Inside the Market’s roundup of some of today’s key analyst actions
Though lumber prices are rising in reaction to recent mill closures, CIBC World Markets analyst Hamir Patel said stocks in the sector continue to trade at a “steep discount.”
“While we will hold off revising our commodity deck again until after the second quarter concludes, our W. SPF forecast of $370 per thousand board feet in 2020 is looking overly conservative in light of the accelerated pace of capacity curtailments in the West," he said. “We are now tracking 1.7 billion board feet per year of permanent North American capacity curtailments since the start of 2019, with another 1.8 Bbf per year of temporary curtailments in effect over the second quarter. This represents 6 per cent of LTM [last 12-month] NA production (61.7 Bbf).”
That led him to raise his rating for a trio of companies:
West Fraser Timber Co. Ltd. (WFT-T) to “outperformer” from “neutral” with a target price of $73, rising from $62. The average target on the Street is $72.63, according to Bloomberg data.
Canfor Corp. (CFP-T) to “outperformer” from “neutral” with a $14 target, up from $11 but below the consensus of $17.44.
Resolute Forest Products Inc. (RFP-T) to “outperformer” from “neutral” with a $9 target, which falls 15 cents short of the consensus.
“While LumberCo share prices have moved sharply higher since Canfor’s large 200 million board foot temporary curtailment announcement a week ago (CFP +23%, IFP +16% and WFT +13%), we note that the stocks are all still trading at steep discounts to replacement value, with Canfor trading at only $175 per thousand board feet of capacity (valuing CFX at market and VIDA at transaction value), Interfor at $280 and West Fraser at $415 (vs. greenfield costs of over $600/mfbm),” he said.
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Fortis Inc. (FTS-T) remains the “premium Canadian utility name,” said Industrial Alliance Securities analyst Jeremy Rosenfield following a series of recent investor meetings with the company.
“FTS remains the largest Canadian publicly listed utility, with more than $50-billion of regulated electric and gas transmission and distribution assets, as well as gas infrastructure in North America,” he said. “The company’s platform of nearly 100-per-cent regulated assets offers shareholders stable earnings and cash flows.”
Mr. Rosenfield said the St. John's-based utility continues to offer “solid” mid-single digit growth, driven by organic investment in U.S. utilities. He expects its five-year capital plan to be rolled forward at its coming Investor Day in September, and said Fortis is likely to continue to see 6 per cent year five-year rate base growth.
“FTS continues to execute its current $17.3-billion five-year organic capital investment plan (2019-23), which includes major investments within ITC ($4.5-billion) , and UNS ($3.5-billion). At 65-70 per cent of earnings and 55 per cet of total forecast investment, the U.S. regulated utilities represent the main drivers of the Company’s growth, including average annual rate base growth of 6-7 per cent through 2023, supporting 6 per cent per year dividend growth over the same period. We expect that FTS’s organic investments will translate into 5-7-per-cent average annual EPS growth over the forecast period (CAGR 2018-23), and that this forecast should remain roughly unchanged when the Company rolls forward its capital plan later this year (September). We continue to see further potential upside to the base capital plan, mainly from $3-4-billion of longer-term opportunities.”
“Investors take note: FTS’s valuation discount to U.S. peers remains open. FTS continues to trade at a slight relative valuation discount compared with U.S. regulated utility peers (1-2 times on forward P/E). The current discount continues to misprice FTS’s U.S. exposure and its highly regulated earnings profile, in our view.”
Mr. Rosenfield continues to rate Fortis a “buy” and increased his target price for its stock to $55 from $52. The average target on the Street is $53.
“FTS continues to trade at a slight relative valuation discount compared with U.S. regulated utility peers (an average FY3E P/E of 18 times, which represents an 1-2-times discount to comparable U.S. peers),” he said. “The current discount has closed somewhat, but continues to ignore (1) FTS’s exposure to US regulated businesses (65-70 per cent of earnings, with strong regulatory fundamentals and growth outlooks), and (2) FTS’s highly regulated, stable earnings profile (~100%). We would expect the valuation gap to continue to shrink over the medium term, given (1) the supportive underlying macroeconomic environment in North America (low interest rates, unlikely to rise in the near term5 ), and (2) further growth at FTS’s U.S. utility investments. We continue to see FTS as a high-quality, low-risk defensive utility play for long-term investors looking for stable income and sustainable growth.”
He added: “We continue to view FTS as a defensive utility and power growth play, with (1) stable earnings from a portfolio of regulated utility investments (100 per cent of earnings), (2) healthy long-term EPS growth (5-7 per cent per year, CAGR 2018-23 estimate), driven by more than $17-billion of organic rate base investment, (3) solid dividend growth (6 per cent per year through 2023), and (4) potential upside from longer-term regulated utility and non-regulated energy infrastructure investment opportunities (e.g., the Lake Erie Connector, and other projects).”
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Xebec Adsorption Inc. (XBC.X) is a “focused provider serving the whole RNG [renewable natural gas] stack,” said H.C. Wainwright analyst Amit Dayal.
Believing it is “benefiting from the growing adoption of renewable natural gas and is now positioned as a full stack solution provider offering system sales, infrastructure build out, and support services,” Mr. Dayal initiated coverage with a Blainville, Que.-based company with a “buy” rating.
He thinks the company’s growth momentum is reflected in a backlog building.
“Xeebec grew revenues by 37.0 per cent in 2018, and management’s guidance is calling fora further 122.7-per-cent growth in revenues in 2019 to $45.0-million,” the analyst said. "This grow this coming from several contract wins during the last fifteen months,including a minimum order commitment worth $51.0-million from Italy’s Sapio Group for multiple biogas plant upgrades over three years. These project wins have led to a significant buildup in backlog to approximately $71.9-million as of May 27, 2019, from $13.9-million as of April 23, 2018.
“We believe the company is positioned to benefit from several near-term catalysts that include (and are discussed in more detail in the note): (1) largest-yet landfill project wins, expected to materialize before end of 2019; (2) announcement for the first RNG infrastructure build expected imminently; and (3) closing of two acquisitions in 2019. We believe that the improvements in the company’s revenue and balance sheet, supported by the C$10M capitalr aise on June 11, 2019, have created a fundamental shift in its ability to pursue larger projects, going from only providing core plant technology previously to full system deployments now.”
He set a target of $3 per share. The average is currently $2.36.
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Precision Drilling Corp. (PD-T) is “keeping the cash flow machine humming,” said RBC Dominion Securities analyst Kurt Hallead in a research note released Tuesday.
"We think investors will likely continue to applaud its debt reduction efforts, be favorably disposed to its growth ambitions in the U.S. and intrigued by the deployment of land drilling software, algorithms and automation technology," he said.
Mr. Hallead sees "modest" activity improvement in Canada, though he expects a drag on E&P spending and drilling activity to continue through 2019, pointing to egress issues and wide oil differentials.
However, he continues to see limited visibility south of the border beyond June, calling the outlook for the second half of the year "murky."
Pointing to a lower U.S. rig count growth and frac assumptions, he reduced his 2019 and 2020 EBITDA estimates to $395-million and $495-million, respectively, from $412-million and $550-million.
He maintained an "outperform" rating and $7 target for Precision Drilling shares. The average is currently $4.63.
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Citing a smaller projected rig count, Industrial Alliance Securities analyst Elias Foscolos lowered his financial expectations and target price for shares of Strad Inc. (SDY-T) in the wake of the release of largely in-line first-quarter financial results.
"We have fine-tuned our model and incorporated lower rig counts into 2020 for both Canada and the U.S.," he said. "Additionally, we have slowed our long-term projection for matting growth, and are targeting 180,000 mats by mid-2021 instead of year-end 2020. An announcement of a TMX contract would add upside, likely through higher margins."
Feeling the Calgary-based drilling company is a likely beneficiary of Trans Mountain Expansion (TMX) pipeline expansion, Mr. Foscolos added: "While no contract has been specifically announced, there are only two companies, of which SDY is one, that have the depth and scope to provide the quantity of mats that would be required."
After lowering his financial expectations for both 2019 and 2020, Mr. Foscolos shrunk his target to $2.50 from $2.60, keeping a "buy" rating. The average is $2.75.
"Due to Strad’s diversified product mix, the decrease in drilling activity has a minor impact on our current projections," he said. "Heading into Q2/19, we see the combination of lower rig counts and lower utilization, due to mat builds in anticipation of the TMX expansion, compressing margins and reducing revenue."
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Calling it “thermal with a shale tilt,” RBC Dominion Securities analyst Luke Davis initiated coverage of Athabasca Oil Corp. (ATH-T) with a “sector perform” rating on Tuesday.
“Athabasca's portfolio is resoundingly thermal weighted, supporting decades of potential reserve life, though we do not see expansion potential until WTI pricing is well above the US$60/bbl mark,” he said. “The shale business is divided between the non-operated Kaybob Duvernay and the operated Placid Montney, the latter of which we view as best suited to complement the portfolio but remains undercapitalized in the current environment. In our view, a bilateral swap with the company's JV partner, Murphy, could be mutually beneficial.
“Strong liquidity provides near-term buffer but cost structure and volatility in underlying cash flow stream obscure sustainability metrics. Athabasca's business is capital intensive in nature with the company exhibiting a higher than average cost structure relative to oil-weighted peers (2019E cash costs of $24/boe vs peers at $19/boe). The stock screens weaker than peers from a sustainability perspective, particularly in the context of current futures pricing.”
Mr. Davis said the company currently sits on “strong footing in the context of volatile oil prices,” pointing to its commitment to improving corporate costs, including recent expense reductions, and “strong” liquidity.
However, he thinks both non-discretionary and maintenance capital requirements will limit growth potential “until pricing stability and clarity on egress returns,” leading to his neutral stance on the stock.
“We could become more bullish with continued improvement of the corporate cost structure, reduced volatility in the underlying cash flow stream and a consistent effort to allocate FCF to the light oil business, increasing its scale and corporate contribution,” the analyst said.
Mr. Davis set a $1.15 target for the stock, which sits below the average of $1.49.
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Asanko Gold Inc.'s (AKG-T) underperformance versus its peers presents investors with a buying opportunity, according to H.C. Wainwright analyst Heiko Ihle, who initiated coverage with a “buy” rating.
“Over the past year, Asanko’s stock has fallen from a 52-week high of $1.14 per share that was reached during July 2018 to a closing price of $0.52 on June 17, 2019, for a 54-per-cent decline," the analyst said. "We note that Van Eck’s Junior Gold Miners ETF (GDXJ) declined about 3 per cent over the same time period. We attribute the share price decline to the street not fully appreciating the success of limiting capital expenditures and thereby maximizing future cash flow from the asset base. We further note some perceived residual overhang from the Gold Fields investment that perceived to limit the ultimate upside potential of the company share price given the large-scale dilution.”
Mr. Ihle pointed to progress the Asanko Gold Mine in southern Ghana, which it holds a 45-per-cent economic interest in after entering into a joint venture agreement with “strong partner” Gold Fields Ltd., as a sign of visibility for the future.
“We believe the firm’s share price is on the verge of stabilizing and project the potential for continued operational stability amid improving recognition of the value from the AGM,” he said. “While we acknowledge that exploration is often paired with significant speculation, we view the concentration of known deposits within the AGM as a demonstration of the economic potential amid a promising geologic setting. In short, we expect Asanko to continue rolling additional reserves into production as its geographical location embodies the prolific nature of the West African gold belts and for the asset to continue producing in the long-term.”
He set a $1.60 target price. The average on the Street is $1.79.
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In other analyst actions:
Citing recent share price weakness, TD Securities analyst Vince Valentini upgraded BCE Inc. (BCE-T) to “buy” from “hold” with a $63 target. The average on the Street is $61.62.
Mr. Valentini said near-term uncertainty about average revenue per user (ARPU) is more than offset by mid-to-long term benefits of customers using more data.
With a file from Reuters
David Leeder