Inside the Market’s roundup of some of today’s key analyst actions
Following Monday’s release of second-quarter results that fell short of expectations on the Street, Canaccord Genuity analyst Dennis Fong thinks Vermilion Energy Inc.'s (VET-T) capex budget needs to be “moderated” in order to fund a full normal course issuer bid (NCIB) or substantial de-levering.
Before the bell, Vermilion reported quarterly production of 103,003 barrels of oil equivalent per day, falling in-line with the consensus expectation on the Street of 103,767 boe/d. Cash flow per share of $1.42 missed the $1.52 projection of both Mr. Fong and the Street, which he attributed to a third-party refinery outage in France, lower liftings from Australia and weaker Canadian liquids and natural gas pricing.
With the results, Vermilion announced its board has authorized a NCIB for a maximum amount of 5 per cent of the issued and outstanding shares.
“We estimate Vermilion will show $7-million of free cash flow after its capex and dividend on strip pricing,” said Mr. Fong. "If the company splits this between debt repayment and the NCIB, it implies only 0.2 per cent of shares to be repurchased and for no change to the company’s leverage ($2.0-billion of net debt).
“For a more material implementation of either the NCIB or de-levering, we believe the company would need to adjust its capital program lower to $430-million (our estimate of sustaining capex). This would allow the company to repay $135-million of net debt or repurchase up to 4 per cent of its outstanding stock on strip pricing while keeping production relatively flat. In a scenario where capex was maintained at ~$430 million for two years, we believe Vermilion could repay $270-million of debt and lower D/CF [debt to cash flow] to 1.7 time (from 2.2 times currently) on strip.”
In response to the results, Mr. Fong lowered his CFPS estimate for 2019 by 3 per cent to $6.13 from $6.33.
His target for Vermilion shares declined to $40 from $45, which exceeds the current average target on the Street of $34.03.
“We are maintaining our BUY recommendation; but lowering our price target to $40.00 (from $45.00) which is now based on a 0.9 times (down from 1.0 times) multiple to our contingent net asset value (CNAV) estimate of $44.01 per share,” the analyst said. “The lower multiple to our CNAV is based on the increased risk associated with the above-average leverage and the lower flexibility in the 2019 capital program.”
Meanwhile, CIBC World Markets’ Dave Popowich lowered his target to $35 from $32.50 with an “outperformer” rating.
Mr. Popowich said: “We have been fans of Vermilion’s business model since launching coverage on the company in mid-2016. Having bypassed some of the pipeline bottlenecks that impact pure Canadian producers, Vermilion consistently ranks among the highest netback producers in our coverage universe, which pairs well with a relatively manageable decline profile. However, rising financial leverage is increasingly becoming a key risk to the stock’s valuation, which remains rich in comparison to its peers. We reiterate our Outperformer rating, although our conviction has decreased somewhat following Q2/19 results.”
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Acumen Capital analyst Nick Corcoran upgraded his rating for Diamond Estates Wines and Spirits Inc. (DWS-X) in the wake of Monday’s announcement that Lassonde Industries Inc. (LAS.A-T) has taken a 19.9-per-cent stake in the Niagara-on-the-Lake-based company.
Lassonde, a food and beverage maker, purchased 36.9 million shares of Diamond Estates at 19 cents each for gross proceeds of $7.0-million, which will be used to support of its growth strategies, including the expansion of sales volumes in the its Ontario grocery channel and the development of a new winery in British Columbia’s Okanagan Valley.
“We view the strategic partnership with LAS.A as positive,” said Mr. Corcoran. “The partnership addresses our previous concerns related to 1) whether DWS can return to growth in FY/20, and 2) how DWS will move back onside its debt covenants. LAS.A’s national reach is expected to drive growth in the grocery channel starting in Q2/FY20 (quarter ended September 30, 2020) and the private placement places DWS back onside of its debt covenants.”
Pointing to his improved outlook for Diamond Estates, he moved the stock to “speculative buy” from “hold” with a target of 25 cents, up from 20 cents. The average on the Street is 30 cents.
“We believe that as DWS grows in scale through organic growth and acquisitions that it has the potential to trade in line with the peer group,” the analyst said.
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Despite continuing to suffer from the impact of the trade dispute between the United States and China, Acumen Capital analyst Jim Byrne raised his target price for units of Richards Packaging Income Fund (RPI-UN-T) in reaction to better-than-anticipated second-quarter financial results.
On Monday after the bell, the Mississauga-based company reported revenue of $85.5-million and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $12.3-million. Both exceeded Mr. Byrne’s expectations ($83.5-million and $12.1-million).
“Management indicated they lost a large customer (US$4-million per year) in the food and beverage segment due to the US-China tariff increases. In addition, the company lost a customer (C$4-million per year) due to consolidation,” said the analyst. "The food and beverage segment results were down $0.9-million (2.8 per cent) in the quarter, as those lost customers negatively impacted Q2 by $2.4-million, which was partially offset by organic growth of $1.5-million.
“Growth in healthcare and cosmetics packaging continue to drive organic growth for RPI. Cosmetics packaging was up 16.1 per cent quarter-over-quarter, as growth in RPI’s large customers contributed 4.0 per cent along with new customers adding 3.0 per cent to the top line growth. RPI converted some inventory to take advantage of demand outside of their customer base, which resulted in an additional $1.1-million in sales in the quarter. Healthcare packaging increased $0.9-million in total, $0.3-million organically. The growth rate in healthcare slowed somewhat from 2018 levels mainly due to the threat of a slowdown in spending in Ontario.”
With the results, Mr. Byrne raised his 2019 revenue projection marginally to $336.3-million from $335.2-million, while he lowered his EBITDA estimate to $48.8-million from $49-million.
Keeping a “buy” rating for the stock, he hiked his target to $50 from $44, which is the current consensus.
“We believe RPI units are attractively valued given the company’s strong balance sheet, low payout ratio, and higher than average growth,” he said. “With an estimated payout ratio of 50 per cent in 2019, and 42 per cent in 2020, we believe there is ample room for an increased distribution sometime in the next 12 months. Management has indicated they are waiting for clarity on the Chinese tariff issues before raising the distribution.”
He added: “We believe the units will react favourably to any resolution to the U.S.-China trade dispute.”
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Despite a recent share price rise for Canadian Alt-A mortgage lenders, valuations remain “attractive” by historic standards, according to CIBC World Markets analyst Marco Giurleo.
In a research note previewing second-quarter earnings season, he also emphasized “sentiment towards the space continues to improve,” pointing the 55-per-cent jump for Home Capital Group Inc. (HCG-T) thus far in 2019 and 34-per-cent rise for Equitable Group Inc. (EQB-T). Both exceed the performance of TSX Financials index during the same period, which has risen 14 per cent.
“While there has been little in the way of company-specific news to fuel the recent runup in share prices, the one key area that has provided consistent positive news flow throughout the year has been the rebound in GTA housing,” said Mr. Giurleo. "GTA home sales are rebounding off depressed year-ago levels and home prices are up 5 per cent in the last five months. With over 75 per cent of EQB’s and HCG’s residential mortgage exposure in the GTA, these positive data points provide a strong backdrop for mortgage growth in 2019.
“On the margin front, the recent fall-off in GIC rates (down an average of 44 basis points year-to-date) should support margin expansion through 2019, and with respect to credit quality, we anticipate the environment will remain benign, underpinned by continued employment gains in Ontario. That said, while we have yet to see any meaningful signs of credit deterioration, with the economy showing signs of slowing we anticipate loss rates will gradually migrate higher through our forecast period.”
Mr. Giurleo raised his target for Home Capital shares to $23 from $19, keeping a “neutral” rating. The average on the Street is $23.39.
His target for Equitable rose to $97 from $94 with an “outperformer” rating (unchanged). The average is $89.29.
“HCG trades at 0.83 times book value, which marks the highest level since the liquidity crisis but well below the five-year average of 1.3 times,” said Mr. Giurleo. "That said, profitability for HCG is structurally lower (2020 estimated ROE: 7.0 per cent vs. 15 per cent-plus pre-liquidity crisis) and, as such, we believe the discount is warranted. In contrast, EQB trades at 1.05 times (vs. five-year average of 1.2 times), underpinned by robust mid-teen profitability which in our view justifies modest multiple expansion (target multiple 1.1 times) and provides for a strong return with lower relative execution risk.
He added: "While the bar going into the quarter has been set high, fundamentals remain strong and we see a number of positives on the horizon, such as rebounding GTA housing, a potential addition to the TSX Composite (EQB), material buybacks (HCG), higher margins and benign credit conditions, all of which we believe will support continued strong share price performance.
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Calling it a “steady income vehicle trading at an attractive yield,” Laurentian Bank Securities analyst Yashwant Sankpal initiated coverage of True North Commercial Real Estate Investment Trust (TNT-UN-T) with a “buy” rating.
“TNT offers exposure to well-located, non-trophy office properties in suburban/urban markets across Canada, with a primary focus on Ontario,” he said. "At this point, TNT investors are getting an opportunity to participate in a commercial REIT that has been generating steady income through its focus on properties leased to government/credit-rated tenants and financed with long-term, fixed-rate mortgages. TNT expects to continue its growth strategy and reach the $1-billion market cap threshold over the next five years (currently $412-million) by growing in its key markets: the GTA, Ottawa, Vancouver and Victoria. This growth should allow TNT to benefit operationally and from a valuation perspective.
“At a 9-per-cent distribution yield and a three multiple point discount to its Office peer group P/FFO, TNT is an attractive stable-income real estate play, especially against a backdrop of richly valued Apartment and Industrial REITs.”
Believing it possesses a “reasonable” balance sheet given its a relatively small REIT in “growth mode,” Mr. Sankpal set a $7 target. The average on the Street is currently $6.80.
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When Maple Leaf Foods Inc. (MFI-T) reports its second-quarter results on Thursday before the bell, Canaccord Genuity analyst Derek Dley is expecting to see “continued momentum” in its plant-based protein offerings.
For the quarter, Mr. Dley is expecting to see a year-over-year revenue increase of 9 per cent to $988-million, driven by both the acquisition of VIAU Foods and “strong growth” in its sustainable meat platform.
“We have witnessed an uptick in investor interest in Maple Leaf following the reporting of Q1/19 earnings results, namely due to commentary surrounding the company’s plant-based protein business,” he said. "We view this as an exciting growth opportunity for the company, as Maple Leaf looks to push the development and marketing of its Lightlife burgers. Our own channel checks suggest an increase in broad retail distribution of the product over the last few weeks, and Maple Leaf announced a partnership with the Kelsey’s restaurant chain to sell its Lightlife burger.
“Consumers adoption of plant-based protein products has spiked during 2019, however we believe the consumer awareness of Lighlife’s competition, Beyond Meat is well ahead of Lightlife at this point, and believe the company will need to be more aggressive with its marketing campaigns to compete head-on with Beyond Meat. This is likely to reduce margins for Maple Leaf in the near term, but we believe investing in this growth channel is the correct long-term strategic decision.”
He maintained a “buy” rating and $36 target for the stock. The average is currently $35.86.
“In our view, Maple Leaf continues to offer investors an attractive growth profile at an inexpensive valuation, given the company’s leading market share, healthy balance sheet and strong FCF generation,” he said.
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Expecting the rally in gold to continue, Laurentian Bank Securities raised its price deck for gold, leading its equity analysts to adjust their net asset value projections for miners in their coverage universe as well as target prices for their stocks.
“Gold continues to trade around a six-year high, having moved from $1,280/oz at the end of May to $1,420/oz at the time of writing,” said analysts Barry Allan and Ryan Hanley in a research note released Tuesday. “We believe that this has largely been driven by global economic fears, including slowing global growth and more dovish comments by the U.S. Federal Reserve. Additionally, the ongoing trade war between the US and China and concerns over Brexit have all combined to result in depressed bond yields on a global scale (including near-zero or negative sovereign debt throughout much of Europe as well as Japan), all of which are positive for gold.”
The firm increased its 2019, 2020 and long-term forecast for gold to US$1,400 per ounce. It had previously estimated US$1,250, US$1,300 and US$1,300, respectively.
With those changes, Mr. Hanley raised his target prices for the following companies:
Alamos Gold Inc. (AGI-T, “buy”) to $11 from $9. Average: $10.24.
Argonaut Gold Inc. (AR-T, “buy”) to $3 from $2.50. Average: $3.46.
New Gold Inc. (NGD-T, “hold”) to $1.90 from $1.25. Average: $1.59.
Rubicon Minerals Corp. (RMX-T, “buy”) to $3 from $2.50. Average: $2.59.
Superior Gold Inc. (SGI-X, “buy”) to $1.50 from $1.25. Average: $1.41.
Mr. Allan made the following changes:
Detour Gold Corp. (DGC-T, “buy”) to $25 from $20. Average: $20.10.
Eastmain Resources Inc. (ER-T, “buy”) to $1.10 from $1. Average: 62 cents.
Guyana Goldfields Inc. (GUY-T, “buy”) to $4.25 from $3.50. Average: $2.51.
Jaguar Mining Inc. (JAG-T, “speculative buy”) to 25 cents from 20 cents. Average: 22 cents.
Marathon Gold Corp. (MOZ-T, “buy”) to $3 from $2.50. Average: $2.14.
TMAC Resources Inc. (TMR-T, “buy”) to $9.50 from $8.50. Average: $8.32.
Wesdome Gold Mines Ltd. (WDO-T, “buy”) to $7.75 from $6.25. Average: $6.41.
The analysts said: “Argonaut Gold and Wesdome Gold remain our preferred picks, as outlined in our Dec. 17, 2018 Preferred Picks report. Since this date, Argonaut and Wesdome are up approximately 94 per cent and 79 per cent, respectively, vs. the Van Eck Junior Gold Miner ETF (GDXJ) which has increased by 39 per cent over the same period.”
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In other analyst actions:
SunTrust Robinson Humphrey analyst Neal Dingmann initiated coverage of Encana Corp. (ECA-N, ECA-T) with a “hold” rating and US$4 target. The average on the Street is US$8.38.
KeyBanc Capital Markets analyst Josh Beck initiated coverage of Lightspeed POS Inc. (LSPD-T) with an “overweight” rating and $45 target, which exceeds the consensus of $36.71.
In the wake of its year-to-date rally and seeing no clear catalysts on the horizon, BMO Nesbitt Burns analyst Danilo Juvane downgraded Kinder Morgan Inc. (KMI-N) to “market perform” from “outperform" with a US$22 target. The average is US$21.78.
David Leeder