Inside the Market’s roundup of some of today’s key analyst actions
Expecting increased capital spending over the next 2-3 years at the same time as declining copper production, Raymond James analyst Farooq Hamed is “tapping the brakes” on Hudbay Minerals Inc. (HBM-T, HBM-N).
Accordingly, he downgraded his rating for the Toronto-based miner to “market perform” from “outperform.”
“HBM’s operations performed well in 2018, topping copper production guidance and meeting zinc and precious metals forecasts,” said Mr. Hamed. “Further, over the past few years, HBM has done well to ‘fix’ the balance sheet post Constancia construction. However, with copper production expected to decline sequentially as grades fall at Constancia and the 777 mine winds down in 2021, we believe HBM is at the beginning of a new capex cycle required to rejuvenate the production profile. As a result, we are downgrading our rating.”
As it ramps up spending at its Rosemont open pit copper mine in Arizona, Mr. Hamed said he expects HudBay’s total capex to grow to $850-million in 2021 from $196-million in 2018.
“At the same time capital requirements begin to ramp up we expect HBM to continue to experience declining copper production until Rosemont enters production,” the analyst said. “Over the next five years we expect copper production to have a negative 6-per-cent CAGR [compound annual growth rate] and negative 8-per-cent CAGR for zinc. We do expect precious metals production to begin to increase once the Lalorgold zone contributes in 2022.”
Mr. Hamed maintained a target for HudBay shares of $9. The average target on the Street is $9.87, according to Bloomberg data.
“We acknowledge that we could be early with the downgrade given the significant ramp up in capex does not start until 2021,” he said. “Further, with the possibility of potential catalysts of Rosemont receiving its permit or a resolution at Pampacancha materializing in the near term, there is positive headline risk. Finally, with the potential for a trade resolution between the U.S. and China, there is also commodity price risk to our rating change.”
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Following Wednesday’s release of “disappointing” fourth-quarter financial results, Desjardins Securities analyst Benoit Poirier said he’s “parking on the sidelines” on Uni-Select Inc. (UNS-T), downgrading his rating for its stock to “hold” from “buy” as he awaits further clarity on the potential outcome of its ongoing strategic review.
Before market open, the Boucherville, Que.-based distributor of automotive products, and paint and related products reported revenue of US$419-million, a rise of 1 per cent year-over-year and inline with the projections of both Mr. Poirier (US$424-million) and the Street (US$423-million). However, adjusted EBITDA of US$21.4-million and earnings per share of 13 US cents both fell well short of his expectations (US$24.5-million and 18 US cents, respectively).
The company’s 2019 guidance also missed his estimates with organic sales growth of 1.25-3.25 per cent and consolidated EBITDA margin of 5.75-6.75 per cent (versus Mr. Poirier’s estimate of 7.1 per cent.).
“UNS continues to progress with its strategic review, but it has initiated a CEO search, which has made us reconsider the probability of a full divestiture of the company,” the analyst said. “We are downgrading the stock to Hold (from Buy) as we await better clarity on the outcome of the strategic review and the performance of each division.”
In reaction to the results, which he said displayed “ongoing challenges” across all its segments, Mr. Poirier dropped his 2019 and 2020 EPS estimates to 89 US cents and US$1.07, respectively, from US$1.28 and US$1.58.
His target for Uni-Select shares fell to $20 from $29. The average on the Street is now $17.67.
“While we continue to believe UNS’s valuation is attractive vs its peers, we prefer to remain on the sidelines due to (1) its leveraged balance sheet, (2) the challenging industry conditions across all three segments, and (3) the uncertain outcome of the ongoing strategic review,” he said.
Elsewhere, Macquarie analyst Michael Glen lowered the stock to “underperform” from “neutral”with a target of $13.50, dropping from $25.
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Citing both a lack of cash flow growth and free cash flow through 2020 as well as a “premium” valuation in comparison to its peers, Raymond James analyst Tara Hassan lowered her rating for Alamos Gold Inc. (AGI-T, AGI-N) to “market perform” from “outperform.”
On Wednesday, the Toronto-based company reported 2018 adjusted earnings per share of 5 US cents, a penny above Ms. Hassan’s estimate and in-line with the Street. However, cash flow per share of 54 US cents missed expectations.
“While Alamos remains one of the better positioned intermediates with respect to its balance sheet and quality of its underlying assets, we expect the lack of near-term production growth relative to its peers may impact investor sentiment,” said Ms. Hassan.
She kept a target of $8.50, which is 19 cents lower than the average.
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In the wake of the “surprise” resignation of a key director on Wednesday, Industrial Alliance Securities analyst Elias Foscolos downgraded Source Energy Services Ltd. (SHLE-T) to “speculative buy” from “buy.”
On Wednesday after market close and ahead of its full fourth-quarter results on March 14, Source reported lower-than-expected sand volumes for 2018, while, at the same time, announcing activity in the first-quarter is expected to “substantially” increase.
Mr. Foscolos called the update “overall not very material.”
Instead, he emphasized the importance of the resignation of Cody Church, a founder of Calgary-based private equity group TriWest, who has been with Source since TriWest invested in it in 2013. TriWest currently owns 25 per cent of outstanding SHLE shares.
“The combination of the Board changes and the revised outlook for sand volumes through Q4/18 and Q1/19 do not change our target price, but increase the risk profile on the company, and as a result, we are downgrading our recommendation,” said Mr. Foscolos.
He maintained a $2.50 target, which exceeds the consensus of $2.18.
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Bombardier Inc. (BBD-B-T) shares “should gain altitude,” said Citi analyst Stephen Trent, who retiterated his positive, long-term cash flow thesis for the company.
“Although the market has had legitimate reactions to the variance in Canadian plane- and train manufacturer Bombardier’s near-term cash flow expectations, the share price selloff in recent months looks well overdone,” said Mr. Trent. “The company’s expected, strong, long-term free cash flow improvement remains intact, there does not appear to have been anything untoward in Bombardier executives’ stock option plans and European regulators’ blocking the planned merger of two competitors might now also create a little strategic breathing room for Bombardier transportation.”
Though he lowered his 2019 and 2020 earnings per share projections to 15 cents and 27 cents, respectively, from 17 cents and 28 cents, Mr. Trent increased his 2021 expectation by a penny to 32 cents.
Keeping a “buy” rating for the stock, Mr. Trent increased his target for Bombardier shares to $4 from $3.70. The average on the Street is $4.40.
“Forecast adjustments for Buy-rated Bombardier include the incorporation of 4Q results, an improved working capital cycle as well as slightly more conservative, expected transportation segment throughput into our model,” he said. “This combination of slightly lower 2019 estimated EBITDA but better cash flow, along with a nudge in the EV/EBITDA fair value range from 9.5 times to 9.75 times, increases Citi’s target price.”
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Pointing to an “improving” outlook, BMO Nesbitt Burns analyst Andrew Kaip raised his rating for Osisko Gold Royalties Ltd. (OR-T) to “outperform” from “market perform” with a $17 target, up from $13 and above the average of $16.39.
“2018 was a transition year for OR, and while not fully in the clear (the Renard stream has yet to fully perform), we are more constructive on the outlook for the company,” said Mr. Kaip.
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Desjardins Securities analyst Frederic Tremblay thinks Savaria Corp. (SIS-T) “is not a broken story,” advising investors to “buy the dip” under the belief its 2019 guidance is achievable and 2020 is likely to show its “true potential.”
“Only six months have passed since the game-changing acquisition of Garaventa and, clearly, we have yet to see the true potential of Savaria’s global platform,” he said. “The revised 2019 guidance and our newly introduced 2020 forecasts demonstrate the positive impacts anticipated to emerge from changes at Garaventa Europe, an improving margin outlook at Span and continued strength in Savaria’s core accessibility business. We believe that the current valuation offers a good entry point.”
After dropping his financial estimates slightly for 2019 in reaction to Wednesday’s release of preliminary fourth-quarter results, which he feels were “broadly in line” with expectations, Mr. Tremblay lowered his target for the stock to $16 from $20. The average is now $17.
He maintained a “buy” rating for the stock.
“SIS trades at 12.0 times our 2019 and 10.5 times our 2020 EBITDA estimates,” he said. “This is at the bottom of the historical range. The SIS story remains attractive and we believe that solid execution would contribute to a multiple expansion.”
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On the heels of a period of outperformance that has left it with a “fair” valuation, Citi analyst Nicholas Joseph downgraded his rating for AvalonBay Communities Inc. (AVB-N), a large-cap U.S. apartment REIT, to “neutral” from “buy.”
“While we remain positive on AVB on a relative basis given its solid same-store growth, accretive development pipeline, and strong balance sheet, the downgrade is the result of identified catalysts playing out and a more fair valuation after outperforming apartment peers and REITs overall since April 2018,” said Mr. Joseph. "The outperformance was driven by better-than-expected and accelerating same-store growth in addition to earnings accretion from development.
“As a reminder, Citi has an absolute rating system, with Buy-rated stocks requiring an expected 15-per-cent total return over the next 12 months. The shares now trade at a 4.9-per-cent implied cap rate and generally in line with consensus NAV. Risks include macro concerns of continued elevated apartment supply and a later-cycle economic environment in addition to company-specific risks, such as potential execution and earnings volatility associated with the condo sales at the $620-million Columbus Circle development.”
Mr. Joseph made the move in the wake of the Feb. 4 release of a “solid” fourth-quarter earnings report, noting: “AVB continues to create value through its accretive development pipeline and organic same-store growth. While 2019 core FFO [funds from operations] growth of 3.3 per cent is below the long-term average, it is impacted by capital markets activity, fewer development deliveries as AVB right-sized the development pipeline, and higher floating-rate debt costs. On the call, AVB focused on a constructive operating environment with a solid but moderating economy, positive demographics, modestly higher 2019 supply (driven by Northern California), but lower projected starts in AVB markets.”
The analyst raised his target for the Arlington, Va.-based REIT to US$205 from US$190, which sits just above the average of US$201.48.
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In other analyst actions:
Canaccord Genuity analyst Raveel Afzaal downgraded Crius Energy Trust (KWH-UN-T) to “hold” from “speculative buy” with a target of $9.10, up from $8 and above the average of $8.27.
David Leeder