Inside the Market’s roundup of some of today’s key analyst actions
Following a "robust" start to 2019 for Canadian real estate investment trusts, Canaccord Genuity analysts Mark Rothschild and Brendon Abrams believe valuations have become elevated despite attractive valuations.
That led to say they are "taking our foot off the gas after a strong Q1" that has seen REITs in their coverage universe generate an average total return of 16.6 per cent year-to-date.
“Given the strong recovery in unit prices, REITs under coverage are trading, on average, 3 per cent above levels reached on Sept. 15, 2018, prior to the market correction,” the analysts said in a research note released Tuesday. “Additionally, we note that 17 REITs (out of 35 under coverage) have reached their 52-week highs within the past two months.”
They added: "We expect real estate fundamentals to remain strong or, for some asset classes, continue to strengthen in the near term, which should lead to sustained cash flow and NAV growth. In addition, investors are pricing in a slower pace of interest rate hikes, which gives us greater confidence that cap rates can remain stable in the near term, supporting our NAV estimates. Following year-end 2018 results, we increased our target prices for 19 REITs by an average of 8.4 per cent and lowered our target prices for three REITs by an average of 3.8 per cent. While we expect cash flow growth to remain robust through our forecast period, the run-up in unit prices has resulted in REITs trading close to, and in some cases above, our NAV [net asset value] estimates. Therefore, forecast total returns for REITs under coverage have declined from, on average, 28.3 per cent at the beginning of 2019 to 12.1 per cent currently. Forecast returns range from 63.2 per cent for Dream Unlimited Corp. to negative 3.8 per cent for Killam Apartment REIT."
Following a "significant run-up" in unit prices in 2019, the analysts noted their total return forecasts have "declined materially" for several REITs, and many are trading at a premium to their NAV estimates.
Accordingly, pointing to "more modest" near-term total returns, Mr. Rothschild downgraded his rating for four REITS to "hold" from "buy."
- Choice Properties Real Estate Investment Trust (CHP-UN-T) with a $13.50 target. The average on the Street is $13.74, according to Bloomberg data.
“Choice has had a strong start to 2019, generating year-to-date returns of 23.7 per cent, the highest of any retail REIT in our coverage universe,” he said. “Over time, we expect the REIT to post stable cash flow growth, underpinned by its long-term leases with Loblaws, with additional contributions to cash flow from completing large-scale development projects. Choice’s units currently trade at a 4.1-per-cent premium to our NAV estimate as compared to a discount of 2.5 per cent for its Canadian retail peers. Reflecting the strong performance from the units over the past three months, our total return forecast has declined from 19.3 per cent at the beginning of 2019 to 1.3 per cent currently.”
- Summit Industrial Income Real Estate Investment Trust (SMU.UN-T) with a $12 target, which exceeds the consensus by 32 cents.
“Summit currently trades at a 15.9-per-cent premium to our NAV estimate, above its industrial REIT peers which trade at a 3.4-per-cent premium,” he said. “Given the REIT’s unique exposure to the hot GTA and Montreal industrial markets, we believe a premium is justified. However, after a 27.3-per-cent year-to-date total return, Summit’s unit price is, in our view, fairly valued and we believe a HOLD rating is warranted.”
- Artis Real Estate Investment Trust (AX.UN-T) with a $11.50 target. The average is $11.91.
"Following the announcement of a new strategic plan which involved a 50-per-cent reduction in its distribution, Artis’ unit price declined 19.2 per cent between Nov. 1 and Dec. 30, 2018," he said. "With the units trading at a 27.7-per-cent discount to our NAV estimate and 38.8 per cent below IFRS, we upgraded Artis at the beginning of 2019. Approximately year-to-date, Artis has generated a total return of 21.8 per cent, and the units now trade 13.0 per cent below our NAV estimate. While this valuation appears compelling, we believe that the distribution cut will be an issue for retail investors for some time. With our target price implying a one-year total return of 8.4 per cent, we now rate Artis a HOLD."
- InterRent Real Estate Investment Trust (IIP.UN-T) with a $15 target. The average is $14.46.
“Following exceptionally strong performance in 2018, with a total return of 46.5 per cent, InterRent has maintained its momentum into 2019, returning 12.0 per cent year-to-date,” he said. “Fundamentals in InterRent’s core markets are exceptionally robust, and we expect this to translate to solid cash flow growth through over the next few years. While we remain bullish on the REIT’s prospects, we believe that the units are fairly valued at current levels. InterRent trades at an implied cap rate of 4.2 per cent and 31.8 times our 2020 AFFO [adjusted funds from operations] per unit estimate. Currently our target price for InterRent implies a one-year total return of 5.2 per cent and, therefore, we are reducing our rating.”
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Beacon Securities analyst Doug Cooper nearly doubled his target price for shares of Village Farms International Inc. (VFF-T) in the wake of Monday’s announcement that its 50-per-cent owned joint venture, Pure Sun Farms, has exercised its option on the existing 1.1 million square foot Delta 2 greenhouse facility in Delta, B.C.
"This will double the size of PSF’s footprint in Delta BC to 2.2 million square feet," said Mr. Cooper in a research note released late Monday. "We believe this catapults PSF to top-3 status in terms of scale of all of the Canadian LP’s in terms of domestic capacity. As a reminder, PSF also has an option on D1 (2.4 million SF), which is available until September 28, 2021. If that is optioned, we believe PSF will be the largest Canadian LP and could ultimately have 30-40-per-cent market share in Canada.
"In terms of total production, our recent site visit confirmed that PSF is currently on a 50-55,000 kilogram run-rate (making it one of, if not the largest Canadian producer right now) and the company announced that it expects to be on a 75,000-kilogram run-rate by Q3/FY19. As we have noted in the past, we believe such yield targets may prove to be conservative and are certainly much more conservative than other Canadian LPs yield forecasts. The addition of D2 will double its production capacity to 150,000+ kg. VFF indicated that construction should be complete in FY20 and the D2 should be at its target run-rate by Q4/FY20."
Maintaining a "buy" rating for Village Farm shares, Mr. Cooper hiked his target to $60 from $32. The average on the Street is $41.25.
"Upside still remains from its hemp business and the addition of D1," he said.
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Fearing an acceleration in China’s supply growth could diminish its pricing power, Credit Suisse analyst Curt Woodworth downgraded Alcoa Inc. (AA-N) to “neutral” from “outperform.”
"While we see LME aluminum prices near bottom, we are concerned about plans for accelerated smelter build out in China in 2020/2021 with 3.0 mt to be commissioned in 19 and 2.7 mt in 2020 (most via capacity swap trades)," he said. "The Alunorte restart/EGA Al Taweelah ramp should drive alumina sharply lower by 4Q-19. The rebalance of seaborne trade flows could cause prices to temporarily undershoot fair value and create difficult backdrop for LME to rally.
He added: "The vast majority of smelters outside of China sell premium casthouse products, not plain ingot. The casthouse margin uplift significantly alters the level of cash negative smelters with WoodMac noting 10-per-cent cash negative versus 40 per cent on ingot basis. Note AA reported $80 per tont of annual margin gain from 2010-2015."
Mr. Woodworth lowered his target for the stock to US$31 from US$40. The average on the Street is US$39.15.
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In the wake of the spin-off of Dow Inc. (DOW-N), Citi analyst P.J. Juvekar downgraded parent company DowDuPont Inc. (DWDP-N) to “neutral” from “buy.”
"We downgrade RemainCo DWDP to Neutral with a target price of $40/share, reflecting an ETR [expected total return] of 10 per cent (based on when-issued share price as of 4/1/19 close) which is an insufficient amount of upside to justify a Buy rating," he said.
"We update our DWDP Ag & Specialty Product segment EBITDA estimates to reflect the standalone costs expected to be incurred by Corteva (Ag) and DuPont (Specialty Products) following their planned separation on June 1st 2019. Our target EV/EBITDA multiples are 11.0 times and 12.0 times on Ag and Specialty Products respectively. Post separation, DuPont could unlock value through restructuring, asset sales or a RMT. Corteva has become a 'show me' story after a few disappointing quarters."
Mr. Juvekar lowered his target to US$40 from US$60. The average is now US$42.61.
"Following DWDP’s updated guidance, we reduce 1Q19 estimates by 5 cents per share (down 6 per cent) to 83 cents per share as PE prices were weaker than anticipated and wet weather in the U.S. Midwest region delayed pre-planting applications and product delivery to customers," he said. "In Ag, our 1Q EBITDA estimate declines to $757-million from $855-million prior (down 10 per cent). While our operating model includes Materials Co as it was still part of DWDP in 1Q19, our SOTP valuation excludes the Materials Science division which just spun off as Dow Inc. We value DuPont based on direct comparable peers in the industrial & specialty chemical sectors; while we value Corteva at a premium to FMC."
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Meanwhile, Credit Suisse analyst Chris Parkinson initiated coverage of Dow Inc. (DOW-N), which is set to debut on the New York Stocks Exchange on Tuesday, with an “outperform” rating, calling its risk-reward proposition “favorable enough.”
"We initiate on "new Dow" (DWDP spin #1) with a favorable thesis based on: (i) our belief cash flow generation will improve to 90 per cent of EBITDA (77-per-cent average '15-'17), representing an additional $1-billion in FCF; (ii) our expectation that plastics margins will steadily improve on stable global demand and 'balanced' new supply; (iii) healthy consumer-based product demand ex-auto (downstream silicones, etc.); and (iv) steady improvement in the II&I segment during 2H19 (off of a low 2H18 base)," he said. "We anticipate 1H19 'headline' risk due to trade noise and Euro macro stagnation, but believe DOW's $2.81 per share dividend and $3-billion buy-back should limit downside risk until 2H conditions improve. In the LT, we anticipate improving execution (vs. historical precedent), refined disclosure, and disciplined cap deployment are cause for enthusiasm."
Mr. Parkinson set a US$62 target.
"DOW's diversified portfolio across its three segments, Performance Materials & Coatings, Industrial Intermediates & Infrastructure and Packaging & Specialty Plastics should mitigate downside risk vs. peers, while offering ample opportunity to outperform over the cycle, all while improving cash conversion," he said. "This supports a valuation level at the high end of the comp group, equating to 7.0 times our 2020 EBITDA estimate and a 4.5-per-cent div yield."
Calling it an “undervalued cash cow with cyclical upside,” Citi analyst P.J. Juvekar initiated coverage with a “buy” rating and US$67 target.
“Downside risk is limited as shares have been adequately priced for an expected downturn in the ethylene cycle, in our view; at 5.3 times EV/EBITDA (fiscal 2020 estimates)," he said, "Dow trades at 19-per-cent discount to peers. We see integrated PE margins bottoming out at 25c/lb in 2H19 (30c/lb today) before recovering in early 2020. However, despite cyclical margin pressure in the near term, self-help levers should drive $3.5-billion of FCF upside by 2020 to $5-billion. Technical selling of Dow shares by some of DWDP’s shareholders that don’t want commodity exposure could allow investors to pick up this high-quality name below intrinsic value.”
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Raymond James analyst Daryl Swetlishoff recommends investors add to positions in Canadian forest products companies, noting “building materials share values are highly correlated with spot commodity moves and are currently trading at cycle lows.”
“Despite quarter-to-date Canadian lumber shipments running in line with last year’s depressed levels, in hospitable 1Q19 building conditions have constrained demand leading to subdued markets,” said Mr. Swetlishoff. "In response, we have reduced our 2019 benchmark SPF lumber price forecast by 5 per cent to US$420 per thousand board feet (mfbm). We are also introducing 2020 estimates based on the same US$420/mfbm SPF lumber forecast.
“The downward revisions results in lower target prices across our universe. We note that last year, very high 1Q18 excess demand levels presaged the 2Q18 WSPF benchmark all time price spike. This year despite weaker housing activity, we still forecast 1Q19 excess demand exceeding 10 per cent, which we expect to translate into higher 2Q19 lumber prices. With stocks languishing near trough levels we advocate adding to positions.”
Mr. Swetlishoff lowered his target for the following stocks:
Canfor Corp. (CFP-T, “strong buy”) to $22 from $25. Average: $20.92.
Canfor Pulp Products Inc. (CFX-T, “outperform”) to $22 from $25. Average: $20.25.
Conifex Timber Inc. (CFF-T, “outperform”) to $2.50 from $4. Average: $2.25.
Interfor Corp. (IFP-T, “strong buy”) to $21 from $24. Average: $20.20.
Mercer International Inc. (MERC-Q, “strong buy”) to US$23 from US$25. Average: US$23.20.
Norbord Inc. (OSB-T, “outperform”) to $45 from $51. Average: $42.06.
Western Forest Products Inc. (WEF-T, “outperform”) to $2.40 from $2.60. Average: $2.41.
West Fraser Timber Co. Ltd. (WFT-T, “strong buy”) to $84 from $94. Average: $77.33.
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Ahead of Wednesday’s release of its fourth-quarter financial results, Canaccord Genuity analyst Camilo Lyon lowered his earnings expectation for Roots Corp. (ROOT-T), expecting a “soft finish” to fiscal 2018.
Mr. Lyon is now projecting earnings per share of 46 cents for the key holiday period, falling from 51 cents, which is the current consensus on the Street.
“Our new EPS estimate calls for a comp decline of 2 per cent (down from flat) and modest gross margin expansion of 17 basis points (down from up 70 bps),” he said.
“Our revised outlook is based on a combination of factors. First, a shift in timing of shipments in the partner business to Q3 from Q4, likely resulted in a year-over-year decline in Q4 (down an estimated 15 per cent). Second, given weak Q3 sales, the company carried excess inventory into Q4. While ROOT has moderated its forward receipts, we witnessed incremental markdowns on seasonal product, likely pressuring gross margin. Third, last year’s Q4 was comprised of 13 weeks (vs. 12 weeks this year), with the extra week creating a $3-million sales and gross margin headwind this year. All these factors coupled with a tough comp comparison (up 15 per cent) likely resulted in a y/y comp decline with flat to modest gross margin expansion. That said, despite our moderated Q4 outlook, we believe the company could speak to a stabilization of trends as we head into F19.”
Though he lowered his target for Roots shares to $5 from $6, versus a $5.44 consensus, Mr. Lyon expressed optimism for a rebound in fiscal 2019.
“In our view F18 was a reset year for ROOT as a number of transitory factors negatively impacted F18, including (1) the Canada 150 comparison that posed significant traffic headwinds, (2) a lack of transitional product and over-reliance on cold weather gear and sweats, and (3) marketing missteps in Q3 that resulted in a weaker overall brand voice,” he said. “While the company’s performance was disappointing last year, we believe management is taking corrective measures to reignite comp growth in F19. That said, the company needs to show stabilization and consistency in demand trends before valuation multiples can rerate higher, factors that likely take at least two quarters to play out.”
Mr. Lyon kept a “buy” rating for the stock.
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Largo Resources Ltd. (LGO-T) currently offers investors a “compelling” risk-reward, said CIBC World Markets analyst Bryce Adams, who initiated coverage of the Toronto-based mineral company, which he calls “one of the few pure plays on vanadium markets,” with an “outperformer” rating.
“Largo Resources is focused on the primary production of vanadium flake, high purity vanadium flake, and high purity vanadium powder at the Maracás Menchen mine located in Bahia State, Brazil,” he said. “Largo is one of only three large-scale primary vanadium producers in the world. Key attributes are 1) high purity product and 2) low cost profile. Largo is one of only a few vanadium producers that can supply high-purity specialty markets.”
He set a $4 target, which exceeds the consensus of 27 cents.
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The Street took a largely bullish stance on Lightspeed POS Inc. (LSPD-T) after initiating coverage of the stock on Tuesday.
Calling its valuation “attractive," CIBC World Markets’ Todd Coupland gave the Montreal-based software firm an “outperformer” rating and $26.
“We believe Lightspeed’s shares should be purchased,” he said.
“Lightspeed trades at 8 times our conservative fiscal 2021 estimated revenue. Peers trade at 10 times. Our forecast assumes only 7 per cent of customer locations adopt payments. We expect full potential of 50 per cent to be reached in a few years.”
Elsewhere, believing it plays in a point-of-sale market that is “ripe for disruption" and calling its platform “differentiated,” National Bank Financial’s Richard Tse set a $25 target with an “outperform” rating.
BMO’s Thanos Moschopoulos also gave the stock an “outperform” rating with $25 target, while JPMorgan’s Tien-tsin Huang pegged it a “neutral” with a $22 target.
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In other analyst actions:
Scotiabank analyst Ovais Habib upgraded Kirkland Lake Gold Ltd. (KL-T) to “sector outperform” from “sector perform” with a $50 target, which falls short of the consensus of $51.76.
GMP analyst Steven Butler also upgraded Kirkland Lake to “buy” from “hold” with a target of $51.75.
Scotiabank’s Trevor Turnbull downgraded Guyana Goldfields Inc. (GUY-T) to “sector perform” from “sector outperform” with a $1.50 target, down from $1.75 and below the $2.08 consensus.
Mr. Turnbull also lowered SSR Mining Inc. (SSRM-Q, SSRM-T) to “sector perform” from “sector outperform” with a US$12 target, down from US$13. Consensus is US$15.60.
Eight Capital analyst Ian Macqueen downgraded Frontera Energy Corp. (FEC-T) to “neutral” from “buy” with a $14.50 target, down from $21. The average is now $15.33.
Tudor Pickering & Co analyst Matthew Taylor initiated coverage of Keyera Corp. (KEY-T) with a “buy” rating and $37 target, which falls 47 cents below the consensus on the Street.
David Leeder