Inside the Market’s roundup of some of today’s key analyst actions
Bombardier Inc.'s (BBD.B-T) fourth-quarter earnings warning “craters management credibility,” according to AltaCorp Capital analyst Chris Murray.
In the wake of last week’s announcement, which fell “significantly” short of his expectations on all key metrics, Mr. Murray thinks it’s now “likely” that asset sales or a breakup are ahead.
Citing “uncertainty around the performance of each operating business compounded by higher than expected debt levels and the highly speculative nature of the equity at this stage,” he lowered his valuation multiple, leading to a reduction in his target price for Bombardier shares and prompting him to downgraded his rating for the Montreal-based manufacturer to “sector perform” from “outperform.”
“Management indicated that cash on hand at Q4/19 was $2.6-billion, with proceeds of $1.1-billion from the sale of the CRJ and Aerostructures businesses expected by mid-year,” he said. "We would expect as is typical, the early part of the year is likely to require working capital investments on top of the ramp of the Global program, which is supposed to accelerate in 2020. Ultimately liquidity may be insufficient to support operational needs.
“We do not believe an equity cure is realistic and with the Company receiving several debt downgrades post-warning and remaining highly levered, we believe additional debt issues would be challenging as on top of traditional corporate debt, the Company has already tapped the high yield market with the Transportation loan with the CDPQ, which already carries a 15 per cent=plus yield. With the Company already having carved out several business lines (QSeries, CRJ, Aerostructures, Training), we do not see a significantly sized carve out remaining short of the Business aircraft business or Transportation. While is seems that the sale of the ALCP JV stake is likely, we are not expecting this generates significant liquidity, although it may avoid additional cash flow needs for investment.”
With the announcement, Mr. Murray lowered his 2019 and 2020 earnings before interest, taxes, deprecation and amortization (EBITDA) projections by 32.2 per cent and 10.3 per cent, respectively, to $795-million and $1.42-billion.
Pointing to the “significantly more cautious outlook,” he also dropped his target to Bombardier shares to $2 from $3.80. The average target on the Street is $2.08, according to Bloomberg data.
“We view the release as extremely negative, as what was expected to be the capstone year in 2020 of the turnaround-plan now appears to significantly weaker than expected, and financial leverage is likely to require significant asset divestitures," said Mr. Murray. "At this juncture there now exists real questions about the long-term prospects of the firm and of management, whose credibility is impaired with investors.”
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Raymond James analyst Steven Li thinks any rebound in higher margin infrastructure sales in the IT Hardware industry in 2020 could “substantially” boost Baylin Technologies Inc.'s (BYL-T) earnings.
Accordingly, taking a more “constructive” view toward the Markham, Ont.-based wireless technology management company, Mr. Li raised his rating to “outperform” from “market perform.”
“This is not a call on the upcoming quarter (we are actually tweaking our revenues slightly lower on lower Mobile for 4Q19) but we think some of the transient factors that hurt infrastructure in 2019 should pass as we progress through 2020,” said Mr. Li in a research note released Monday.
“Unfavourable carrier capex dynamics hurt the BYL narrative in 2019, culminating in a negative 3Q19 pre-announcement in September. The delay in the T-Mobile and Sprint merger approval continues to impact capex from these customers while AT&T’s focus has been more on debt repayments in 2019 following recent acquisitions (i.e. Time Warner). We think 2020 might see some of these transient factors pass. Both AT&T and Verizon recent commentary seems to suggest that as they start thinking about 5G/millimeter wave, they will need to aggressively take advantage of small cells, especially if those 5G deployments are focused on urban places where there is no macro cells and it’s just small cells.”
The analyst also emphasized the impact of a September announcement that a Baylin subsidia ry has been selected as one of three vendors to supply a tier one network equipment provider with 5G MMU (Massive MIMO Unit) antenna modules, on a worldwide basis.
“This is a sizable deal expected to start ramping in 2Q20 (expected 7 figures, low 8 figures potential in year 1),” he said.
Despite the renewed optimism, Mr. Li expected “muted” fourth-quarter revenue from its mobile division, leading him to lowered his projection to $34.3-million from $36.9-million.
He added: “We are still closely watching BYL’s balance sheet. We show BYL remains onside on covenants although we believe it could get tight in 1Q20. If infrastructure recovers as we expect, this would significantly boost BYL’s EBITDA profile (and alleviate any covenant concerns) given the higher than average margins from infrastructure. What can also help here is the cost optimization completed in the last two months (minus 70 headcount year-over-year).”
Mr. Li maintained a target price of $2.80 for Baylin shares. The average on the Street is $3.10, according to Bloomberg data.
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In the wake of Friday’s announcement from Hexo Corp. (HEXO-T, HEXO-N) of another US$20-million registered direct offering involving the same five U.S. investors as a late December deal with identical terms, Desjardins Securities analyst John Chu thinks shareholders should prepare similar deals in the future.
“Based on conversations with HEXO, these U.S. investors are likely at their ideal investment level now,” he said. “However, following an $800-million base shelf prospectus in November 2018, we could see more financings going forward. HEXO recognizes the cannabis environment has changed dramatically and access to capital has become very difficult. Consequently, if investors are willing to invest meaningfully in the company at terms it finds acceptable, the company will consider it. HEXO also indicated to us that its ATM should commence around January 22, 2020 (recall that Aurora had raised $165-million through its ATM in 4–5 months).”
“Recall that HEXO closed a $70-million unsecured convertible debenture in early December 2019, raised US$25-million on Dec. 26 and an additional US$20-million [Friday] to go along with $73-million in cash on hand as of 1Q FY20 (ended October), which should put its cash position at $200-million, all else being equal. We have also raised our FY20 capex by $20-million to be more in line with HEXO’s expectations. Overall, there is no change to our sales outlook or EBITDA forecast.”
Maintaining a “buy” rating, Mr. Chu lowered his target for Hexo shares to $3.50 from $3.75. The average is $2.59.
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CES Energy Solutions Corp. (CEU-T) is benefiting from a “relatively solid” start to 2020 drilling activity in Western Canada, said Canaccord Genuity analyst John Bereznicki after hosting a series of non-deal institutional client meetings in Toronto.
“In our view, the key themes from these meetings are CES’ ongoing focus on free cash flow generation and the solid start to 2020 the company is experiencing in its drilling fluids operations in both Canada and the U.S.,” he said. “We view CES as a focus name given its asset-light business model, production exposure and ability to realize market share gains in a challenging North American oilfield environment. We believe the recently announced ChampionX transaction also underscores the inherent value of CES shares.”
Based on Baker Hughes data and his own channel checks, Mr. Bereznicki thinks larger Canada-based contract drillers are seeing activity that exceeds peak levels realized in the first quarter of 2019.
“In the case of CES, we estimate the company is currently active on 40 per cent of the domestic rig fleet, up 10 to 15 rigs from the prior year (with a bias to deeper, complex wells),” he said. “While we suspect some operators may be front-end loading their capital programs, we nonetheless believe this active start to 2020 could be a positive harbinger for the balance of this year provided commodity prices remain intact.”
“While the current US land rig count of 775 is down 25 per cent from the prior year, we believe CES has been able to mitigate the impact of lower industry capital spending through continued market share gains. We estimate CES is currently active on 14 per cent to 15 per cent of active U.S. land rigs (up from 12 per cent in Q1/19), with the company’s market share likely in the 20-per-cent range in the Permian. In our view, these market share gains are at least partly reflective of CES’ ongoing inroads with larger operators that have remained relatively active thus far in 2020."
Mr. Bereznicki kept a “buy” rating and $3.75 target for CES shares. The average is $3.69.
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Raymond James analyst Jeremy McCrea raised his financial metrics and target price for shares of Crew Energy Inc. (CR-T) in reaction to Friday’s announcement that it has sold a 22-per-cent working interest in each of its Septimus and West Septimus gas processing facilities in Northeast B.C. for $70-million.
Separately, Crew said it exercised its option to acquire an approximate 16-per-cent net interest in the facilities for $11.7-million.
“Given Crew’s debt position and lower return on capital from a collapse in gas prices, the company has meaningfully slowed down spending,” said Mr. McCrea. "Despite Crew having one of the larger land bases in the B.C. Montney, we believe the lack of available capital to develop the resource has restricted growth and the company to get a ‘fair valuation’ for its undrilled land base.
“We acknowledge that the infrastructure transactions announced [Friday] are a meaningful step in the right direction but overall debt levels remain elevated (2.6 times debt-to-EBITDA at the end of 2020). That said, with termed out debt until 2024 and potential for further disposition options noted below and/or undrilled land, there is increased flexibility. In the meantime, the company’s transition to focus on ultra-condensate rich wells (UCR) should help corporate return metrics. We also suspect the cost savings in well designs seen with other operators recently could also be available to CR. In any event, the company has plenty of torque and potential upside for investors bullish on the commodity but unfortunately, we believe given the balance sheet risk and market-cap size still, there is outsized risk in the context of other E&P peers.”
In response to the deals, the analyst raised his cash flow per share estimates for 2020 and 2021 to 59 cents and 57 cents, respectively, from 58 cents and 54 cents. His net asset value per share projection increased to $1.20 from $1.05.
With a “market perform” rating, Mr. McCrea moved his target to $1 from 75 cents. The average is currently $3.69.
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RBC Dominion Securities analyst Geoffrey Kwan made a trio of rating changes on Monday.
He lowered Genworth MI Canada Inc. (MIC-T) to “sector perform” from “outperform” with a $62 target, rising from $60 and above the average of $59.17.
Mr. Kwan raised Sprott Inc. (SII-T) to “sector perform” from “underperform” with a $3.50 target, up from $3 and exceeding the consensus of $3.38.
He also upgraded Brookfield Business Partners LP (BBU-N, BBU-UN-T) to “outperform” from “sector perform” with a US$51 target, increasing from US$47. The average is US$46.47.
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In other analyst actions:
Credit Suisse analyst Andrew Kuske downgraded Hydro One Ltd. (H-T) to “neutral” from “outperform” with a $28 target, rising from $27. The average on the Street is $24.96.
Eight Capital analyst Adam Gill cut Painted Pony Energy Ltd. (PONY-T) to “neutral” from “buy” and lowered his target to 95 cents from $1.20. The average is $1.04.
Cormark Securities analyst Garett Ursu lowered Source Energy Services Ltd. (SHLE-T) to “reduce” from “market perform.” He maintained a 30-cent target, which is 2 cents below the consensus.
David Leeder