Inside the Market’s roundup of some of today’s key analyst actions
The two-day drop in share price for Computer Modelling Group Inc. (CMG-T) following the release of its fourth-quarter 2018 financial results last Thursday offers an opportunity for investors, according to Industrial Alliance Securities analyst Elias Foscolos, who upgraded his rating to “buy” from “hold.”
CMG, a Calgary-based company that produces reservoir simulation software to the energy industry, reported revenue for the quarter of $19.4-million, which met Mr. Foscolos’s estimate ($19.7-million) while exceeding the expectation of the Street ($18.9-million).
In reaction to those results, CMG shares have dropped 8 per cent, closing Monday at $8.21.
“In our view, there was no material change in our outlook that can explain the negative reaction,” said Mr. Foscolos. “With the price of oil strengthening, longer-term fundamentals outside of Canada remain strong. At present, we are predicting [approximately] 5 per cent per year revenue growth as a baseline with further upside possible.”
The analyst maintained a price target of CMG shares of $10.50. The average on the Street is currently $10.06, according to Bloomberg data.
“The price decline over the last two days represents an overly negative reaction and creates an opportunity to accumulate stock in a world-class Canadian software company at a discounted price,” said Mr. Foscolos. “Based on [Monday’s] closing price, our potential one-year upside of 18 per cent justifies upgrading our rating.”
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Recent acquisitions are likely to take Héroux-Devtek Inc. (HRX-T) to a “higher altitude,” said Laurentian Bank Securities analyst Mona Nazir.
She initiated coverage of the Longueuil, Que.-based aerospace parts manufacturer with a “hold” rating in a research report released Tuesday.
“HRX has established itself as the third largest landing gear company globally,” the analyst said. “We believe that downside risk is limited due to stringent industry regulation, strong customer/supplier relationships and long lead times which can take decades to emulate. Recent acquisitions should allow for greater market share gains via customer and geographic penetration.”
Having already established a “leading” position in a higher barrier to entry industry, the acquisitions of Beaver Aerospace & Defense Inc. and Compañia Española de Sistemas Aeronauticos, S.A are likely to both drive synergies and expand the company’s footprint, according to Ms. Nazir.
“HRX has a history of augmenting organic growth with M&A,” said Ms. Nazir. “While transaction multiples may seem rich, upon first look (i.e. 12.7 times EBITDA for CESA), the company has a history of extracting 3-4 times of EBITDA post transaction (~24 month time frame). Both revenue and cost synergies come into play and management spoke of such on its recent Q4/F2018 call. Typically, acquisitions provide greater product breadth within its aerospace end market and allow for geographic penetration into a new area (enlarging footprint or new) and are complementary in nature. Furthermore, post-acquisition, HRX has a history of capitalizing on cross-selling opportunities.”
Ms. Nazir said the combination of expected double-digit organic growth and the benefits seen from M&A equate to nearly 75-per-cent top-line growth by 2021.
“While year-to-date sales have declined due to the lower defence sector sales (recent FQ3 saw lower parts to civil customers and lower repair and overhaul on the P-3 program) F2018 guidance is calling for stable adjusted EBITDA compared to last year, on low single-digit sales declines,” she said. “Looking out into 2021, annual sales guidance sits at $480-$520-million, up from a $386-million annualized run rate (pre-CESA), implying a 24-per-cent to 34-per-cent growth figure over three years. This 8-11-per-cent CAGR figure, sits above industry growth estimates in the 3-per-cent range and does not include M&A. If we incorporate CESA’s contribution, HRX’s revenue profile should increase by 30 per cent (€94-million in sales) and bolting on the Beaver tuck-in ($39-million), sales should increase by another 8 per cent. Given that 50 per cent of CESA’s sales stem from Airbus and part of the acquisition rationale factored in revenue synergies, we believe that advancement of the relationship is likely and could result in further upside (above guidance).”
Ms. Nazir set a target price of $17 for the company’s shares. The average target is currently $18.50.
“While we see the potential for HRX’s stock price to trend upward to the $18-plus range with time, based on current trading multiples and the 37-per-cent stock price appreciation (from March/17 lows), we are launching with a Hold,” she said. “Although recent M&A and organic growth take up revenue potential by 75 per cent (over the next three years), we believe it will take the market some time to fully digest such, particularly in light of the transaction delay and integration and efficiency extraction timing.
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Acumen Capital analyst Brian Pow thinks Sangoma Technologies Corp. (STC-X) has both the scope and scale to compete in the “rapidly evolving” unified communications market.
He initiated coverage of the Markham, Ont.-based company, which provides hardware and software components that enable Internet protocol communications systems for both telecom and datacom applications, with a “buy” rating.
“Sangoma has shown strong growth in revenue and EBITDA after a new management team shifted its strategic focus,” said Mr. Pow. “Acumen is forecasting revenue and EBITDA to grow at a five-year CAGR [compound annual growth rate] of 31.3 per cent and 37.0 per cent, respectively, through fiscal 2019.
“Revenue and EBITDA growth has been driven by acquisitions and organic growth. Sangoma has completed six acquisitions in the past six years as the Company has moved from asingle hardware product to a full suite of unified communications software and services. This has resulted in strong organic growth above the general unified communications industry growth rate of approximately 10 per cent per year.”
On May 15, Sangoma reported “strong” third-quarter 2018 financial results, which saw revenue rise 138 per cent year over year and EBITDA jump 160 per cent. That led management to increase its guidance for both.
“We highlight Sangoma as being a growth story with significant upside through a proven acquisition strategy and strong organic growth. Management has successfully transitioned the Company from a single product in a declining segment to a full provider of unified communication solutions through organic growth and acquisitions,” said Mr. Pow. “With positive net cash of $12.6M (quarter ended March 31, 2018), organic growth in excess of 10 per cent, and a proven track record of executing acquisitions, we believe Sangoma is well on its way to achieving its goal of $100-million of revenue.”
Mr. Pow set a price target of $2 per share, which exceeds the consensus by 8 cents.
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The significant headwinds facing Real Matters Inc. (REAL-T) are likely to test investor patience and constrain near-term trading multiples until stronger organic growth surfaces, said Raymond James analyst Steven Li.
Shares of the Markham-Ont.-based tech company plummeted 23 per cent on Monday after it announced a highly anticipated sale of mortgage-refinancing software to an unnamed U.S. major bank has been cancelled.
“While this T&C Tier 1 deployment barely moved the stock when it was announced, it did give us increased visibility/confidence on T&C [Title and Closing] long-term targets,” said Mr. Li. “REAL reiterated that it’s on track to meet its previously stated objectives (including a 1-3-per-cent U.S. T&C market share) but they are in a lesser position for now without this T&C Tier 1 deployment. Also noteworthy is that this customer is already doing well as an appraisal customer with REAL. While we don’t think this has any impact on the appraisal relationship, at a minimum it illustrates some of the challenges dealing with large Tier 1 clients and also suggests we attribute a higher risk level to the current pipeline as these surprises are possible.”
Mr. Li added: “The negative surprise compounds an already weak mortgage market and also the expected loss of revenues near-term, as REAL rationalizes some non-core T&C operations.”
Maintaining an “outperform” rating for Real Matters shares, Mr. Li dropped his target to $6 from $10. The average on the Street is $9.19.
“Since its IPO, REAL has struggled against a challenged mortgage market in the U.S.,” he said. “On its last earnings call, management highlighted a new headwind – the rationalization of its non-core T&C operations –which had a significant impact on our T&C forecasts for REAL. We actually think T&C expectations might still be too high based on where consensus estimates are. And now this surprise. While we still believe REAL is building a platform (appraisal and title & closing) that holds significant potential for organic revenue growth, we believe the abundance of headwinds will require patience from investors.”
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Vermilion Energy Inc.’s (VET-T, ass="">VET-N) $1.4-billion acquisition of Spartan Energy Corp. should be seen as a “positive,” said Desjardins Securities analyst Kristopher Zack, citing both leverage to higher oil prices and an improved debt ratio.
“When combined with the remaining diversified exposure to Brent oil and European gas prices, we believe the stock could receive additional fundamental support now that the deal is done,” said Mr. Zack.
In reaction to the deal, which closed Monday, the analyst dropped his 2019 cash flow per share estimate for Vermilion by almost 5 per cent to $7 from $7.37. His debt-adjusted cash flow projection fell to $1.1-billion from $1.2-billion.
“Solid free cash flow profile and strong balance sheet support [a] 6-per-cent yield,” he said. “We note a 2019 payout of [approximately] 75 per cent and debt-to-cash flow strengthening to 1.0 times at the current strip. Both screen as better than average even in 2018. The 6-per-cent yield, one of the most attractive on our coverage list, is in good shape as a result, and is underscored by a solid free cash flow profile.
“The stock has lagged the oil-weighted names since the deal was announced on April 16 and is now up just 2.4 per cent versus a 9-per-cent return for the light oil names. Nevertheless, we continue to see the company’s international commodity diversification as a key differentiating factor, noting that 40 per cent of production remains priced on Brent oil and European natural gas.”
Mr. Zack maintained a “buy” rating and $55 target for Vermilion shares. The average target is $53.83.
“We would continue to buy the stock at current levels, noting that the completion of the SPE deal should shift the market’s focus back to the solid fundamentals underlying the company’s cash flow profile,” he said.
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In other analyst actions:
BMO Nesbitt Burns analyst Andrew Kaip upgraded Agnico Eagle Mines Ltd. (AEM-N, AEM-T) to “outperform” from “market perform.” His target rose to US$55 from US$47. The average is US$51.22.
David Leeder