Inside the Market’s roundup of some of today’s key analyst actions
Strong property fundamentals, particularly in Ontario, will likely continue to have a “positive impact” on Canadian real estate companies, said Desjardins Securities analyst Michael Markidis, who said he’s most bullish on the operating environments for multifamily and industrial real estate investment trusts.
“As of Friday’s (May 24) market close, the S&P/TSX Capped REIT Index generated a year-to-date total return of 15.3 per cent,” said Mr. Markidis in a research report released Tuesday. “By comparison, the broader Canadian market (as measured by the S&P/TSX Composite) is up 14.6 per cent; the total return for U.S. REITs (MSCI U.S. REIT Index) was 18.5 per cent. In our initial 2019 outlook (published Dec. 18, 2018), we highlighted Allied Properties REIT, Killam Apartment REIT and Dream Industrial REIT as our best ideas. Year-to-date total returns for DIR (26.0 per cent) and KMP (21.1 per cent) have handily exceeded the S&P/TSX Capped REIT Index; AP (12.5 per cent) has lagged slightly. The simple average for all three picks is 19.9 per cent.
“In terms of performance themes, we note that the three REITs sponsored by a major retailer (CRT, CRR and CHP) have rebounded strongly following relatively disappointing performances in 2018. At the other end of the spectrum, the three REITs with significant exposure to Ontario multifamily properties (MI, IIP and CAR) have, to varying degrees, lagged the REIT index in the year to date. Perhaps this reflects an element of performance fatigue, as each generated top-quartile total returns last year. “
In the note, Mr. Markidis raised his rating for Summit Industrial Income REIT (SMU-UN-T) to “buy” from “hold.”
“We initiated coverage of SMU with a Hold rating a little more than a year ago. Clearly this was the wrong call, as the unit price has appreciated by 50 per cent since,” he said. “So, what do we see now that we did not like more than four dollars ago? First, we are more bullish on industrial fundamentals in SMU’s two largest markets (Toronto and Montréal). We believe this asset base will benefit from continued rent growth and cap-rate compression going forward (refer to key theme 5 below). Second, the REIT recently internalized its management platform; investors should benefit more fully from future economies of scale and a perceived impediment to a potential takeout has been eliminated. Moreover, we appreciate the significant ownership position of management and insiders (more than 12 per cent in aggregate).
“Valuation is the key risk (and likely the single biggest area of pushback that we get from investors) to our call. Our revised target of $13.50 (was $12.50) represents a 4.4-per-cent implied cap rate. This may seem aggressive in the Canadian context; however, we point to Terreno and Rexford, two NYSE-listed industrial REITs that, by our estimates, trade at implied cap rates of 4.1–4.2 per cent.”
Mr. Markidis’s new target of $13.50 exceeds the consensus target on the Street of $12.64, according to Bloomberg data.
He also made the following target price revisions:
Canadian Apartment Properties Real Estate Investment Trust (CAR-UN-T, “hold”) to $53 from $51. Average: $52.17.
Dream Industrial Real Estate Investment Trust (DIR-UN-T, “buy”) to $12.50 from $12. Average: $12.38.
InterRent Real Estate Investment Trust (IIP-UN-T, “buy”) to $15.50 from $15. Average: $14.68.
Minto Apartment REIT (MI-UN-T, “buy”) to $22 from $21.50. Average: $22.17.
Mr. Markidis said: “Our best ideas incorporate our views on property fundamentals, recent stock performance and relative valuation. In late December, this list included AP, KMP and DIR … we are replacing AP and KMP with IIP and MI. We believe this move is appropriate given (1) our belief in the underlying strength of apartment fundamentals in Ontario, and (2) both IIP and MI have lagged in the year to date.”
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In response to weaker-than-anticipated first-quarter financial results, Mackie Research analyst Andre Uddin downgraded Medicure Inc. (MPH-X) to “hold” from “buy.”
“MPH has been trading sideways for the past two years - after the company sold its Apicore business in October 2017,” he said. “We expect the trend to continue until MPH’s profitability (cash flow) starts improving. With $3.58 cash/share, downside risk of MPH should be limited.”
On Monday after the bell, the Winnipeg-based pharmaceuticals company reported revenue for the quarter of $4.9-million, missing Mr. Uddin’s $7.3-million forecast and dipping from $6.1-million during the same period a year ago. Adjusted EBITDA and earnings per share losses of $1.7-million and 18 cents, respectively, also missed the analyst’s projections (gains of $0.4-million and 1 cent).
“We still view Zypitamag as MPH’s key long-term growth driver – however, the sales growth is slow at this stage due to lack of sufficient reimbursement,” he said. “ In Q1, MPH recorded irrelevant Zypitamag revenues vs. our estimate of $0.6-million. We expect Zypitamag sales to start ramping up in later 2019 as more payors cover the drug. We are once again lowering our sales outlook for Zypitamag.
“Aggrastat sales in Q1 were $4.9-million – lower than our estimate of $6.1-million. Although Aggrastat’s Rx volume may continue to grow if the sNDA is approved, we believe sales of this drug should have peaked as it is facing intensive pricing pressure from 6-7 marketed generic Integrilin. We expect Aggrastat sales to decrease going forward relative to the levels of 2018.”
Mr. Uddin dropped his target price for Medicure shares to $7.60 from $6.50. The average on the Street is $9.05.
“MPH has a stronger balance sheet than the majority of Canadian specialty pharma companies,” the analyst said. “Therefore, we believe MPH should be in a good position to conduct additional BD transactions, which would further diversify the company’s revenue base. Management previously stated they are still looking for low-risk, low-cost products.”
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Pointing to its “strong record” of organic growth and M&A activity, BMO Nesbitt Burns analyst Peter Sklar initiated coverage of Parkland Fuel Corp. (PKI-T) with an “outperform” rating.
“We believe Parkland’s current management team has the ability and expertise to pursue additional significant, value creating acquisitions, similar to its international expansion with SOL (Caribbean acquisition),” he said.
“In addition, we believe the company’s Canadian retail business will maintain strong same-store sales comps due to the On the Run/Marché Express conversions, Parkland’s private label program, and benefits from its loyalty program.”
Mr. Sklar set a $50 target, which tops the consensus of $48.80.
“We note that Parkland’s stock performance may be impacted by the volatility of the crack spread, management’s ability to generate synergies, and the long-term secular concern of vehicle electrification,” the analyst said.
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Emphasizing “C-Suite departures aren’t generally signals of good things to come,” Raymond James analyst Andrew Bradford expressed concern about the path forward for Enerflex Ltd. (EFX-T) following the departure of chief financial officer James Harbilas and retirement of chief executive officer Blair Goertzen.
“Here’s a well-tested fundamental truth of investing: well-incentivized C-suite executives don’t generally retire, resign, or otherwise gracefully depart just before things are about to improve,” said Mr. Bradford. “The opposite is far more often the case; and we think so here as well.
“In short, while we don't believe James Harbilas' and/or Blair Goertzen's departures signal any inside knowledge concerning Enerflex's future, we do think their departures coincide with a well-advertized and heavily-discussed decline in Canadian and U.S. bookings. Our analysis suggests this decline could have implications for several quarters to come. In addition, with all respect due to current and interim management, they have substantially big shoes to fill. Succinctly, it's unlikely Enerflex will be a better investment now that Blair Goertzen and James Harbilas have moved on.”
Though he said the departures “don’t signal anything about Enerflex’s outlook (at least anything beyond what has already been disclosed),” Mr. Bradford added: “It’s perfectly valid for investors to wonder about or assign elevated risk for any company whose CEO and CFO departed within months of each other. After all, we can’t recall any major C-suite departure as precursors to material upward economic improvements. However, we highly doubt either departure signals anything about the outlook for Enerflex’s operations - at least not beyond what has already been disclosed. So what has been disclosed? Aside from the changes in the C-suite, the most notable change was the 83-per-cent sequential drop in 1Q bookings to $118-million (in truth, closer to $143-million after correcting for Fx’s impact on the backlog). It’s true that Enerflex’s backlog is a very robust $1.2-billion, which we suspect will help propel near-term Engineered Systems (ES) revenue into record territory for the next 2-3 quarters at least. But we also expect bookings won’t be keeping pace with ES revenues; the adjusted book-to-build was just 40 per cent in 1Q and we expect about 50% for 2Q - levels which haven’t historically been constructive for EFX stock.”
Keeping an “outperform” rating for Enerflex shares, he lowered his target to $22.50 from $24. The average is currently $23.33.
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Tamarack Valley Energy Ltd. (TVE-T) “broke a psychological barrier” this spring by drilling the industry’s first three-mile long lateral, according to Raymond James analyst Jeremy McCrea.
“At this time, it was difficult to know risks associated with drilling at this length, especially within a theme of operators moving away from longer lateral wells,” he said. “We caught up with management to get further clarity on the performance expectations and more importantly, costs for these wells. Ultimately, like we’ve saw with TVE’s 2.5-mile lateral wells that came on production last summer, production in the first few months can be somewhat muted given well clean-up and liquids drawdown in various sections of the well (i.e., a 1 mile well can be expected to peak in its first month, a 2-mile well to peak in month 2, etc). Per management,these 3-mile wells have shown IP90 rates at 190 bbls/d (250 barrels of oil equivalent per day including NGLs) with a decline profile one of the shallowest in the company’s Cardium history. Importantly, these are ‘calendar day’ rates (vs. ‘producing day’) so naturally these rates are higher if days were excluded for well downtime.”
“Ultimately, cost data is equally as important as production and we believe there is a disconnect on what these 3-mile long laterals actually cost vs. investor heuristics. With ever-improving drilling designs (top drive), and full utilization of new technology, TVE was able to drill at ROP of 50m/hr in the last mile vs. prior systems that would slow to 20m/hr. Although management wished to keep some new technological processes quiet for now given competitive purposes, drilling costs were effectively similar to that of 2.0 mile. Overall, total D&C costs were $3.2-million for these 3-mile long lateral wells. With management suggesting economics have improved ina similar step-change from that of a 2-mile from 1-mile, longer-term production results from these wells should help change perception on what is possible once again for industry and Tamarack.”
Seeing the potential for “meaningful” spending increases later this year as mandatory curtailments in Alberta are lifted, Mr. McCrea raised his target for Tamarack Valley to $5 from $4.75, keeping a “strong buy” rating. The average on the Street is $4.44.
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In other analyst actions:
Eight Capital initiated coverage of Fire & Flower Holdings Corp. (FAF-X) with a “buy” rating and $2.75 target. The average on the Street is $2.80.
The firm also initiated coverage of Westleaf Inc. (WL-X) with a “buy” rating and $1.10 target.
David Leeder