Inside the Market’s roundup of some of today’s key analyst actions
Summit Industrial Income REIT (SMU-UN-T) received a “large gain” on the sale of its interests in three data centres in a $178-million transaction, said Canaccord Genuity analyst Mark Rothschild.
On Wednesday after the bell, the Brampton, Ont.-based REIT announced the deal, which involves two facilities in the Greater Toronto Area and one in downtown Montreal, and projects it will generate “a significant realized gain” of approximately $42-million or 35 cents per unit, as well as the repayment of related working capital loans and mezzanine loans of approximately $62-million.
Calling the price tag “a significant premium to recently appraised values,” Mr. Rothschild raised his rating for Summit Industrial to “buy” from “hold.”
“The price .... allows Summit to extract capital from a business that was ultimately non-core and reinvest in its core industrial portfolio, both through acquisitions and new development,” he said. “Management indicated that the REIT will pay a special distribution of 7 cents per unit on Oct. 2, 2019, which equates to 20 per cent of the realized gain. Summit will continue to be an investor in the development of data centers with Urbacon, although it will be a relatively small investment.”
“While management had spoken positively about its entry into the data centre business, the opportunity to exit with a large gain, and reinvest in its core industrial portfolio, was a powerful motivator for the sale. In the near term, the sale will be FFO dilutive and will result in a material drop in leverage. As the proceeds are fully invested; however, FFO should recover. We have assumed that the capital is reinvested by year-end and therefore, while we have reduced our 2019 estimates slightly, there is no impact to our 2020 estimates.”
Mr. Rothschild maintained a $14 target for Summit units. The average target on the Street is $13.48, according to Bloomberg data.
“We view Summit as an excellent vehicle to gain exposure to the strong Canadian industrial market, the GTA in particular," he said. "This should result in NAV rising over the next few years through internal growth. The unit price has declined 8.5% since early August and the units are currently trading at only a slight premium to NAV. Reflecting the more reasonable valuation, and an 18.7-per-cent forecast total return to our target price, we are upgrading our recommendation.”
Elsewhere, keeping a “buy” rating, Desjardins Securities analyst Michael Markidis trimmed his target to $13.50 from $14.
"SMU entered the data-centre space as a passive capital provider (in partnership with Urbacon) in December 2017," said Mr. Markidis. "The initiative generated an attractive return; however, given the dramatic improvement in SMU’s cost of capital subsequently, the strategic importance of the program was likely diminished in the eyes of management. The estimated proportion of total assets attributable to this segment falls to 1 per cent (from 10 per cent). The liberated capital should soon be redeployed to future acquisitions/developments of light industrial properties in SMU’s target markets (GTA, Montreal and Alberta)."
"The impact to our spot NAV (slips by 10 cents to $10.60) is not material. However, owing to the disparity between the returns previously earned on data-centre investments (direct ownership and mezzanine loans) and what we believe is achievable in the Canadian industrial sector, we believe this initiative will negatively impact SMU’s earnings power on a leverage-neutral basis. This view has been reflected in our revised FFO outlook."
After reducing his financial projections following Wednesday’s release of weaker-than-anticipated second-quarter results, CIBC World Markets analyst Matt Bank now thinks 2019 will be the second consecutive year of 20-per-cent EBITDA declines for Roots Corp. (ROOT-T).
“The major issues of 2019 have been related to the transition to a new distribution centre, and the costs are very large," he said. "H1 EBITDA was down $7-million, driven by deep discounting (GM% down 445 bps) to clean up older inventory not suited for the new DC. In addition, a slower ramp-up has impacted in-stock levels, resulting in lost sales and higher labour costs to catch up the rest of the year. Other issues include softness in Asia and China-U.S. tariffs.
“While these should normalize next year, implying significant upside in 2020, it is also possible that underlying brand weakness is partially responsible for the slower sales and deeper discounts. With Q3 and to a lesser extent Q4 results impacted, investors will need to wait until Q3/20 to see a ‘clean’ seasonally significant quarter without one-time issues.”
Mr. Bank thinks Roots should display “solid recoveries lapping issues that are in large part transitory and fixable” in the fourth quarter he stressed the third quarter wull again be challenging," and he emphasized “visibility is limited.”
“Free cash flow has also been constrained over F18-F19 due to higher capex (also largely DC-related),” the analyst said. “As this spending falls off and new / renovated stores slow, solid FCF should return, as was demonstrated consistently before last year. While leverage is elevated at 3.7 times net debt/EBITDA (or 4.5 times including leases), Roots is onside with covenants and this should improve seasonally through the year.”
Maintaining a “neutral” rating for Roots shares, he lowered his target to $3.50 from $4.50, noting “soft results are offset by potential earnings upside and depressed valuation.” The average on the Street is currently $3.19.
“We acknowledge material upside in earnings, and at 5 times to 6 times EBITDA the shares are trading near the low-end of peer ranges,” said Mr. Bank. “Balancing the potential upside should operations normalize with deteriorating results and significant uncertainty ahead, our rating remains Neutral. We continue to apply a 6-times target EV/EBITDA multiple on our lowered 2019 forecast.”
Elsewhere, BMO Nesbitt Burns analyst Stephen MacLeod lowered his target to $4 from $5.50 with an “outperform” rating.
Mr. MacLeod said: "We acknowledge that Roots may not be attractive at this point for GARP- or growth-oriented investors; however, given Roots’ strong brand equity, the stock may be appealing for value investors, or even potentially strategic buyers.
“For long-term-oriented investors, we believe the stock has largely re-rated, and at 4.6 times 2020 estimated EV/EBITDA, we think presents decent risk-reward, but success for the stock rests on management execution.”
“Zinc prices have been on a bumpy road this year coming from a high of $3,000 per ton to $2,341 per ton dragged down by incoming supply and trade war effects,” the analyst said. “Meanwhile, Nexa’s stock has remained under pressure (down 20 per cent year-to-date) mainly on the back of zinc and copper weakness but also as cash costs/t particularly for mining have been increasing considerably on a year-over-year basis (up 86 per cent year-over-year in 1H19).”
After updating his financial projections to account for its second-quarter results and higher-than-anticipated costs and expenses, Mr. Ribeiro lowered his target to US$11 from US$12.50. The current average on the Street is US$11.89.
“At this point, we see few reasons to believe in a zinc price rebound and mainly because of this we are downgrading Nexa,” he said.
“We acknowledge that Nexa has an attractive and accretive growth ahead which we calculate should add an additional NPV of $2 per share, but we see valuations near ‘fair’ at 5.5 times EV/EBITDA 2019 and find it difficult for the stock to outperform without a significant rebound in zinc prices.”
Citing the “strong, above-expectations engagement” of the its recently launched World of Warcraft Classic game, Nomura Instinet’s Andrew Marok became the third analyst this month to upgrade Activision Blizzard Inc. (ATVI-Q).
Moving the California-based video game maker to “buy” from “neutral,” Mr. Marok said Warcraft’s success in addition to new features added to its Overwatch game, create “a much more favorable backdrop heading into November’s BlizzCon.”
He raised his target to US$64 from US$59. The average is US$56.40.
Following Wednesday’s release of a “mixed” pre-feasibility study for its Railroad-Pinion project, PI Financial Corp. analyst Chris Thompson downgraded Gold Standard Ventures Corp. (GSV-T) to “neutral” from “buy,” calling it a “good start” but prompting a “retooling” of his valuation.
“Whilst we continue to view South Railroad as a mine in the making, and recognize the PFS as the first iteration of many economic studies (scope for optimization + refinement), we were too aggressive in our previously modelled expectations,” he said. “We have adjusted our operating assumptions for Railroad (Pinion & Dark Star), pulling back on ounces modelled for the time being and have re-scoped our mine/processing plan in-line with the PFS. We plan to revisit our assumptions for South Railroad and rating for GSV after reviewing the PFS Technical Report anticipated within 45 days."
Mr. Thompson lowered his target to $1.30 from $2.60. The average is $2.48.
Calling it “preferred vehicle for investors looking for international office exposure,” BMO Nesbitt Burns analyst Jenny Ma initiated coverage of Dream Global Real Estate Investment Trust (DRG-UN-T) with an “outperform” rating and $17 target. The average is $16.36.
“In the eight years since its IPO, Dream Global has been exceptionally active in growing and evolving into one of the largest publicly traded European office portfolios,” said Ms. Ma.
Ms. Ma also assumed coverage of Inovalis Real Estate Investment Trust (ION-UN-T) with a “market perform” rating and $10 target, falling from the firm’s previous “outperform” rating and $11 target. The average is $10.25.
“We apply a 10-per-cent discount to NAV in arriving at our target price for Inovalis REIT to account for its smaller portfolio, lower liquidity, and greater near-term operational risk given that leases encompassing nearly half of the REIT’s portfolio are due to mature through 2021, as well as greater economic uncertainty in Germany and to a lesser extent France,” she said.
In other analyst actions:
Macquarie analyst Ben Crowley upgraded Alacer Gold Corp. (ASR-T) to “outperform” from “underperform” with a target of $6.30, rising from $5.40. The current average on the Street is $6.54.