR [internal rate of return] on our forecasted after-tax attributable cash flows from the asset (based on our forward curve-derived price deck, 7 per cent based on spot gold price of US$1,345 per ounce). We believe this relatively high rate of return exemplifies the undervalued nature of the shares in the market today. This assumes no further cash flows from Wahgnion (we schedule first production in 2020), or any value attributable to Golden Hill (an asset which we believe could hold considerable value).”
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Needham analyst Rick Patel lowered his rating for Lululemon Athletica Inc. (LULU-Q), expecting sales growth to slow in the second half of fiscal 2018.
“We think [long-term] drivers remain intact (international, e-commerce, and men’s) and 1Q18 should be good on a strong start to the year and easy comparisons,” said Mr. Patel.
“However, we think the setup is more difficult for 2Q-4Q18 when LULU laps stellar execution from last year. Guidance for 2018 reflects the continuation of strong momentum and the Street is already modeling this. Because of this and its premium valuation, we see less potential for upside, and accordingly move to the sidelines.”
Citing its current valuation, after an 85-per-cent rise since the second quarter of 2017, Mr. Patel the Vancouver-based apparel maker to “hold” from “buy” without a specified target. The average on the Street is US$89.46.
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Knight Therapeutics Inc. (GUD-T) presents investors with an attractive risk-reward proposition, said RBC Dominion Securities analyst Douglas Miehm, who recommends its stock for investors seeking long-term price appreciation.
He initiated coverage Montreal-based pharmaceuticals company with an “outperform” rating.
“Knight was formed in 2014 as a carve-out of Paladin Labs when it was acquired by Endo International for $3.2-billion,” said Mr. Miehm. “Like Paladin, Knight’s focus is on the licensing and acquisition of late-stage pharma products for Canada and select international markets. Knight’s CEO Jonathan Goodman led Paladin through a decade of revenue and EBITDA growth (compounded) 30 per cent annually, with shares going from $2.30 to $142.06 following its acquisition. With the same strategy being employed at Knight, we see strong potential for repeated success over the mid- to long-term.”
“Mr. Goodman and Ms. Samira Sakhia (CFO) were instrumental to Paladin’s success. During their tenure, Paladin limited transactions to 7.0x EBITDA and never once used debt. Consistently accretive transactions give us confidence in management’s ability to execute at Knight. That being said, we acknowledge that the spec pharma deal environment is more competitive than the last ten to fifteen years at Paladin, suggesting significant value creation could take some time.”
Mr. Miehm emphasized the company’s “unique” business model, noting it generates return on capital lending to and investing in life science firms as well as using those agreements to create licensing opportunities.
“Additionally, a focus on non-U.S. markets reduces the competitive pressures that Knight may face,” he said.
“Mr. Goodman owns 17 per cent of GUD (total inside ownership of 25 per cent), which we believe aligns management and shareholder interests.”
The analyst set a price target of $9.50 per share, which is 7 cents less than the current consensus.
“While we note that large-scale deals may not occur in the near-term, we believe downside is limited as it is unlikely that shares trade below book value (currently 1.1 times),” said Mr. Miehm. “We think there is upside to current levels if the shares move towards Paladin’s historical P/ B of 1.5-2.0 times.”
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Caterpillar Inc. (CAT-N) stock has the potential to outperform in the next 6-12 months, according to Citi analyst Timothy Thein, citing positive estimate revisions, increased capital returns and improving China macro data points.
“Recent outsized seasonal draws in China steel [inventories] point to improving construction sector activity,“ said Mr. Thein. “Our commodities team believes a pick-up in China growth indicators is coming, which would help to lift industrial metals prices.”
He added: “We also believe CAT has been able to increase prices in China on the back of the strength in construction markets (and low dealer inventories).”
Mr. Thein upgraded it to “buy” from “neutral” with a target of US$180, down from US$185. The average is currently US$177.96.
“Clearly our call is not early, and we are mindful of weakness in certain macro lead indicators (and further yield curve flattening) that has started to raise some doubts around the ‘synchronized global growth’ narrative,” he said.
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Deutsche Bank analyst Paul Trussell raised his rating for Under Armour Inc. (UAA-N) to “hold” from “sell,” believing strength internationally can help offset North American struggles and help it reach its earnings goals for the fiscal year.
“First-quarter and fiscal year 2018 earnings are attainable in our view, reflecting improved sell-through of new products and a commitment to cost reduction,” said Mr. Trussell. “While North American wholesale trends continue to face pressure, new accounts partially offset and we believe international growth remains robust as we note Under Armour’s peers in the athletic space recently produced outsized growth overseas, particularly in China.”
“We believe the opportunity to grow internationally on the top-line remains robust as Under Armour’s peers in the athletic space continue to produce outsized growth. Many in our athletic coverage (Lululemon, Under Armour, and Nike) have called out international as a main component of growth, particularly driven by China.”
Mr. Trussell raised his target for the stock to US$16 from US$13. The average is US$14.69.
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The risk-reward for Wajax Corp. (WJX-T) appears balanced, according to BMO Nesbitt Burns analyst Devin Dodge, who initiated coverage with a “market perform” rating.
“We believe Wajax stands to benefit from a pickup in activity levels in Western Canada and the company’s restructuring efforts should allow for margin expansion as top-line performance improves,” said Mr. Dodge.
“However, we believe the risk profile is elevated and valuation doesn’t provide sufficient margin of safety should the company encounter any bumps in the road.”
He set a $26 target, which is lower than the average target on the Street of $29.63.
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In other analyst actions:
Stelco Holdings Inc. (STLC-T) was upgraded to “outperform” from “sector perform” by National Bank Financial analyst Maxim Sytchev, who raised his target to $33 from $29. The average is $29.50.
Canaccord Genuity analyst Carey Macrury downgraded Barrick Gold Corp. (ABX-T, ABX-N) to “hold” from “buy” with a target of $19, down from $22.50. The average is $22.83.
Mr. Macrury upgraded Goldcorp Inc. (G-T, GG-N) to “buy” from “hold” with a target of $25, up from $21.50 and ahead of the average of $22.83.
He initiated coverage of Newmont Mining Corp. (NEM-N) with a “hold” rating and US$46 target, exceeding the consensus of US$44.47.
RBC Dominion Securities analyst Geoffrey Kwan upgraded Genworth MI Canada Inc. (MIC-T) to “sector perform” from “underperform” with a target of $42. The average is $46.60.
BMO Nesbitt Burns analyst Fadi Chamoun upgraded Kansas City Southern (KSU-N) to “outperform” from “market perform” with a target of US$125, rising from US$120. The average is US$118.73.
Barclays analyst Amir Rozwadowski upgraded Verizon Communications Inc. (VZ-N) to “overweight” from “equal-weight” with a US$56 target, which is 23 cents higher than the consensus.
Goldman Sachs analyst Jami Rubin upgraded Merck & Co. Inc. (MRK-N) to “buy” from “neutral” with a US$73 target, up from US$63. The average is US$68.32.
David Leeder