Inside the Market’s roundup of some of today’s key analyst actions
Pattern Energy Group Inc. (PEGI-Q, PEGI-T) is “another yieldco riding into the sunset,” said RBC Dominion Securities analyst Shelby Tucker.
Following Monday’s announcement that San Francisco-based wind power producer is poised to be acquired by the Canada Pension Plan Investment Board for US$2.63-billion, Mr. Tucker moved his rating for its stock to “sector perform” from “outperform,” saying he’d be surprised if a higher bid appeared during the 35-day go-shop period.
"The acquisition price reflects 12.7 times the midpoint of management’s 2020 CAFD forecast," he said. "We estimate that it is 13.3 times the run-rate EBITDA of the portfolio (12.9 times if the EV is reduced to reflect the amount invested in Pattern Development, which has yet to contribute positive EBITDA). Management stated that price and certainty are two important factors under consideration, both of which CPPIB can deliver. Even though our analysis indicates that a strategic buyer could accretively acquire PEGI at a higher price, some factors that give us reason to believe the likelihood of a higher bid is low (less than 20-per-cent probability) include: i) a $52.7 million break fee ($0.54/share); ii) the right for CPPIB to match a higher bid; iii) and a strategic buyer may need to offer a combination of common shares and cash, which may be considered less attractive than an all-cash offer even if the face value of the consideration is higher."
At the same time, Mr. Tucker lowered his financial expectations for Pattern in reaction to the release of weaker-than-anticipated third-quarter results.
His target for Pattern shares is now US$26.75, down from $28. The average on the Street is US$26, according to Bloomberg data.
Elsewhere, Raymond James’ David Quezada lowered the stock to “market perform” from “outperform” with a target of US$26.75, up from US$26.
Mr. Quezada said: “We see the odds of a competing bid as modest for several reasons including: 1) It appears a fulsome process was run with multiple bids evaluated; 2) we would expect CPPIB would likely be among the lowest cost of capital players involved in bidding; and 3) several months have elapsed since Pattern was rumored to be in play—during which we would have expected other interested parties to come forward.”
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Seeing a “stronger” outlook, CIBC World Markets analyst Robert Catellier raised Gibson Energy Inc. (GEI-T) to “outperformer” from “neutral.”
“The recent investment grade credit rating caused us to view Gibson as ‘all dressed up and nowhere to go’ in light of the production curtailments in Alberta,” said Mr. Catellier following Monday’s release of its third-quarter results, which he saw as “strong” operationally.
“Indeed, the company had not sanctioned the construction of a new storage tank at Hardisty for some time, putting its target of 2-4 tanks a year in jeopardy for 2019. Recently eased production curtailments (for incremental production shipped by rail) give us increased confidence in the infrastructure outlook. Higher marketing guidance helps too, but investors are more likely to pay up for the higher-quality infrastructure cash flow stream.”
He raised his target by a loonie to $26, which falls 27 cents below the consensus.
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Pointing to both its valuation and a lack of near-term catalysts, CIBC World Markets analyst Scott Fromson dropped Park Lawn Corp. (PLC-T) to “neutral” from “outperformer” ahead of the release of its third-quarter results on Nov. 12.
“Our call is not related to a change in PLC’s fundamentals, nor does it reflect a shift in our positive long-term outlook for the company’s business model,” he said. “Rather, we point to three factors. First, the stock is up 17 per cent since closing at $25.26 on Oct. 1, and is now broaching our unchanged $30 price target; valuation now appears fair. Second, after recently nudging down our estimates, we are below consensus for the seasonally softer Q3. Finally, we expect limited near-term catalysts, particularly acquisitions as PLC continues integrating operations.”
Mr. Fromson’s target of $30 is below the average of $32.35.
“Our long-term view is that PLC has significant growth potential in the fragmented, high-barrier-to-entry death care industry,” he said. “PLC has less than 2-per-cent market share vs. death care giant Service Corporation International (SCI), which has 16-per-cent market share. Given PLC’s current leverage (2.4 times trailing 12-month/2 times run-rate basis), however, we’d expect management to message that acquisitions will be limited to tuck-ins over the next six to 12 months, particularly as it continues its integration process on acquisitions made both this year and last.”
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A day after its executives acknowledged they are cooperating with a U.S. federal probe into its accounting practices, Baird analyst Jonathan Komp downgraded Under Armour Inc. (UAA-N), citing uncertainty surrounding the investigation.
The sporting apparel company’s plummeted almost 19 per cent in the fallout from the probe, which was revealed over the weekend, and with a reduction in its annual revenue forecast for a second consecutive quarter.
“While the Q3 fundamental update was relatively consistent with recent expectations, the unexpected news and subsequent disclosure of an ongoing accounting-related investigation by the SEC/DOJ represents tangential risk to our prior thesis,” said Mr. Komp. “While we have no specific reason to suspect wrongdoing by current executives, at a minimum we see heightened near-term execution risk stemming from internal distraction, and/or sentiment overhang.”
Moving the stock to “neutral” from “outperform,” Mr. Komp also reduced his target to US$20 from US$31. The average on the Street is US$20.61.
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Though she thinks Fairfax Financial Holdings Ltd. (FFH-T) current valuation is “attractive” given “firming” insurance trends and ongoing portfolio optimization, Raymond James analyst Brenna Phelan lowered her target price for its shares in reaction the release of its third-quarter results.
On Oct. 31, Fairfax reported net earnings for the quarter of $68.6-million, or 24 cents per share. That result fell short of the consensus expectation on the Street of $3.67-billion, or $3.34 per share).
“We would characterize the quarter as mixed, a function of greater investment losses than we think were broadly expected and generally very strong (high-teens at key subsidiaries) premium growth trends,” said Ms. Phelan. "In other words, the thesis of firming North American commercial lines markets is playing out, but book value growth was hindered by some large losses on key equity holdings.
“In terms of outlook from here, reported growth in NPW [net premiums written] gives good visibility into that rate and unit growth being earned through in coming quarters, insulating the combined ratio and driving Insurance pre-tax ROE higher.”
Ms. Phelan added: “Although Fairfax’s 3Q19 provided another reminder that the company’s results will often be lumpy, we think that the outlook across its insurance subsidiaries, coupled with the composition and optionality in its investment portfolio, represent good visibility into Fairfax delivering on our 13.5-per-cent ROE forecast for 2019, followed by 9-10 per cent in 2020/2021. Based on these forecasts, we think current valuation at 0.9 times BVPS [book value per share] is too low on a longer-term outlook.”
With the results, she lowered her 2019, 2020 and 2021 EPS projections to $60.71, $43.33 and $49.31, respectively, from $64.71, $45.80 and $51.67.
She kept an “outperform” rating with a target of $760, down from $780. The average is now $739.34.
“We think the risk/reward for the share price moving higher from here looks quite attractive,” she said.
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Though he deemed its third-quarter results “poor,” Sprott Capital Partners analyst Brock Salier raised Semafo Inc. (SMF-T) to “buy" from “hold,” seeing it providing an “attractive” entry point for investors.
“We consider three points as we now upgrade from a HOLD to a BUY; (i) the pit wall failure resulted in a deferral, not a loss, of FCF [free cash flow], outside the small one-off costs of the closure, and (ii) ‘the market is always right’ and, rightly or wrongly, has punished Semafo for the quarter-over-quarter dip with the share price now at pre-gold-rally prices (412c from 525c, or $350-million of lost market cap) putting the stock back up to an estimated 23-per-cent FCF yield in CY20,” said Mr. Salier. “Hence, again rightly or wrongly, we would expect improved quarter-over-quarter performances in the next two quarters to drive the share price up. Finally, (iii) ‘hidden’ in today’s quarter are outstanding drill results from development project Bantou, including 90 metres at 2.1 grams per ton from just 5-metre depth – this, and the new 2.5-3 million ounce 4Q20 resource target, materially increases our enthusiasm for ‘will be a mine’ Bantou. With drill results and resource upgrades building on quarter-over-quarter production improvement next year, we upgrade Semafo.”
Mr. Salier maintained his $4.80 per share target, which falls below the $6.62 consensus
“While the market will fixate on guidance, a potential negative catalyst next quarter if missed, clearly Semafo suffered a Black Swan event, and any miss is (i) backward looking related to a poor 3Q, and (ii) is, or will be today, baked into the current share price," he said. “Hence, we think the next two quarterlies will bring far more positive material catalysts, being strongly improved quarter-over-quarter production and financials. This should follow with a Bantou interim resource upgrade. We can’t understate the positive impact of just the beginning of a major drill programme there. The combination of (i) wide medium-grade hits near surface, (ii) depth extensions pointing to vertical growth as drilling deepens, and (iii) narrow-vein high grade leads us to see Bantou shaping up as a quality ‘will be a mine’ asset. In fact, we expect our own valuation lift to be the start of a repeating trend as the company defines interim, then 4Q20, resources, then de-risks those with economic studies, and likely all the way to production. Specifically our current US$120-million valuation compares to US$500-million for each of Mana and Bantou, a sign of the future. The key delta is perhaps size, with Semafo’s target for Bantou of 2.5-3 million ounce being well above those assets, albeit at likely lower grades.”
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Desjardins Securities analyst John Chu lowered his second-quarter sales forecast for Canopy Growth Corp. (WEED-T) in reaction to similar reductions from its peers as well as July and August industry recreational sales data.
Ahead of the Nov. 14 release of its financial results, Mr. Chu now projects sales of $95-million for the quarter, down from $139-million previously and below the consensus estimate on the Street of $105-million. His EBITDA expectation is now a loss of $105-million, sliding from $109-million loss and exceeding the consensus of a loss of $92.6-million.
“Recall that during the June quarter, industry sales were up 50 per cent quarter-over-quarter but WEED reported a net sales decline of 4 per cent,” the analyst said. “Furthermore, we note that HEXO (HEXO-T, “buy” rating, $5.00 target) forecast its fall sales to be relatively flat quarter-over-quarter vs its summer sales; hence, WEED may see further loss of market share (industry sales for the September quarter are tracking at 40-per-cent quarter-over-quarter growth) and only modest quarter-over-quarter sales growth. Our EBITDA forecast is mostly unchanged as we suspect the company would have been able to curb some costs once it realized sales were falling short of expectations.”
Mr. Chu kept a “hold” rating and $46 target for Canopy shares. The average is $40.15.
“We have already seen a resetting of expectations in the sector recently and expect this to continue as we move through earnings season,” he said.
Elsewhere, citing “severe operational inefficiencies,” National Bank Financial analyst Endri Leno initiated coverage of Canopy with an “underperform” rating and a Street-low $17.50 target.
Mr. Leno noted that Canopy’s share of the Canadian recreational market has slid from 37 per cent in the fourth quarter of calendar 2018 to 25 per cent in second quarter of 2019, and said “a further stepdown to 20 per cent could follow.”
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As fiscal 2019 approaches a conclusion, Desjardins Securities analyst Doug Young expects several Canadian banks to miss some medium-term targets.
In a research report previewing fourth-quarter earnings season, which is scheduled to begin on Nov. 26, the analyst said he’ll be seeking guidance on whether those targets can be met in the coming year.
“Given the more subdued outlook for NIMs and loan growth, and a normalizing credit environment, expense management remains top of mind,” he said. “We are forecasting year-over-year improvement in NIX ratios for all the banks except CM. Can the banks temper expense growth quickly? Will the group take more restructuring charges to drive efficiency improvements? If so, will the market give them a pass on these charges, as has been the case over the past few years? We note annual expenses tend to be trued up in 4Q. Credit remains a hot topic. We are not expecting big surprises in the retail segment but noticed some commercial credit noise in the U.S. recently, specifically.”
For the quarter, Mr. Young is expected average cash earnings per share growth of 4 per cent year-over-year for the Big 6. He’s projecting Canadian P&C banking to grow 2 per cent and international and U.S. banking to expand by 10 per cent.
“The Big 6 Canadian banks (excluding NA) are trading below their 20-year historical average P/4QF EPS multiples," he said. "There are some tailwinds for the Canadian banks over the near term: (1) a constructive economic backdrop, with low unemployment; (2) a benign credit environment for now; (3) comfortable CET1 ratios; and (4) a focus on managing expenses—important as loan growth slows. In addition, the banks have been able to effectively manage a number of headwinds over the past few years, such as a decline in oil prices and new regulatory capital rules. However, we also acknowledge that there are a number of risks on the horizon, such as operating in the late stages of the economic cycle, volatility in equity markets, potential for increased volatility in provisions for credit losses (PCLs) under IFRS 9 and the high levels of household debt in Canada. That said, relative to other investment alternatives in Canada, we believe bank valuations are still reasonable..”
After tweaking his estimates, Mr. Young made several target price changes:
Toronto-Dominion Bank (TD-T, “buy”) to $81 from $83. The average on the Street is $79.25.
Bank of Nova Scotia (BNS-T, “buy”) to $82 from $80. Average: $77.73.
Canadian Western Bank (CWB-T, “hold”) to $36 from $34. Average: $33.08.
National Bank of Canada (NA-T, “hold”) to $68 from $64. Average: $65.88.
Mr. Young maintained a “hold” rating and $105 target (versus a $102.62 average) for shares of Bank of Montreal (BMO-T), but noted: “BMO is the name to watch. (1) Recently, there were some credit bumps in the U.S. energy and agriculture sectors, and in names where BMO is listed as part of the lending syndicate. (2) We anticipate decent NIM compression at its US P&C banking operations (down 6 basis points sequentially). (3) Will it take another restructuring charge to meet future expense targets? We are forecasting an adjusted NIX ratio of 60.6 per cent and positive operating leverage for 4Q FY19.”
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Diversified Royalty Corp.’s (DIV-T) $52-million acquisition of Nurse Next Door Professional Homecare Services Inc. prompted CIBC World Markets analyst Scott Fromson to remove the “speculative” qualifier for his “outperformer” rating.
“Following the Mr. Mike’s investment in May, we see this as further evidence DIV is indeed able to source and close good deals,” he said."We had assumed a deal around this size, though the valuation is a bit higher than our estimate. It’s a single more so than a home run, but we like that DIV isn’t swinging for the fences. We expect DIV to now fully cover the dividend, which it raised by a modest 3.4 per cent to an annualized $0.23."
“We like the diversification and exposure to an aging North American population. NND offers a broad range of services, including personal care, meal preparation, homemaking, companionship, around-theclock care and end-of-life care. NND was founded in 2001 and is 95-per-cent franchised, operating a total of 177 locations (65 in Canada, 109 in U.S. and three in Australia). It had TTM revenues of $106-million, all from private payors. System sales CAGR over the past five years is a robust 20 per cent.”
His target remains $4, which sits 24 cents below the consensus.
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In other analyst actions:
CIBC World Markets analyst Cosmus Chiu lowered Osisko Gold Royalties Ltd. (OR-T) to “neutral” from “outperformer” after resuming coverage of the stock. His target slid to $15.25 from $18.50, which falls short of the $17.24 average.
“With the closing of the Credit Bid Transaction to acquire Stornoway Diamonds, we are now off restriction and reinstating coverage of Osisko Gold Royalties,” he said. “During the restriction period, Osisko Gold Royalties also embarked on a separate transaction to acquire 100 per cent of Barkerville Gold Mines, a development stage company where OR already held a 32.6-per-cent stake prior to the proposed acquisition. This second transaction to acquire Barkerville is the reason for our downgrade.”
Eight Capital analyst Ammar Shah initiated coverage of Burcon NutraScience Corp. (BU-T) with a “buy” rating and $1.50 target. The average is currently $1.75.
With a file from Bloomberg News
David Leeder