Inside the Market’s roundup of some of today’s key analyst actions
Brookfield Infrastructure Partners LP’s (BIP.UN-T, BIP-N) proposed $4.3-billion acquisition of Enercare Inc. (ECI-T) is “attractive from a strategic and valuation perspective,” according to Desjardins Securities analyst David Newman.
“We view the transaction in a positive light and believe the offer price by BIP is attractive. We recommend investors tender their ECI shares,” said Mr. Newman, leading him to move his rating for Enercare shares to “tender” from “buy.”
The analyst feels the deal, announced Wednesday before market open, will accelerate Enercare’s growth plans, noting: “CI’s growing capex program used to fund its long-tailed growth initiatives (eg U.S. HVAC rental roll-out, sub-metering installations, Smarter Home program), efforts to consolidate the fragmented U.S. HVAC market via tuck-in acquisitions and dividend program were straining the company’s cash flows and balance sheet. This created an overhang in ECI’s shares. We believe BIP will take a longer-term view.”
He moved his target for Enercare shares to $29 from $23 to reflect the deal. The average target on the Street is currently $26.64, according to Thomson Reuters Eikon data.
“With the proceeds, we would recommend buying either Parkland Fuel (C$38 target) or Superior Plus (C$16 target),” he said.
Elsewhere, RBC Dominion Securities cut Enercare to "sector perform" from "outperform" with a target of $29, rising from $25.
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Though CanWel Building Materials Group Ltd.'s (CWX-T) second-quarter financial results exceeded his expectations, Raymond James analyst Steve Hansen downgraded his rating for the stock to “acknowledge the maturation of the current LBM [lumber and building materials] cycle and the moderating housing backdrop.”
On Wednesday, the Vancouver-based company reported adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $27.5-million, up 34 per cent year over year and beating the Street’s expectation of $26.5-million. Revenue jumped 19.4 per cent to $382-million.
Mr. Hansen called both the company’s growth and gross margin trend “solid,” noting: “Notwithstanding recent headlines, we remain broadly constructive on many of the same macro tailwinds benefitting CanWel in recent quarters, including: 1) robust LBM prices; 2) sustained housing activity across the western US; 3) rising sawlog prices; and, 4) improved Forestry operations. At the same time, we must also acknowledge that LBM prices have recently corrected, and housing activity has moderated in both Canada and the U.S. In this context, while we continue to see healthy upside from current levels, we feel it prudent to lower our rating.”
Moving the stock to “outperform” from “strong buy,” he maintained an $8 target, which exceeds the average on the Street by 16 cents.
Elsewhere, Canaccord Genuity’s Yuri Lynk called the results “mixed,” lowering his target to $7.50 from $7.75 with a “buy” rating.
“We continue to view CanWel as an attractive investment given (1) its 8.4-per-cent dividend yield, (2) high degree of insider ownership, and (3) the upside potential afforded by management’s plans to consolidate the highly fragmented treated wood industry,” said Mr. Lynk.
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Raising his rating for its stock to “strong buy” from “outperform” following better-than-expected quarterly results, Raymond James analyst Jeremy McCrea sees ARC Resources Ltd.'s (ARX-T) future becoming more tied to liquids.
“With the stock up 21 per cent in the past month (XEG: 0.5 per cent), we suspect investors are also sharing our view and looking beyond the old ‘gas-weighted’ nametag,” said Mr. McCrea.
On Wednesday, the Calgary-based company reported quarterly production at 127,879 barrels of oil per day, exceeded the consensus projection of 125,200 barrels and Mr. McCrea’s estimate of 125,600. Cash flow per share of 57 cents topped the 48-cent projection of both the analyst and the Street.
The analyst said: “Although 2Q exceeded expectations, we believe the bigger stories from 2Q are: 1) the increasing narrative of higher growth rates going forward (i.e., condensate production to potentially grow 20-per-cent-plus now). Initially, infrastructure discussions debated swapping/deferring Dawson IV for Attachie however the company now plans on proceeding with both projects concurrently (including additional liquids handling at Dawson Phase I and II); 2) Shifting capex to higher liquids targets. In addition to new Cardium locations licensed, ARC mentioned a capex shift/advance to target more Lower Montney liquids-rich locations at each Dawson, Parkland and Attachie given recent results. With the $150-million delineation program switching to development, better economics should also improve growth/returns; and 3) More concrete discussions on the value proposition and commercialization of Attachie. Although no specific well results were provided with the recent 7-well pad (given clean-up procedures and capacity restrictions at 3,000 bbls/d), the 2Q video montages and our discussions with management indicate well results are exceptional and are similar, if not exceeding the prior 2 wells from the area. Unfortunately, management noted investors will have to wait till 3Q for further details. Although actual funds flow from these projects are still 18 -24 months away, our argument where the best share price performance occurs is on valuation re-ratings (and more specifically a re-rating on the perceived value investors should be paying for undrilled upside). With language suggesting expedited growth into 2019+, targeting more liquids-rich plays and higher NPV’s/well and a greater excitement management seems to be portraying with its Attachie block today, we believe a re-rating has just started to occur with ARC’s future growth and undeveloped land.”
Mr. McCrea raised his price target to $23 from $22.50. The average on the Street is currently $18.82.
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There was “more ammo for bulls than bears” in Tesla Inc.’s (TSLA-Q) commentary released with its second-quarter financial report, according to RBC Dominion Securities analyst Joseph Spak.
“Given stock’s propensity to sentiment/momentum, we could see a rally,” said Mr. Spak, emphasizing the optimism of chief executive Elon Musk.
On Wednesday after market close, the electric carmaker released better-than-anticipated results.
Total revenue of US$4-billion represented a jump of 43 per cent year over year and fell in-line with expectations on the Street. Non-GAAP earnings per share of a loss of US$3.06 missed the estimates of both Mr. Spak (a loss of US$2.80) and the Street (a US$2.87 loss), however it included an unexpected share restructuring charge of 61 U.S. cents.
“We are more comfortable with 2H18 profitability/cash flow,” said Mr. Spak.
Keeping a “sector perform” rating for Tesla shares, he raised his target price to US$315 from US$280. The average is US$309.10.
“Elon’s tone was generally improved versus last quarter, which may seem trivial, but TSLA stock has become somewhat of an Elon sentiment gauge,” he said.
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Canaccord Genuity analyst Doug Taylor upgraded Quarterhill Inc. (QTRH-T, QTRH-Q) following a “huge” patent victory over Apple Inc. (AAPL-Q).
On Wednesday, Ottawa-based Quarterhill a subsidiary of WiLAN Inc., announced a California jury awarded it $145.1-million in damages against the U.S. tech giant due to infringement on two patents.
“While the short press release does leave many questions, Quarterhill stock is likely to gap materially higher [Thursday], considering that the entire market cap of WiLAN is US$127-million (C$165M) and the company closed Q1 with US$73-million in net cash (C$0.80/share),” said Mr. Taylor. “The win will likely also embolden WiLAN to press its wireless IP against other players in the wireless ecosystem with potential greater returns. As we build the potential contributions into our model, we note the likelihood of an appeal and the potential for it to take time to collect the proceeds.”
Moving its stock to “speculative buy” from “hold,” Mr. Taylor hiked his target to $2.50 from $2 in order to “reflect a discounted value noting more upside to actual collection.” The average target is $2.54.
He added: "Combined with the recent weakness in the share price leading into the announcement (down 30 per cent since Q1), we are increasing our rating.
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“A delicious buffet of opportunities awaits” investors with Premium Brands Holdings Corp. (PBH-T), according to Desjardins Securities analyst David Newman.
Citing its potential total return of 15 per cent, “attractive” growth profile and “growing” dividends, and pointing to a range of potential near-term catalysts, Mr. Newman initiated coverage of Vancouver-based specialty food company with a “buy” rating.
“Premium Brands Holdings’ (PBH) enviable and proven track record of growth has been driven primarily by its unique acquisition and differentiation strategy, with the company acquiring and investing in high-value specialty food companies and differentiated food distribution businesses,” he said. “PBH’s holding company structure offers entrepreneurs greater autonomy, cultural continuity, succession planning, liquidity and estate planning, with PBH supporting growth in the acquired business through the provision of capital, procurement, shared services, innovation and best practices, which has resulted in strong organic growth. PBH has built a highly defensible and sustainable business in terms of products (focus on local and regional markets/clusters, as well as ontrend, protein-centric, healthy and on-the-go products) and culture (effective partnership, flat organizational structure). Put simply, PBH’s strategy is to buy good companies and turn them into great companies.”
Mr. Newman said the company’s speciality offerings and “unique” distribution model, which has led to “strong regional brands and on-trend products,” has created an enviable competitive moat for the company, leading to “enhanced” pricing power and margins.
Pointing to its ability to "feast on bite-sized acquisitions" and an ability to build its business organically, the analyst said its "premium" growth has led to a premium valuation, leading him to set a target price of $115 for its shares. The average on the Street is currently $131.40.
“PBH’s long-term objective is to generate a compounded annual return for its shareholders of 15 per cent by investing in stable, well-run specialty food businesses with solid growth profiles and attractive risk profiles,” he said. “Since the end of 2011, PBH has expanded its market cap by more than 9 times, increased its trading volume by 270 per cent and paid out more than $215-million in dividends to shareholders. Over the same timeframe, PBH has delivered 571 per cent in cumulative total shareholder returns, significantly outperforming the 66-per-cent total return generated by the S&P/TSX Composite Total Return Index. Based strictly on price changes, PBH has delivered a cumulative return of 516 per cent versus 37 per cent for the S&P/TSX Composite Index. In fact, over the past 10 years, PBH was one of the best-performing stocks on the TSX (ranked 10th among S&P/TSX Composite constituents). Having consistently increased its dividend for the past six consecutive years—capped by the recent 13.1-per-cent increase in its quarterly dividend to 47.5 cents per share, or $1.90 per share on an annual basis (fourth year in a row that the dividend was raised by 10 per cent or more)—the company was recently added to the S&P/TSX Canadian Dividend Aristocrats Index effective January 31, 2018. We anticipate continued solid growth in the dividend.”
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There is unlikely to be surprises when goeasy Ltd. (GSY-T) releases its second-quarter financial report after market close on Aug. 7 given the pre-release of selected results, said Desjardins Securities analyst Gary Ho, who expects the focus to be centred on its revised three-year outlook.
Mr. Ho is projecting earnings per share for the Mississauga-based consumer-finance lender of 79 cents for the quarter, which is 4 cents lower than the Street's consensus. He's also projecting consolidated operating income of $25.8-million.
“While we expect higher gross loans receivables due to robust demand ($784-million in 2018, $1.0-billion in 2019), we anticipate a slightly lower revenue yield (53.8 per cent in 2018, 48.3 per cent in 2019) due to a higher mix of lower-rate/lower-risk products," he said. "Our net charge-off estimates are at the lower end of previous guidance. We note that pro forma debt financing, GSY’s debt/ total cap is ~70–75 per cent. We will be interested in hearing management’s comfort level on this. We will also be looking for an update on potential new product initiatives over the next few years."
In a research note previewing the results, Mr. Ho lowered his 2018 EPS projection to $3.45 from $3.49, however his 2019 estimate rose by 20 cents to $4.40. His revenue and operating income expectations also increased for both years.
That led him to raise his target price for goeasy shares to $48 from $44 with a "buy" rating (unchanged). The average is $49.17.
Mr. Ho said: "Our investment thesis is predicated on: (1) management executing on targets given its track record in meeting/exceeding past targets; 2020 guidance has the loan book doubling; (2) with the exit of two incumbents, the non-prime consumer lending market is underserved (particularly in Quebec); (3) with scale, the business could generate 20-per-cent-plus ROE; and (4) we expect double-digit dividend growth in the next few years."
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Tervita Corp. (TEV-T) is a “relative beta play on oil,” said Canaccord Genuity analyst John Bereznicki.
He initiated coverage of the "New Tervita," formed from the recent merger of Newalta Corp. and Tervita Corp., with a "buy" rating.
"This transaction returns Tervita to the public market after 11 years as a private entity," said Mr. Bereznicki. "We estimate New Tervita holds a 27-per-cent share of the outsourced WCSB oilfield waste market, where it competes with Secure Energy Services as a virtual duopoly."
"Relative to Secure, New Tervita’s facilities are more evenly distributed throughout the WCSB. We believe this provides the company with relatively greater exposure to more conventional heavy and medium oil plays as well as to Alberta’s oil sands region. With the collapse of global oil prices in 2014 and egress issues driving Canadian heavy oil (WCS) spreads higher, we believe economics in these plays have been particularly challenged for some time. Having said that, we also believe large integrated oil sands operators (such as Suncor and Husky) have been relatively better able to manage their production (and spending) in this challenging fundamental environment."
Mr. Bereznicki said he expects "wide" WCS oil price differentials to continue to present headwinds for the company through 2019, though he feels Tervita provides investors with "beat to recovering oil prices longer term."
"New Tervita would have generated $200-million in pro forma EBITDA in 2017, assuming a full-year contribution from Newalta and no synergies," he said." Reflecting a partial-year contribution from Newalta and no synergies, we are forecasting EBITDA of $182.1 million in 2018 and $263.2 million in 2019, predicated on low double-digit organic growth and $25 million in synergies realized next year. We expect New Tervita to exit 2018 with net debt of 3.1x times TTM [trailing 12-month] EBITDA on a normalized basis and expect this figure to fall to 2.4 times TTM EBITDA by the end of 2019."
He set a price target of $12.50 for the stock.
"We believe several factors support a valuation discount to Secure, including a relatively more levered balance sheet and greater WCS differential exposure (while a pending Competition Bureau review also adds an element of investor risk, we don’t believe its outcome should be material to our thesis)," said the analyst. "Our $12.50 target is based on an 8.0-times EV/EBITDA multiple applied to our 2019 estimates, representing a 1.0-times discount to our target multiple for Secure and a 2.0-times discount to the average FTM historic EV/EBITDA trading range for Secure based on consensus expectations."
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In other analyst actions:
Eight Capital initiated coverage of Aurora Cannabis Inc. (ACB-T) with a “buy” rating and $9 target, which is 88 cents less than the consensus.
David Leeder