WPT Industrial Real Estate Investment Trust (WIR.U-T) is a “uniquely positioned” Canadian REIT given its exposure to the strong U.S. industrial market, according to Canaccord Genuity analyst Mark Rothschild.
He initiated coverage of WPT Industrial, which possesses 52 industrial properties and a single office property in 15 U.S. states, with a “buy” rating.
“Canaccord Genuity believes that WPT presents an attractive way to play the U.S. industrial property market,” said the analyst. “The high-quality portfolio is diversified across a number of markets in the US. In addition, in the last five years, e-commerce distribution space demand has grown from less than 5 per cent of North American industrial leasing to almost 22 per cent of all new leasing, according to Cushman & Wakefield.”
Mr. Rothschild pointed to a several factors in justifying his rating:
- It owns a “high-quality” portfolio of industrial properties that should produce “steady and growing” cash flow
- It is led by an “experienced and well-regarded” management team
- It’s “well positioned” to capitalize on e-commerce growth
- It benefits from strong industrial property fundamentals
- It operates in the “large and fragmented” U.S. industrial market which provides “capacity for significant growth”
The analyst set a price target of US$14.15 for WPT units, which is 14 U.S. cents less than the consensus on the Street.
“The units are attractively valued and currently trade at an implied cap rate of 6.4 per cent, or a 9.1-per-cent discount to NAV [net asset value],” said Mr. Rothschild. “On a cash flow multiple basis, WPT trades at 15.1 times 2019 AFFO [adjusted funds from operations], well below U.S. comparables at 23.0 times 2019 AFFO, but slightly above Canadian peers at 12.6 times. While fundamentals are stronger in some Canadian markets, the GTA in particular, WPT’s assets are generally higher quality than the properties of most of its Canadian peers.
“Our US$14.15 target price is in line with our NAV estimate and equates to approximately 16.6 times 2019E AFFO. We believe that as the REIT internalizes management, the units should ultimately trade above NAV to reflect the strong growth prospects detailed above. Combined with an attractive 5.9-per-cent distribution yield, our US$14.15 target price implies a one-year total return of 16.0 per cent.”
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Since The Hydropothecary Corp. (THCX-X) has demonstrated has now its “stranglehold” in Quebec with a plan to to sell about 200,000 kilograms of cannabis in the province’s recreational market over the next five years, Beacon Securities analyst Vahan Ajamian said he wouldn’t be “surprised” to see one of its larger peers look to acquire it.
The Gatineau-based producer’s shares jumped 13 per cent on Wednesday after new details emerged on six previously announced supply agreements signed by the province.
“While all others announced three-year agreements at the same tonnage as previously disclosed, Hydropothecary announced a five year agreement with built in tonnage escalators each year,” said Mr. Ajamian.
“Hydropthecary’s agreement calls for it to supply: 20,000 kilograms in Year 1; 35,000 kilograms in Year 2; and 45,000 kilograms in Year 3. While the final two years will be determined by the performance in the first three years, the company is modelling 49,500 kilograms and 54,450 kilograms in Years 4 and 5 respectively, which would make this a 200,000-plus kilograms contract to the SAQ over the five years (the SAQ has an option for the sixth year). This agreement represents the largest transaction in cannabis history – and puts Hydropothecary in the enviable position of having presold the majority of its forward production to a government entity in one province, providing certainty of sale, while leaving enough supply to go elsewhere and establish a national brand.”
Mr. Ajamian maintained a “buy” rating for Hydropothecary shares with a $9.50 target, up by a loonie. The average is $7.30.
“While we were previously expecting revenue per gram to trickle down slowly over time, we are now forecasting a more immediate decline in the short-term when recreational sales start, but a higher long-term price ($5.60 per gram versus $5.00 per gram previously). As a result, we are raising our price target.”
“Since we named Hydropothecary our top pick in our Jan. 8, 2018, report, its shares have vastly outperformed (down 8 per cent vs the sector down 38 per cent on average). We believe that this has been entirely supported by superior fundamentals (i.e., higher revenue per gram and lower cost per gram than the ‘Big 5’ LPs – and having now outsold all of its peers). The company’s shares trade at a paltry EV/2020 estimated EBITDA multiple of 2.8 times (the fiscal year starts less than a year and a half from now – first year of recreational sales) versus peers averaging 9.1 times.”
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Falco Resources Ltd.’s (FPC-X) Horne 5 project in Rouyn-Noranda, Que., presents the opportunity to invest in a “scarce” Canadian gold asset, said Desjardins Securities analyst Raj Ray.
Initiating coverage of the Montreal-based company with a “buy” rating, Mr. Ray called Horne 5 “one of the most advanced-stage development projects that, in our opinion, is investable and executable from a development perspective owing to its location in one of Canada’s best jurisdictions to build a mine, its scale and scalability, the relative ease of permitting given its brownfield nature and the below-average capital intensity for similar-sized gold projects.”
In comparing the project, expected to commence production by 2010, to other operating Canadian gold mines, Mr. Ray said Horne 5 ranks in the top six in reserve size, mine life and estimated operating profile.
“In an industry faced with impending production declines, lack of meaningful discoveries and jurisdictional risk, the Horne 5 project warrants scarcity value in our opinion,” he said.
“While Canadian-domiciled assets attract a premium owing to political and fiscal stability, the historical Rouyn-Noranda mining camp is one of the best locations in Canada for building a mine due to its urban location and excellent infrastructure (electricity, rail, water, etc). In addition, the Horne 5 project is located on the site of a historical mine and, therefore, the deposit will be accessed through an existing shaft that will be dewatered and rehabilitated. Overall, the Horne 5 project will have significant savings in terms of time and capital due to the available infrastructure compared with a project of similar size in a remote location.”
Mr. Ray set a target price of $1.75 for Falco shares, which is below the average target of $1.88.
“Falco currently trades at a significant discount on P/NAV [price-to-net asset value] at 0.39 times (based on our base-case assumptions) versus the average for peers of 0.48 times, and on EV/Aueq resources [enterprise value to gold equivalent resources] at US$11 per ounce versus the average for peers of US$35 per ounce,” he said.
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Distinct Infrastructure Group Inc. (DUG-X) is “poised to profit big from a golden era in telecom and utility construction,” said Raymond James analyst Frederic Bastien.
He initiated coverage of Toronto-based infrastructure provider for Canadian utilities, municipal and provincial governments with an “outperform” rating, believing it “checks several boxes small-cap investors look for in a stock—a leading position in a fragmented market, highly profitable recurring work and a fully-invested management team.”
Mr. Bastien said Distinct’s track record for both project execution and safety and customer service has earned it preferential contractor status with “many” clients.
“At the top of the list are Canada’s big telecoms, which are making generational investments in fibre optic bandwidth,” he said. “They are doing so because the exponential growth in data consumption is placing enormous demands on their fixed wireline networks. Not to be left behind, utilities are upgrading their grids to improve resiliency and adapt to changing power flow dynamics. All of this is effecting solid organic and strategic growth opportunities for contractors with the skills and capacity to handle more work—such as DIG.
“DIG generates higher EBITDA margins than most other construction stocks we follow partly because it self-performs the vast majority of its work. It also has the good fortune of serving deep-pocketed customers, thanks to the oligarchy status of Canada’s big telecoms and the monopoly-like powers regulated utilities enjoy. Importantly, these clients care far more about quality of workmanship, safety performance and timely execution than getting bang for their buck (unlike public sector clients). This has allowed Distinct to negotiate master service agreements (MSA) with Bell and Rogers, rather than pursue the more competitive hard-bid route common in construction.”
Mr. Bastien set a target price of $1.90 for its shares, which is 4 cents less than the consensus.
“Our analysis shows Distinct can leverage these strengths to capitalize on the growing and consolidating market for telecom and utility construction, and unearth above-average returns through 2019,” he said.
“DIG is the only remaining publicly-listed specialty contractor domestically and among the select few that can perform telecom work on a national scale. Another pull for us are its two co-CEOs and largest shareholders. They continue to bring strong and complementary skills to the table, but are now drawing on new partners to transform Distinct into a Canadian infrastructure services leader. This includes anchor investor Seafort Capital, which stands ready to backstop the firm’s many future growth initiatives, whether they be organic or strategic.”
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RBC Dominion Securities analyst Benjamin Owens believes Trican Well Service Ltd.’s (TCW-T) first quarter appeared to be “unusually difficult.”
“It appears that Trican took a few bumps and bruises over the quarter as rail impacts, customer specific delays, and weather were a challenge for the company,” said Mr. Owens in a research note previewing the release of the yet-to-be-scheduled quarterly results. “On March 29, we reduced our 1Q EBITDA estimate by 31 per cent (to $51-million from $74-million) to account for these factors. We think 1Q headwinds are not indicative of ‘normal’ operating conditions.
“The company saw limited disruption to its fracturing activity from sand availability during the quarter because the company was able to source sand from other locations. Sourcing sand from sub-optimal locations impacted the bottom line as trucking costs increased.”
Maintaining an “outperform” rating and $5 target for Trican shares, which is 20 cents less than the consensus, Mr. Owens feels the reduced expectations for the quarter have already been factored in by investors.
“TCW is down 23 per cent year-to-date versus the broader Canadian OFS index (STENRE) down 8 per cent, despite an 11-per-cent rally over the past week (and 800 bps of outperformance vs STENRE),” he said. “While Street estimates have yet to fully adjust, we think investors have likely mostly accounted for the challenging 1Q.”
“Despite headwinds currently facing the Canadian oilfield services sector, we think Trican is well positioned as the largest frac services company in the basin in what remains a fairly balanced market for active hydraulic fracturing equipment.”
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Reaching an “inflection point” for its wireless business, Barclays analyst Phillip Huang upgraded Shaw Communications Inc. (SJR.B-T) to “overweight” from “equal-weight.”
“This business has entered a new phase of stronger multi-year growth that is currently undervalued by the market,” said Mr. Huang.
He raised his target for Shaw shares to $32 from $29, which is the current consensus.
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In other analyst actions:
TD Securities analyst Mario Mendonca upgraded Manulife Financial Corp. (MFC-T, MFC-N) to “buy” from “hold.” Mr. Mendonca kept a $28 target, which sits below the average on the Street of $29.60.
TD Securities analyst Damir Gunja upgraded Enercare Inc. (ECI-T) to “action list buy” from “buy” with a $24 target (unchanged), which is 34 cents less than the consensus.
Eight Capital analyst Sultan Sukumar initiated coverage of Mogo Finance Technology Inc. (MOGO-T) with a “buy” rating and $9 target. The average is $9.42.
Echelon Wealth Partners analyst Ralph Garcea initiated coverage of Nubeva Technologies Ltd. (NBVA-X) with a “speculative buy” rating and $4 target.
David Leeder