Inside the Market’s roundup of some of today’s key analyst actions
After the release of “solid” first-quarter financial results, Desjardins Securities analyst Michael Markidis thinks “the time is now” for Crombie Real Estate Investment Trust (CRR.UN-T), prompting him to raise his rating to “buy” from “hold.”
“Our upgrade takes into account CRR’s (1) strategic relationship with Empire/Sobeys (41.5-per-cent interest, 57 per cent of AMR); (2) above-average lease duration (13 and 10 years for Sobeys and the total portfolio); (3) capital discipline (asset growth has been primarily funded by dispositions for the past two years); and (4) $500-million-plus active major development pipeline (50-per-cent complete, deliveries scheduled for 2020/21),” said Mr. Markidis. “These factors are not appropriately reflected in CRR’s relative valuation, in our view.”
On Thursday, the New Glasgow, N.S.-based REIT reported funds from operations per unit of 30 cents, which is flat from the same period a year ago and in line with Mr. Markidis’s projection. Same property net operating income rose 3.4 per cent, due to gains in occupancy from its office segment and ground-level intensification in its retail portfolio.
Mr. Markidis note the REIT is “getting into the fulfillment game” with the recent acquisition of a 20.25-acre site in near Montreal for $32-million, which will house a 285,000 square foot facility for Sobeys’ online grocery home delivery service in Quebec and the Ottawa area.
He also emphasized Crombie’s dispositions are “executing in spades,” noting: “In 1Q19, CRR sold (1) 100-per-cent interests in three properties; and (2) a 50-per-cent non-managing interest in a seven-property portfolio (located in various primary and secondary markets) for $106-million ($321/sf). Post-quarter transactions include the sale of (1) an 89-per-cent non-managing interest in a portfolio of 26 properties in secondary and tertiary markets to Oak Street, a Chicago-based real estate private equity firm, for $162-million ($205/sf); and (2) a 39,000 sf property in Markham (GTA) for $22-million ($550/sf). CRR’s EV implies a value of $250/sf for the remaining portfolio (excluding air rights).”
Though he marginally lowered his FFO per unit estimates for the next two fiscal years, Mr. Markidis raised his target for Crombie to $16 from $14.50. The average on the Street is $15.70, according to Bloomberg data.
“Our $16.00 target (was $14.50) is now based on a 0–5-per-cent NAV premium and equates to 13 times our estimated 2020 FFO,” he said. “Our expanded target multiple (5–10-per-cent discount formerly) reflects the accelerated pace of dispositions/realized pricing.”
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In a separate note, Mr. Markidis lowered his rating for SmartCentres Real Estate Investment Trust (SRU.UN-T) to “hold” from “buy,” citing both its current valuation (an 8-per-cent premium to his spot net asset value assumption) and a “more tempered” outlook for same-property net operating income growth.
“The 0.2-per-cent year-over-year decline in same-property NOI in 1Q19 was largely due to the closing of 21 Bombay and Bowring stores aggregating to 103,000 square feet (the chain entered liquidation after filing for creditor protection in late 2018),” the analyst said. “The transitional downtime will be exacerbated in 2Q as leases for 46 former Payless Shoes locations (114,000 sf) are disclaimed. We believe SRU will successfully backfill these unplanned vacancies; however, the effort will likely take 12–18 months to unfold.”
He added: “We believe the key risk to our call is potential investor reaction/perception to the completion of condo/townhouse projects in Vaughan (Transit City and Vaughan NW) which are expected to generate development profit (and transaction FFO) of $65–85-million ($0.40–0.50/unit) over the next 4–5 years.”
Mr. Markidis dropped his 2019 and 2020 FFO per unit estimates to $2.19 and $2.24, respectively, from $2.35 and $2.57.
His target for SmartCentres units remains $34, which falls 71 cents below the consensus.
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Industrial Alliance Securities analyst Nav Malik upgraded AirBoss of America Corp. (BOS-T) in the wake of better-than-anticipated quarterly results and the announced merger of its defense segment with a privately held U.S. firm.
On Thursday, the Newmarket, Ont.-based rubber product manufacturer reported first-quarter earnings before interest, taxes, depreciation and amortization (EBITDA) of $7.9-million, up 5 per cent year-over-year and ahead of the projections of both Mr. Malik ($6.4-million) and the Street ($6.8-million). Earnings per share of 12 cents was a 9-per-cent drop from the same period a year ago but also exceeded estimates (10 cents and 11 cents, respectively).
“Solid growth in the Rubber Solutions (RS) segment and the Defense business offset weakness in the Engineered Products (EP) Anti-Vibration business (previously labelled the Automotive division),” said the analyst.
Separately, AirBoss said it was merging its defense business with Critical Solutions International Inc., a global supplier of route clearance vehicles, countermine capability and survivability products to U.S. and foreign military forces, to create Canadian and U.S. entities that will form AirBoss Defense Group.
“The creation of ADG allows BOS to continue participating in the defence industry, while realizing partial value for its Defense business,” said Mr. Malik. “BOS will receive $60-million and 55 per cent of the equity in ADG as consideration for contributing its Defense business to the new entity. The previous owners of CSI will hold a 45-per-cent equity interest in ADG. BOS’ contribution is being valued at $100.0-million and the CSI business is valued at $32.7-million for a combined enterprise value of ADG of $132.7-million. ADG will be a larger player in the defence industry, with a complementary offering of products. In addition, CSI’s expertise in global marketing and distribution provides for greater cross-selling opportunities, in our opinion. The transaction is expected to close in H2/19, subject to regulatory approval.”
With that transaction and the stronger-than-expected quarterly results, Mr. Malik hiked his 2019 and 2020 EBITDA estimates by 19 cents.
Accordingly, he moved AirBoss shares to “buy” from “hold” and raised his target to $12 from $8.50. The average on the Street is $12.38.
“We believe the merger with CSI is positive as it unlocks some value in the Defense business while still allowing BOS to participate in growth,” he said. “In addition, we expect RS will continue to perform well, and initiatives in the Anti-Vibration segment should also lead to improved results going forward. BOS shares are 30 per cent below year-ago levels, providing an attractive entry point in our opinion.”
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Though he called it a “steady” performer, Canaccord Genuity analyst Doug Taylor lowered his rating for Magellan Aerospace Corp. (MAL-T) to “hold” from “buy” in reaction to its recent share price rebound and new “uncertainties.”
“Magellan reported Q1 results on Friday night that were mixed vs. expectations,” he said. “The company continues to note positive general end-market fundamentals. Shares have rebounded 38 per cent from the recent lows set in December. While Magellan trades at a still attractive valuation (6.6 times next 12-month EBITDA), we believe that is likely to remain the case while model uncertainty exists around MAX production rates and in light of the ongoing pressure from OEMs on suppliers like Magellan. We are therefore moving our rating to a HOLD (from Buy), now with a $20 target (from $21) which reflects lower near-term estimates. We see upside from Magellan deploying its under-levered balance sheet to further consolidate aerospace assets. However, given the unpredictability of the timing of M&A, we prefer to evaluate the merits of such transactions upon announcement.”
After the bell, the Mississauga-based company reported revenue of $270-million, exceeding the projections of both Mr. Taylor ($254-million) and the Street ($252-million). Adjusted EBITDA of $41-million was in line with estimates ($44.3-million and $41.4-million, respectively), while earnings per share of 35 cents missed expectations (37 cents and 38 cents).
“Magellan had upbeat commentary about each target end market, once again noting increasing vertical integration in the commercial end market which is still years from its expected peak,” the analyst said. “Boeing’s recent strategy shift to consolidate its supply chain is seen as beneficial; the recent multiyear contract for the production of 777X control surface ribs is evidence. MAL also highlighted new positive developments in the helicopter and defense end markets.
“MAX exposure does add new near-term uncertainties. While we believe the MAX represents less-than 15-per-cent of Magellan’s revenue, Boeing’s temporary reduction to its build rates for this platform (down 19 per cent to 42/month from 52) adds another near-term headwind for a company that already must battle OEM pricing pressure to demonstrate consistent growth. Recall that Magellan supplies Boeing with winglet components and landing gear kits for the MAX platform. A longer or more permanent reduction in build rates could impact our estimates further.”
After lowering his earnings estimates for 2019 to take into account “lower Boeing 737 MAX production rates, the wind-down of the A380 program and increasing supply chain pressure from OEMs,” Mr. Taylor moved his target for Magellan shares to $20 from $21. The average is currently $21.33.
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“Pausing” ahead of the release of its fourth-quarter results on Wednesday, Canaccord Genuity analyst Raveel Afzaal lowered his rating for Just Energy Group Ltd. (JE-T) to “hold” from “speculative buy,” suggesting the company could “get interesting” due to potential as an acquisition target.
“[We are] expecting acceleration in the on-going trend by power generators to acquire energy retailers in order to become vertically integrated and enhance margins,” he said. “The low and stable energy price environment has made it more challenging for energy retailers to grow customer base at attractive margins. However, it has also adversely impacted return targets on traditional generation assets which are at the risk of declining further as more and more renewable energy assets come online and depress peak pricing.
“JE could earn a premium acquisition multiple relative to Vistra's 4 times EV/pro-forma EBITDA bid for Crius. We believe JE represents an attractive acquisition candidate by power generators such as Calpine and NRG given its large book of 4.2 million customers and sales channel which add 1 million gross residential and commercial customers per annum. To put this in perspective, Crius Energy which is in the process of being acquired by Vistra has 1.4 million customers. We believe a larger scale along with a greater portion of JE's customers on fixed rate contracts has resulted in a 2 times EV/EBITDA premium historically to Crius Energy.”
Mr. Afzaal thinks the Mississauga-based natural gas and electricity retailer “would likely wait until significant and visible cost-cutting initiatives are well underway prior to considering a sales process.”
“Crius Energy did an excellent job of reducing its operational expenses to 33 per cent of gross profit ahead of its sales process,” he said. “Just Energy's OPEX currently represents an estimated 40 per cent of gross profit and has recently initiated a significant opex reduction program for $40-million. We believe JE will likely require up to 12 months to implement its cost-cutting initiative.”
“Vistra estimates Crius pro-forma EBITDA of $100-million which is expected to improve to $120-million through very visible acquisition synergies. Just Energy is currently operating close to $190-million in EBITDA. Assuming $40-million of cost-cutting initiatives implies EBITDA of $230-million before acquisition-related synergies. Using the same synergy target as a percentage of EBITDA used in Vistra-Crius transaction as a bench mark and factoring in JE’s industry leading hedging program implies post-synergy EBITDA of $300-320-million for JE. Using a 6.0-times multiple given larger scale (compared to 4.0 times for Crius pro-forma EBITDA by Vistra) implies an intrinsic share price of $6.80-$7.80/sh.”
Seeing a slowdown in gross margin improvement, Mr. Afzaal lowered his EBITDA projection for the fourth quarter to $68-million from $78-million, which now implies full-year EBITDA of $191-million. That falls below the company’s guidance of $200-$220-million.
“We expect Q4/19 to benefit from improving gross margin but at a slower pace compared to prior quarters along with a portion of selling expenses which are being amortized due to a accounting change in F’19,” he said. “However, we expect this to be partially offset by (1) smaller customer base within the Consumer division, (2) higher bad debt expenses and (3) higher hedging costs.”
His target for Just Energy shares fell to $5 from $5.50. The average on the Street is $6.32.
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A group of equity analysts from banks that underwrote Pinterest Inc.’s (PINS-N) IPO initiated coverage of the stock on Monday following the end of a 25-day quiet period.
Citi analyst Mark May gave the social media company a “buy” rating and a US$34 target. The average on the Street is US$28.04.
Mr. May said: “The Pinterest app is used every month by millions of people to discover new products, generate new ideas, organize projects and to get stuff done. Management focused its first 5-6 years on developing the product and growing the audience, and in the last 3-4 years has rapidly developed its advertising monetization platform. The early-stage nature of its monetization engine combined with the high-intent nature of its audience use-case suggests meaningful opportunity for ARPU [average revenue per user] growth. As a result, we see the company producing $5-billion in revenue and over $500-million in FCF by 2024 (representing a 35-per-cent 5-year revenue CAGR), which we believe supports a 12-month price target of $34/share. As this represents 17-per-cent upside from current levels, we are initiating coverage of PINS with a Buy rating.”
RBC Dominion Securities’ Mark Mahaney gave it a “sector perform” rating and US$28 target.
Mr. Mahaney said: “PINS is addressing the very large advertising market with powerful secular tailwinds. We believe the company can sustain double-digit percentage MAU [monthly active users] and ARPU growth until 2021. That said, with PINS shares trading 50 per cent above the IPO price and at 16 times EV/Sales on our ‘19 Revenue estimates, we view them as reasonably valued.”
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Believing it’s “time to back up the truck,” Raymond James analyst Ben Cherniavsky raised his rating for North American Construction Group Ltd. (NOA-T, NOA-N) to “strong buy” from “outperform.”
“Despite its strong run lately, the valuation of North American’s stock was still, in our view, attractive,” he said. “That said, from a trading perspective, we were a little apprehensive about chasing a stock that had more or less gone straight up all year. Integration costs and weather during the first few months of 2019 also made us reluctant to pound the table on NOA in advance of its 1Q19 results.”
He kept a target of $22, which is a loonie below the consensus.
“With that noisy quarter now behind the company we believe the deck has been cleared for a more compelling buying opportunity,” he said.
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Seeing its current valuation has stretched following a recent share price rally, Guggenheim Securities analyst Ken Wong downgraded Shopify Inc. (SHOP-T, SHOP-N) to “neutral” from “buy.”
“We believe bullish investors have already embedded a revenue outcome for FY19 and FY20 consistent with historical beats to consensus,” said Ken Wong. “The valuation multiple has surpassed previous peak levels (16 times NTM [next 12-month] EV/Sales vs. 14 times) which we believe limits share appreciation from delivering results that significantly outpace street estimates."
Mr. Wong removed his price target for the stock, which had previously been US$285.
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Longbow Research analyst Alton Stump lowered Restaurant Brands International Inc. (QSR-T, QSR-N) to “underperform” from “neutral,” citing “a significant level of discord between corporate and franchisees related to [Burger King’s] recently more aggressive discounting strategy amidst an environment of higher labor and input costs.”
Maintaining a US$55 target, Mr. Stump said the company should not “trade above its own 5-year average given challenging same-store sales conditions currently facing its Tim Hortons and especially Burger King brands.”
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In other analyst actions:
Alliance Global Partners analyst Aaron Grey initiated coverage of Canopy Growth Corp. (WEED-T) with a “buy” rating and $75 target. The average on the Street is $76.74.
Mr. Grey gave Tilray Inc. (TLRY-Q) a “neutral” rating and US$50 target, which falls short of the US$81.11 consensus.
Haywood Securities initiated coverage of Trulieve Cannabis Corp. (TRUL-CN) with a “buy” rating and $28.50 target, which exceeds the consensus of $28.
The firm also initiated coverage of Curaleaf Holdings Inc. (CURA-CN) with a “buy” rating and $20 target. The average is $17.96.
J.P. Morgan analyst Christopher Schott upgraded Bausch Health Cos Inc. (BHC-T, BHC-N) to “neutral” from “underweight.”
Cormark Securities Inc. analyst Garett Ursu upgraded Frontera Energy Corp. (FEC-T) to “buy” from “market perform” with a $19 target, up from $17. The average is $15.67.
BMO Nesbitt Burns analyst Jenny Ma upgraded Artis Real Estate Investment Trust (AX-UN-T) to “outperform” from “market perform” with a target of $12.50, down from $12. The average is $12.63.
Arqaam Capital Limited analyst Rita Guindy upgraded TransGlobe Energy Corp. (TGL-T) to “buy” from “hold” with a $2.90 target. The average is $4.
David Leeder