Inside the Market’s roundup of some of today’s key analyst actions
AltaGas Ltd.’s (ALA-T) “transformative” $8.4-billion acquisition of WGL Holdings Inc. (WGL-N) is likely to provide a robust backlog of projects when it closes within the next two months, said Industrial Alliance Securities analyst Elias Foscolos.
In the wake of last week’s release of better-than-expected first-quarter financial results, Mr. Foscolos initiated coverage of the Calgary-based energy infrastructure company with a “buy” rating.
“The WGL acquisition will enhance both geographical and product diversification along with a large backlog of growth capital projects,” said Mr. Foscolos. “However, given the expected mid-year closing and the anticipated asset sales in 2018, we believe investors should focus on pro-forma normalized 2019 estimated EBITDA adjusting for future debt, preferred shares issued, asset sales, and installment receipt conversion as a basis of valuation.”
Mr. Foscolos projects EBITDA and adjusted funds from operations (AFFO) per share to grow by 14 per cent and 12 per cent, respectively, between 2017 and 2019, leaving the potential for dividend increases.
“The company current pays a $0.1825 per month dividend ($2.19 per share annualized) that yields 8.8 per cent,” he said. “The company has stated that it plans to grow its dividend by 8-10 per cent annually. Our modelling confirms that this growth will be achievable over the next two years.”
Mr. Foscolos set a target price of $29 for AltaGas shares. The consensus on the Street is currently $28.69, according to Thomson Reuters Eikon data.
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Though he expects “solid” financial growth driven by both its defence business and improvements to operational efficiencies, Industrial Alliance Securities analyst Nav Malik lowered his firm’s rating for AirBoss of America Corp. (BOS-T) to “hold” from “buy” upon assuming coverage.
Mr. Malik justified the move by emphasizing AirBoss shares have appreciated by over 30 per cent since mid-March.
“We believe the shares are fairly valued at current levels,” he said.
Mr. Malik’s target for the stock to $14.25 from the firm’s previous $15 target, which the current consensus target among analysts covering the stock.
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Loblaw Companies Ltd. (L-T) displayed a “good” start in the first quarter toward handling the headwinds it will likely face throughout 2018, said Desjardins Securities analyst Keith Howlett.
“We view the 1Q18 results positively in that there was evidence that Loblaw is successfully managing through the substantial minimum wage increase in Ontario (as of Jan. 1),” he said. “Internally measured food price inflation at Loblaw was marginally lower than CPI food inflation of 1.2 per cent. Same-store grocery sales growth of 1.9 per cent was ahead of inflation. Management is executing well against its financial and operating objectives despite the extraordinary headwinds of drug reform and increased minimum wages.
“Underlying business momentum will become apparent once the external (regulatory) headwinds are cycled in 2019. Healthcare reform was largely responsible for a 20 basis points year-over-year decline in gross margin rate. Given that Shoppers contributes just over 25 per cent of company revenue, the impact of reform on Shoppers’ gross margin rate was quite dramatic.”
In reaction to the quarterly results, released Wednesday, Mr. Howlett raised his 2018 earnings per share projection by a penny to $4.64. His 2019 estimate rose to $5.21 from $5.08 due to a higher level of share buybacks.
Keeping a “buy” rating for the stock, he lowered his target to $76 from $77, which is the consensus.
“Loblaw is being managed more effectively, both operationally and financially,” said Mr. Howlett. “Retail execution is improving continuously, and there is a tighter rein on capital spending, along with ongoing dividend increases and the return of excess capital to shareholders. Regulatory headwinds will mask the underlying improvement in 2018. We view the shares as inexpensive but there is no urgency given close to flat net earnings growth in 2018.”
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3M Company (MMM-N) now presents a “high quality” investment option at an enticing relative valuation, said RBC Dominion Securities analyst Deane Dray,
Touting an “attractive entry point for one of the highest-quality multi-industry names,” he raised his rating for the Minnesota-based conglomerate to “outperform” from “sector perform.”
“In the past four months, 3M shares have been on a re-rating downslope to where they have now reached what we have found to be a compelling support level at a negative 5-per-cent relative P/E discount to its Multi-Industry peers,” said Mr. Dray. “From what we can gauge, the recent 1Q18 earnings pressure stemmed from familiar and contained end market-specific dynamics, including weakness in auto, dental, and consumer electronics, rather than a widespread macro deterioration. We do not typically lead with valuation on an upgrade thesis, but in this case, the support level skews risk-reward demonstrably to the upside, in our view. Moreover, at this stage of the economic cycle, our bias is to recommend higher-quality names in our Multi-Industry coverage, and we highlight that 3M sits right behind Roper and AMETEK at the top of our Investment Framework rankings of earnings quality. Finally, we like the potential duration of this positive rating. Our experience has been that 3M shares often act as a must-own consumer staple to ride recessions, whenever that next phase arrives.”
The analyst hiked his target to US$238 from US$227. The consensus is US$218.15.
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Touting a distinct business structure and leverage for growth in both the recreational and medical marijuana industry, Mackie Research analyst Greg McLeish initiated coverage of Cannabis Wheaton Income Corp. (CBW-X) with a “buy” rating.
″CBW’s unique model is made up of three distinct verticals – upstream, midstream and downstream,” he said. “This platform provides early stage LPs and late stage LP applicants with non-dilutive financial capital and ongoing regulatory support, in exchange for receiving a minority equity interest, as well as the rights to a negotiated offtake of the cannabis produced. This model allows its partners to access the necessary capital in order to expedite their time to market, and creates long-term value for both the company and its industry partners.”
Mr. McLeish said Toronto-based Cannabis Wheaton, formerly Knightswood Financial Corp., currently possess a “strong” financial position with cash and equivalents of approximately $200-million. He said that strength will allow it to deploy $100-$150 million towards streaming projects as well as potential working capital requirements.
“The CBW model allows it to access cannabis production from a growing collection of diverse partners, thus enhancing its position to participate in anticipated provincial distribution channels,” he said. “Through existing agreements, the company has locked up more than 100,000 kilograms of funded production, positioning it as one of the leading suppliers for both medical and recreational cannabis markets.”
“CBW’s management believes it is important to create value to the base commodity: A natural evolution for this is a move into cannabis oils and other concentrates. The company had been exploring opportunities for large scale extraction and distillation, formulation and product development. On April 4, 2018, it entered a definitive acquisition agreement for all outstanding shares of Dosecann Inc., another key component of CBW’s vertical integration strategy. The acquisition will allow the company to expedite its move into cannabis oils, and positions it well for the cannabis derivative products market once available (including pharmaceuticals, nutraceuticals, and consumer packaged goods). The company’s ability to add value to the cannabis it offtakes from its partners should enable it to protect and enhance returns.”
He set a target price for its shares of $3.
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CGI Group Inc. (GIB.A-T) is “well-positioned” for improved profitability growth in the second half of fiscal 2018, according to Desjardins Securities analyst Maher Yaghi.
On Tuesday, the Montreal-based technology and business consulting firm reported second-quarter financial results that largely met expectations. Revenue of $2.95-billion narrowly missed the Street’s expectation of $2.88-billion, while adjusted EBIT of $424-million was in line with estimates.
“While margins were a tad lighter than our forecast, we believe profitability will improve in 2H FY18 following the restructuring announced last year and for which not all benefits have yet been reaped,” said Mr. Yaghi.
“The most important data point is the very strong book-to-bill ratio of 1.19x, which was driven by strength in Northern Europe, North America and the UK. We believe this strong performance in new orders is likely to support constant-currency revenue growth, which was 4.9% in the quarter, beating our estimate of 2.6%. Acquisitions were responsible for about half of this growth, giving us confidence in the company’s M&A strategy.”
Keeping a “buy” rating for CGI shares, Mr. Yaghi increased his target to $84 from $80. Consensus is $77.55.
“While CGI’s valuation has increased recently relative to its peers, we still believe there is room for multiple expansion, which we believe could occur if the company resumes growing its EBIT margin, which we expect in 2H FY18,” he said.
“We believe CGI’s shares continue to provide an attractive investment opportunity. We expect the company to generate EPS growth of 14.1 per cent in FY18; we have not modelled further M&A transactions. In our view, the robust growth, FCF yield of 7 per cent and strong management team are a solid combination for good stock performance.”
Elsewhere, Echelon Wealth Partners’ Ralph Garcea raised his target to $90 from $85 with a “buy” rating and his large cap “Top Pick” status.
Mr. Garcea said: “After exiting unprofitable contracts over the last few years, CGI has returned to overall organic growth across most regions over the last seven quarters.”
Canaccord Genuity’s Robert Young raised his target to $84 from $79 with a “buy” rating (unchanged).
Mr. Young said: “We expect CGI to benefit disproportionately as large organizations move from smaller targeted IT projects towards enterprise-wide digital transformation mandates which are best suited for end-to-end IT Services vendors, like CGI, with a global footprint. We believe that CGI is well positioned to grow revenue organically while the balance sheet is well positioned for transformative M&A, supporting its ‘build and buy’ strategy.”
Raymond James’ Steven Li moved his target to $80 from $85 with an “outperform” rating.
Mr. Li said: “There is a lot to like here. With room for organic growth to accelerate in 2H18 (as SSA, Glasgow ramp), for margins to expand in contrast to peers (utilization up significantly, savings yet to come) and for M&A pace to pick up (cash generation making new highs), we reiterate our OUTPERFORM. Valuation gap to Accenture is almost as wide as it’s ever been and we expect this gap to narrow as CGI delivers on its organic growth and margin targets in F2018.”
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Canaccord Genuity analyst Oliver Bailey initiated coverage of Tidewater Midstream and Infrastructure Ltd. (TWM-T) with a “buy” rating.
“Calgary-based Tidewater is a unique small-cap midstream company focused on expanding egress options for natural gas and NGL production in the Western Canadian Sedimentary Basin (WCSB),” the analyst said. “With market access challenges putting significant financial strain on domestic gas producers, we believe Tidewater is well positioned to benefit from growing demand for new egress solutions in Western Canada. We also believe Tidewater’s deeply discounted valuation represents an attractive entry point for longer-term investors seeking exposure to a high-growth midstream company with a record of value creation.”
He set a $2 target, which is 23 cents more than the consensus.
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BMO Nesbitt Burns’ Stephen MacLeod is the latest analyst to downgrade Rogers Sugar Inc. (RSI-T) following Tuesday’s release of weaker-than-anticipated second-quarter results and a reduction in its guidance for maple sugar products.
Mr. MacLeod moved the stock to “market perform” from “outperform” with a target of $6.25, falling from $7. The average target is currently $6.25.
“While income-oriented investors may find the 5.8-per-cent yield attractive, we believe the shares are likely range-bound in the absence of tangible progress on acquisition synergies,” he said.
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In other analyst actions:
TD Securities analyst Brian Morrison upgraded Gildan Activewear Inc. (GIL-N, GIL-T) to “buy” from “hold” with a target of US$35, rising from US$33. The average on the Street is US$33.90.
GMP analyst Steven Butler upgraded Yamana Gold Inc. (YRI-T, AUY-N) to “buy” from “hold” and raised his target to $4.95 from $4.45. The average is $4.46.
National Bank Financial analyst Dan Payne downgraded the recommendation on Bellatrix Exploration Ltd. (BXE-T, BXE-N) to “underperform” from “sector perform” with a target of $1.75, down from $2. The average is $1.54.
David Leeder