Inside the Market’s roundup of some of today’s key analyst actions
Believing it’s time for a “more bullish view” on Cogeco Communications Inc. (CCA-T), Desjardins Securities’ Maher Yaghi raised his rating for its stock to “buy” from “hold.”
“We see the stock as undervalued versus peers, trading at discount of 1.5 times enterprise value-to-EBITDA and potentially offering good downside support,” the analyst said. “Second, we believe the company’s organic growth rate is beginning to improve, and heading into fiscal 2019, we expect organic growth in the midsingle-digit range, in line with the industry average. Finally, we see potential for better capital allocation that could generate upside to our target.”
Mr. Yaghi said he downgraded the Montreal-based communications company on July 11, 2017, expecting underperformance versus rivals, which were benefiting from growth in the wireless sector, based on both lower organic growth and a limited potential for accretive acquisitions. Since that move, Cogeco Communications’ return has been negative 18 per cent, while the sector’s average has been a 3-per-cent gain.
“Our view is that we are entering a period in which the stock’s relative performance should begin to improve, supported by a better organic growth rate, helped by improving margins in Canadian cable and a more stable Business ICT [information and communications technology] segment,” he said. “Another reason for our improved outlook is the company’s continued ambition to look for more cable assets in the U.S., supported by its partner CDPQ [Caisse de dépôt et placement du Québec].”
“Finally, as the Business ICT segment begins to post improved results, we would not be surprised and would even support a decision by management to redeploy capital from that business to increase the pace of cable acquisitions in the U.S.. Such a move is likely to lead to an improved multiple for the stock.”
Mr. Yaghi maintained a price target of $82 for shares of Cogeco Communications. The average on the Street is currently $83.54, according to Bloomberg data.
“Given the large valuation discount to peers and the potential for more accretive acquisitions in the U.S. and improving organic growth trends, we are upgrading our rating on CCA,” he said.
Mr. Yaghi was one of two analysts on the Street to upgrade the stock.
Late Monday, Canaccord Genuity’s Aravinda Galappatthige raised his rating to “buy” from “hold” with a target price of $79, rising from $73.
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Valuations for Canadian life insurers are currently “undemanding” and “complemented by high earnings growth,” according to Canaccord Genuity analyst Scott Chan, who initiated coverage of the sector with a “favourable” outlook.
“Within the large-cap Canadian financials sector, we expect both the banks and lifecos to provide investors with solid total returns, with the lifecos trading at slightly lower P/E [price-to-earnings] multiples and higher EPS growth expectations,” said Mr. Chan in a research report released Tuesday. “From a top-down perspective we think the Canadian lifecos are better positioned than the banks.”
He added: “Positive sector attributes include: (1) lower-risk product mix and high-return businesses versus. a decade ago; (2) strong capital positions and de-risked balance sheets; (3) reduction in capital markets exposure (e.g. interest rates, equity markets) and less headline reserve risk, which has resulted in a decade-low sector beta/more defensive profile; (4) rising bond yields a structural positive; and (5) focus on higher margin growth (e.g. wealth management, Asia, group business). We believe this will drive group EPS (avg.) growth of 11 per cent in 2018 and 8 per cent in 2019 (and dividend growth of 8 per cent) supported by undemanding valuations (e.g. 15-per-cent P/E discount to group historical average.).”
Mr. Chan initiated coverage of Manulife Financial Corp. (MFC-T) with a “buy” rating, calling it his top pick for the sector and believing its stock, currently trading at trough levels, holds the most upside.
“The company continues to trade at what we view as an unwarranted discount to peers given its earnings growth profile and attractive geographic exposure / shifting business mix,” he said. “MFC derives 50 per cent of group earnings from its Asian and WAM businesses combined, which are both higher growth/ROE [return on equity] businesses than the rest of the group and should command a premium multiple, in our view. Over time, these two segments should contribute an increasingly large percentage of group profits and help MFC achieve its medium-term ROE /earnings growth targets while also increasing the consistency and quality of earnings. For a company which has historically had a poor relationship between reported and core earnings, lower information risk would be key for MFC to eventually see a multiple re-rating toward Canadian peers.”
He set a target price of $29 per share for Manulife, which is 44 cents less than the current consensus on the Street.
“With expected better core results, low double-digit earnings growth, and a clearer path towards 13-per-cent ROE, we suggest MFC has significant valuation re-rating potential medium term,” he said.
Calling it “the most conservatively run of the large Canadian lifecos, with a track record of performance and value creation unmatched by large Canadian peers,” Mr. Chan also gave Great-West Lifeco Inc. (GWO-T) a “buy” rating and $38 target price, which exceeds the consensus of $36.55.
“We rate Great-West Lifeco (GWO) a BUY and like its (1) consistent earnings stability stemming from the high level of conservatism built into the balance sheet; (2) high and stable capital ratio with optionality from excess capital; (3) well-diversified geographic exposure and low-risk business mix weighted towards the high-margin group business; (4) excellent long-term track record of compounded BVPS growth; (5) upside to EPS growth expectations; (6) share price underperformance vs peers; and (7) attractive relative valuation with a generally neutral sell-side community,” he said.
He added: “GWO has an excellent track record of compounded book value growth (our preferred measure of value creation) versus peers, and a good record of reserve releases in recent years, supporting our view of a generally conservative underwriting culture. A common issue we hear from investors relates to the quality of earnings. However, we believe that the consistently positive experience gains (e.g. differences between the actual experience during reporting period and the best-estimate assumptions at the start of reporting period) and assumption changes are more sustainable, a by-product of POW’s [Power Corporation of Canada] conservative influence on GWO’s operations. The analyst community is almost universally neutral on GWO shares; we believe part of the reason stems from the long-term underperformance of Putnam. However, with the asset manager only breaking even, we believe investors are getting the potential upside in the business for free. GWO has a good track record on its large acquisitions and acquiring another U.S. asset manager to add scale would represent one of the most significant catalysts for GWO shares, in our view.”
Mr. Chan thinks Industrial Alliance Insurance & Financial Services Inc. (IAG-T) has “high” earnings growth potential at “undemanding” valuation multiples, leading him to initiate coverage with a “buy” rating and $60 target. The average on the Street is $63.22.
“We like IAG’s (1) track record of EPS/BVPS growth; (2) stable capital ratios with organic capital generation and low balance sheet leverage; (3) increasing WM / distribution earnings mix with no legacy business; (4) higher quality of earnings with lower information risk in the business; and (5) undemanding valuation, with shares currently trading at a slight discount to our 2019 estimated BVPS of $52.00/share and at a 2 times PE multiple discount to its five-year average,” he said. “IAG has proved nimble in aggressively shifting its business mix into capital-light products and reducing the interest rate risk in the business. Reserve increases for lapse risk over the past few years now appear behind the group and management appears confident in its 10-per-cent annual EPS growth target for 2020. At its June 2018 Investor Day, IAG reiterated that the company has several additional levers that leave room for management to exceed its stated EPS ambition.”
With its shares trading at a 10-year high versus its peers, Mr. Chan gave Sun Life Financial Inc. (SLF-T) a “hold” rating with a $58 target, which is 44 cents below the consensus.
“Sun Life is a relatively stable insurer with excess capital flexibility ahead of its peers that is likely to limit ROE expansion,” he said. “Strong execution has translated into leading returns within the Financial sector. Over the past five years, SLF stock’s total return of 14 per cent per annum leads all Canadian lifecos over the period. With YTD outperformance as well, we find better value with MFC and GWO.
“We believe SLF shares are fully valued and are trading above historical levels relative to peers. Since 2011, SLF shares have re-rated from a 20-per-cent discount to peers toward a 20-per-cent premium today. The last time SLF enjoyed this relative premium valuation was a decade ago. We do suggest a premium valuation is warranted, due to a high asset management mix, Asian growth potential, lower risk profile on legacy business, and positive earnings execution, but see this as currently reflected in the share price.”
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Ahead of the release of its first-quarter 2019 financial results, Industrial Alliance Securities analyst Elias Foscolos downgraded Computer Modelling Group Ltd. (CMG-T) based on recent “strong” share price appreciation.
In justifying his move of the stock to “hold” to “buy,” Mr. Foscolos said the Calgary-based company’s stock has risen 9 per cent since he raised his rating on May 29 without a corresponding change to his target price, which is currently $10.50. The average on the Street is $10.06.
He does expect the company’s first-quarter results to be “strong,” projecting revenue of $19-million and EBITDA of $8.5-million, which exceeds the consensus.
“The next key catalyst event would be the announcement of a licensing agreement of CoFlow to a third party which would not only boost short-term revenue but also add confidence,” he said. “Ahead of the first quarter results, and an unchanged $10.50 target resulting in a potential one-year return of 8 per cent we have elected to reduce our rating to Hold.”
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Mr. Foscolos also lowered his rating for Badger Daylighting Ltd. (BAD-T) in reaction to a 22-per-cent rise in its share price since the release of first-quarter 2018 results in early May.
“We expect that BAD will report strong sequential growth in EBITDA ($35-million) in Q2/18,” said Mr. Fosclos. “However, ahead of the results and in conjunction with our Q2/18 sector preview we have elected to reduce our rating on the stock based on the recent stock price appreciation. There are definite tailwinds including a lower U.S. tax rate and subdued noise from short-sellers. Focusing on the fundamentals leads us to conclude that sequential quarterly revenue growth by Q3/18 will be more challenged due to flattening U.S. petroleum related drilling activity.”
Moving the Calgary-based provider of non-destructive excavating services to “hold from “buy,” he kept a target price of $34.50, which exceeds the consensus of $33.54.
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Several equity analysts took a bullish view toward MAV Beauty Brands Inc. (MAV-T) upon initiating coverage of its stock after coming off restriction on Tuesday,
On July 11, the Toronto-based personal care company completed its initial public offering at a price of $14.00 per common share and began trading on the Toronto Stock Exchange.
Calling it an “attractive” investment opportunity based on “strong” earnings growth potential, “robust” free cash flow profile and relative valuation to its peers in the Global Personal Care sector, RBC Dominion Securities analyst Sabahat Khan gave MAV an “outperform” rating and target price of $17.
“MAV is well positioned within the recession-resistant global hair care segment which has grown at a long-term rate of 4 per cent and generated positive year-over-year-sales growth even through the global financial crisis. MAV’s brands are also exposed to a number of sub-segments with growth rates in excess of the overall hair care market, including: 1) the ‘masstige’ segment, which is benefiting from strong consumer demand relative to lower-priced “mass” products; and, 2) the fast-growing ‘natural’ category.”
“We believe the favourable growth outlook for the hair care industry, the strong growth profile of independently-founded brands relative to mass-market brands, the opportunity to increase distribution at existing retail partners, and the outlook for strong growth in international markets should enable MAV to grow at rates well in excess of the overall market, and to deliver successfully against its three-year growth targets.”
Elsewhere, Canaccord Genuity’s Camilo Lyon gave MAV a “buy” rating and $18 target.
Mr. Lyon said: “MAV was launched 23 years ago by celebrity hair stylist Marc Anthony and has gained broad recognition as a leader in the “masstige” segment of the market by consistently creating trend-leading, salon-quality hair care solutions at attainable price points. At the core of its strategy is MAV’s ability to innovate, test and react to market trends faster than the competition. Underpinning this competitive advantage is an independent, entrepreneurial culture the inspires innovative solutions for evolving hair care needs. Moreover, the company is distinctly focused on leveraging social media and influencers to authentically strengthen its connection with the millennial consumer, all of which supports a revenue/EBITDA CAGR of 27 per cent/29 per cent through 2020. Given its outsized growth characteristics, the high visibility into its revenue drivers, a stable industry backdrop, and attractive valuation, we view MAV as a high-quality addition to a growth portfolio.”
CIBC World Markets' Mark Petrie initiated coverage with an “outperform” rating and $17 target.
Mr. Petrie said: "MAV Beauty Brands is positioned to deliver leading growth in the consumer space as it benefits from favourable industry and consumer trends, as well as the integration of new brands and follow-on revenue opportunities. Our valuation of 14 times 2019 EV/EBITDA balances substantial near-term growth and attractive long-term potential with the early stage of execution. "
Others initiated coverage included:
Raymond James' Joseph Altobello with a “strong buy” rating and $16 target.
Jefferies' Stephanie Wissink with a “buy” rating and $15 target.
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In the wake of the release of PrairieSky Royalty Ltd.’s (PSK-T) second-quarter financial results, Raymond James analyst Jeremy McCrea thinks “the battle will continue between investors who are more near-term focused versus long-term investors.”
On Monday, Calgary-based PrairieSky reported production for the quarter of 22,944 barrels of oil equivalent per day, missing the estimates of both the Street (23,571 boe/d) and Mr. McCrea (23,176 boe/d).
“We were concerned about another possible slow quarter for PrairieSky and given the share price weakness following Q1, we suspect investors also shared this same concern. Although 2Q18 production was slightly below consensus expectations, we believe some of the concerns for a larger miss were avoided,” the analyst said.
He added: “For near-term investors, 2Q production marks a point now lower than levels seen in 1Q16 and 15 per cent below levels seen in 1Q17 (with decline rates outpacing new well activity). That said, recent announcements including the Leucrotta Montney agreement, Baytex/Raging River merger, and Pengrowth’s Lindbergh update along with PSK royalty interest in some of the most active/emerging plays in Canada (Viking, Duvernay) are likely to keep longterm PSK investors in place. We don’t necessary believe the quarter will change any side’s opinion except for a greater emphasis on 3Q results. If PSK can show a reversal in production trends, we believe low-risk growth investors will likely be inclined to buy-in at the current share price however, if production declines continue, there are some longterm investors who might be tempted to re-evaluate their positions.”
Keeping a “market perform” rating for its stock, Mr. McCrea lowered his target by a loonie to $28.50. The average is currently $30.88.
“Nevertheless, we still believe the share price is up on possible short covering,” he said.
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In other analyst actions:
Citing the potential for increased costs when it releases its updated technical report on its ELG Mine and Media Luna projects in its Morelos Gold Property in Mexico, which is expected later this summer, TD Securities analyst Daniel Earle downgraded Torex Gold Resources Inc. (TXG-T) to “hold” from “buy” with a target of $13, falling from $17. The average is currently $18.45.
GMP analyst Stephane Foucaud upgraded Jadestone Energy Inc. (JSE-X) to “buy” from “speculative buy” with a target of $1.40, rising from $1.10 and ahead of the average on the Street of $1.13.
Canaccord Genuity initiated coverage of Profound Medical Corp. (PRN-X) with a “buy” and $2 target, which sits 87 cents below the consensus.
David Leeder