Inside the Market’s roundup of some of today’s key analyst actions
A day after AGF Management Ltd. (AGF-B-T) confirmed that London-based private wealth-management firm Smith & Williamson is in “exclusive discussions” with Tilney Group Ltd. about a possible merger, CIBC World Markets analyst Paul Holden raised his rating for AGF to “outperformer” from “neutral,” citing the potential upside from the sale. AGF owns a 33.6-per-cent stake in Smith & Williamson.
“The current share price is not adequately capturing potential proceeds for AGF, which we think would be predominately used to repurchase stock, reduce financial leverage and co-invest in infrastructure assets,” said Mr. Holden.
He increased his target for AGF shares to $7.50 from $6. The average on the Street is $6.50.
“We are updating our valuation framework to reflect a transaction multiple for S&W versus our prior price target that valued S&W at book value,” he said. "We use public comps in the U.K. plus a transaction premium to arrive at our valuation multiple range of 2.0-2.5 per cent of AUA. The multiple range suggests that AGF’s stake in S&W could be worth $2.67-$3.24 per share versus book value of $1.55 per share.
“Our price target increases from $6.00 to $7.50 and assumes that a transaction will be successful. Tilney has completed a number of acquisitions since it was acquired by Permira in 2014 and, according to media reports, had approached S&W in the past.”
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Mosaic Capital Corp.'s (M-X) “attractive” 8-per-cent dividend yield is complemented by “significant” share price torque, according to Canaccord Genuity analyst Raveel Afzaal.
“This is due to just 10 million shares outstanding and high leverage (40 per cent in safer perpetual preferred securities),” he said. “For perspective, a $15-million acquisition at an historical 5.0 times EV/EBITDA multiple could increase our target by $1.50 per share (20 per cent), all else equal. Mosaic ended Q2 with $13-million in cash and $56-million in available credit ($22-million available for acquisitions).”
Last week, Mosaic reported "strong" second-quarter financial results. Adjusted EBITDA rose 33 per cent year-over-year to $9.8-million, exceeding the projections of both Mr. Afzaal and the Street ($8.3-million and $8.4-million, respectively). The beat came, in large part, due to outperformance from its Infrastructure division.
“Mosaic has been outperforming our forecasts for the past four quarters and mgmt is targeting 5-10-per-cent EBITDA growth for its portfolio companies,” he said.
However, pointing to higher debt in the second quarter, Mr. Afzaal lowered his target for Mosaic shares to $7 from $7.50 with a “speculative buy” rating (unchanged). The average on the Street is $6.63.
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Shares of Beyond Meat Inc. (BYND-Q) are “appealing once again,” according to JPMorgan analyst Ken Goldman, who raised his rating for the plant-based meat producer to “overweight” from “neutral.”
“With cash-on-hand likely to exceed $300-million by the end of 3Q, another guidance raise potentially ahead, and the stock 40 per cent off its high, we think the stock is appealing once again," he said.
Mr. Goldman pointed to: three reasons for "renewed" optimism: "The potential to acquire new food-service customers, continued strength in measured data, and valuation."
His target for the stock increased to US$189 from US$188. The average on the Street is US$165.43.
“We appreciate that the secondary offering spooked many investors; however, founder/CEO Ethan Brown trimmed only a tiny portion of his holdings, and we cannot blame anyone involved pre-IPO for locking in some gains,” he said.
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Seeing a “more difficult” macro environment for U.S. large-cap IT hardware companies, Citi analyst Jim Suva reduced his estimates in enterprise infrastructure and expects “consensus estimates for a 2H recovery to become more muted than initially expected.”
In a research report released late Monday previewing earnings season in the sector, Mr. Suva downgraded HP Inc. (HPQ-N) to “neutral” from “buy,” believing “positive data points in PCs offset mixed Print data points and offer limited positive catalysts ahead.”
“Data points for HP’s fundamentals remain mixed," he said. "We expect PC segment will likely see stronger than anticipated near term results given demand pull-in ahead of tariffs during C2Q quarter (Intel, ODM data) as well as an easing in chip component shortages. On the other hand data points in the printer segment are more mixed with Canon, a large partner for HP, drastically reducing projections on laser supplies inventory adjustments into the quarter, albeit with stabilization expected ahead. As we look further out, we expect tailwinds in the commercial PC segment from Windows 10 refresh (Windows 7 support expiring in Jan 2020) will temper as we move into CY2020. While employment trends remain strong, macro risks could also pressure commercial purchases in PCs and Print as we move into CY2020.”
He reduced his target for HP shares to US$21 from US$25. The average on the Street is US$23.08.
“Shares are currently trading at 8.5 times PE NTM [price-to-earnings next 12 months], below their 5 year median range (10.75 times),” said Mr. Suva. “We acknowledge HPQ’s strong FCF conversion and strong shareholder returns (8-9 per cent per year) coupled with shift to more contractual services and 3D Print opportunities are all positives but we believe upside to estimates and multiples remain more limited and hence we move to the sidelines.”
At the same time, Mr. Suva opened a “short term negative catalyst watch” for Hewlett Packard Enterprise Co. (HPE-N). However, he maintained a “neutral” rating based on its current valuation.
He lowered his target to US$14 from US$17. The average is US$16.95.
“Data points in enterprise spending trends in hardware have been mixed (Intel, WDC, Cisco, Arista, NTAP) with hardware deals remaining pressured given macro uncertainty. Our short term negative catalyst watch is based on our view of these concerns and consensus expectations too high,” said Mr. Suva. “Mid to long term we see continued shift to cloud pressuring revenues for tech hardware spending. We note HPE is pivoting to more profitable parts of the business (eg. storage, networking, high performance compute, analytics) while exiting non profitable contracts and reducing exposure to tier 1 cloud providers segment (just under 10 per cent of server business). While the company continues to trade at a discount to peer group given margin profile, we maintain our Neutral rating until we can see positive fundamental traction in core portfolio coupled with margin expansion and normalized FCF generation.”
Mr. Suva kept a “buy” rating for Dell Technologies Inc. (DELL-N) and lowered his target to US$65 from US$80. The average is now US$68.65.
“We maintain our positive view on Dell shares," he said. "We believe Dell is better positioned than its peers within the enterprise IT Hardware space which should enable it to continue to outgrow the overall market. As the company migrates to higher value offerings esp in servers, storage (hyperconverged infrastructure, all flash array, midrange storage portfolio) and benefits from recent investments made in go to market selling capabilities as well as a deflationary memory pricing environment we expect overall operating income to also improve during the forecasted period. We also expect the company to pay down debt and shares to benefit from multiple rerating as the company delevers.”
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Rubicon Minerals Corp.'s (RMX-T) preliminary economic assessment on its Phoenix Gold Project in Red Lake, Ont., is “robust” but features a shorter mine life, leading Laurentian Bank Securities analyst Ryan Hanley to lowered his financial forecast for the company.
On Monday, the miner released its updated PEA that pointed to annual production for the facility of 88,700 ounces at cash costs of US$624 per ounce over a 5-year mine life.
"It is important to note that despite PEAs typically being very early stage in nature, in the case of RMX’s PEA, many more concrete data points were incorporated, which significantly increase our confidence in the company’s projections," the analyst said.
Despite a shorter mine life impacting the company's net asset value, Mr. Hanley did say there's "still ample value."
“Due largely to the reduced amount of tonnage in our model and corresponding shorter mine life, our NAV/sh for RMX declines to $2.18 from $2.95 previously,” he said. “As a result, we are lowering our target to $2.25 per share, from $3.00 per share previously. Despite the reduction in NAV due to a shorter mine life, there is still excellent potential for RMX to add to its resource base as not only does the deposit remain open at depth and along strike, but several additional exploration targets exist within 2km of the Phoenix Gold Project which could provide additional mill feed. Even with a much higher level of confidence in our updated valuation given the release of the PEA, which incorporated several concrete data points which are not normally captured in a PEA (processing of material through the mill over the last several years, bulk sample reconciliation, trial mining, etc.), we have left our discount rate unchanged at 8 per cent.”
Mr. Hanley maintained a "buy" rating for Rubicon with his new target of $2.25 (from $3). The average is $2.47.
“We believe that RMX is now trading below its break-up value of $70-million, and therefore offers limited downside,” he said.
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In other analyst actions:
TD Securities analyst Vince Valentini cut Cogeco Communications Inc. (CCA-T) to “hold” from “buy”
RBC Dominion Securities initiated coverage of MTY Food Group Inc. (MTY-T) with a “sector perform” and $70 target, which exceeds the current consensus of $65.17.
David Leeder