Inside the Market’s roundup of some of today’s key analyst actions
Canadian banks are currently “under-owned” by international investors and offer high-quality compound growth, according to Citi analyst Ian Sealey.
In a research note released Wednesday, Mr. Sealey upgraded his rating for Canadian Imperial Bank of Commerce (CM-T, CM-N), believing it displays both a high return on tangible equity and an attractive price-to-tangible-book value in comparison to its peers.
Moving CIBC to “buy” from “neutral,” the analyst raised his target price for its shares to $130 from $125. The average target on the Street is $130.25, according to Bloomberg data.
On the sector as a whole, Mr. Sealey sees risks stemming from both the domestic housing market and NAFTA renegotiations, though he does not expect a rise in mortgage impairments.
He reiterated his top picks of Royal Bank of Canada (RY-T, RY-N) and Toronto-Dominion Bank (TD-T, TD-N).
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Barclays analyst Douglas Tsao upgraded Valeant Pharmaceuticals International Inc. (VRX-N, VRX-T), citing increased bullishness that the Laval, Que.-based company has reached an inflection point as its existing business stabilizes.
Mr. Tsao sees a foundation for growth driven by expected product launches, though he cautioned that not be “blockbusters.” He thinks updates in its dermatology business are key to the turnaround, having garnered the most attention and grabbing increased market share as rivals Allergan plc (AGN-N) and GlaxoSmithKline Pharmaceuticals Ltd. (GSK-N) cut back in that area.
Mr. Tsao moved Valeant to “overweight” from “equalweight” and raised his target price for its shares to US$29 from US$20. The average target is currently US$20.10.
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Shaw Communications Inc. (SJR.B-T) should a trade at a premium to its peers over the next few years as its takes advantage of wireless opportunities, said CIBC World Markets analyst Robert Bek.
Expecting its shares to outperform over the next 12-18 months, Mr. Bek raised his rating for Shaw to “outperformer” from “neutral,” arguing it should be bought at current levels.
“We have revisited our thesis on Shaw, giving specific attention to its wireless opportunity, both in subscriber execution and in valuation terms,” said Mr. Bek. “We have also stressed our assumptions for core wireline assets (broadband, video and voice), reflecting the current realities of the sector and Shaw management’s bold response. We conclude that our thesis of late has been under-appreciating the wireless opportunity at Shaw (Freedom), not so much in near-term execution potential, but in ultimate size/scope, and on the implications for valuation. With respect to Shaw’s core assets (broadband/video/satellite/voice), we have only tweaked our estimates.”
He added: “The near-term strength of the Shaw asset is not a secret at this point. After major investments in network (which continue), and bringing in strong and experienced Wireless leadership in Wireless President Paul McAleese, Shaw rolled into the 2017 Christmas season with great confidence. Given an empty highway of a network, and a huge handset upgrade with the addition of Apple (which we did not think would come this soon), the company rolled out an aggressive ‘Big Gig’ plan to its markets (10 GB for $50/$60) and immediately saw subscriber momentum shift fast. Even with an immediate competitive response from The Big 3, Shaw’s Freedom Wireless racked up a massive quarter, adding over 93.5k in postpaid subs, multiples above Street expectations. Freedom’s offers continue to resonate in the market, even with continued competitive responses from some of the Big 3, resulting in net add forecasts over the next few quarters (and beyond) in the +40K-50k range. These are excellent subscriber loading totals and estimates. Add in continued growth in ARPU [average revenue per user], and the prospect for revenue growth is compelling. EBITDA growth will also begin to benefit as operating leverage takes hold.”
Mr. Bek raised his target for Shaw shares to $30 from $28, which exceeds the current consensus of $29.27.
“We expect continued quarter-over- quarter execution by Shaw to capture these gains, as the wireless opportunity is realized,” he said. “We expect the core business to remain stable, and benefits from cost-cutting to accrue. There will be noise initially, as the upfront costs of the layoffs take hold; however, we believe that investors should look through this to the realized benefits into F2019 and beyond.
“Given our new $30 price target, our forecast total return over the next 12-18 month is 20 per cent, reflecting reasonable return expectations and a strong dividend in support. Within our cable/telecom coverage list, this expected return profile positions Shaw shares as an attractive buy-and-hold candidate versus peers. Valuations in the space are incredibly tight, and while our new target reflects a premium to Shaw over the group, we believe this makes sense when the full scope of the wireless growth opportunity is considered.”
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Canada Goose Holdings Inc. (GOOS-T, GOOS-N) is “flying at cruising altitude” after closing fiscal 2018 on a “solid” note, said Canaccord Genuity analyst Camilo Lyon.
“We believe the company benefitted from accelerated growth in its DTC [direct-to-consumer] channel coupled with rising brand awareness in the U.S. driven by new store openings and an expanding product assortment,” said Mr. Lyon. “Our store work in Canada and the U.S. during the quarter support our belief that the prolonged winter in the Northeast led to very strong sell-thrus of parkas, likely resulting in upside to Q4 sales and margin estimates as GOOS’ DTC channel was likely the primary point of demand fulfillment.
“Specifically, we see the potential for GOOS to beat our 7-cent loss EPS estimate (consensus at an 8-cent loss) by 3-5 cents. Importantly, we believe channel inventory in outerwear exiting the season is clean across the board, also boding well for fall ’18 orders as retailers are left with bare racks. In addition, given the strong response to the initial knitwear collection, GOOS is strategically expanding this category. While knitwear and lightweight jackets are a smaller part of the overall business, these categories are important in establishing GOOS’ relevance across seasons while also serving as an entry point for consumers in key, warmer climate markets like California. Overall, we continue to view GOOS as company that is evolving into a lifestyle brand, and one that has multiple growth avenues (e.g. channel, category, and geography) to pursue.”
In the wake of last week’s announcement that the company’s DTC entry into China will launch in the fall of this year with retail stores opening in both Beijing and Hong Kong and an ecommerce site on Alibaba’s online Tmall platform, Mr. Lyon called China “the next frontier.”
“These retail openings look to be through distributor partners and will likely boost wholesale sales, with the prospects of bringing them in house in the future,” he said. “Overall, we view these steps as the foundation for long term growth in a critical $23-billion luxury market.”
With a “buy” rating (unchanged), the analyst raised his target for Canada Goose shares to $58 from $48, which exceeds the consensus of $51.53.
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With a market cap now exceeding $1-billion, CannTrust Holdings Inc. (TRST-T) should trade in line with similar sized marijuana producing-peers, according to Echelon Wealth Partners analyst Russell Stanley.
He raised his target price and reiterated his “Top Pick” rating for the Vaughan, Ont.-based company after it announced separately Tuesday the closing of a $100.4-million bought deal and NexgenRx (NXG-X), its healthcare plan claims adjudication partner, has secured its first plan sponsor to include cannabis as a benefit under its patient plan.
The proceeds of the bought deal, priced at $9 per unit, are being allocated for the expansion of its domestic cultivation and processing capacity ($65-million), as well as international expansion ($10-million) and other corporate priorities ($20.4-million).
“With its Q118 results on May 15th, the company reported that the Niagara Greenhouse can likely support annualized capacity of 50,000 kilograms, once the Phase 2 expansion is complete,” said Mr. Stanley. “This represents a 20-per-cent increase from the previously estimated annualized capacity of 40,000 kilograms, reflecting stronger yield expectations, which bodes well for both production scale and unit costs. We have also included the announced additional greenhouse capacity (35,000 square foot and 450,000 square foot buildings) in our forecast. This drives an increase in our production/sales volume estimate from 31,420 kilograms to 57,130 kilograms. We view this forecast as conservative, as it assumes 54-per-cent utilization at Niagara (albeit on a larger footprint) and gives no credit to the additional 850,000 square foot greenhouse planned (as the timelines for it are yet to be announced). On this basis, we have increased our 2019 EBITDA estimate from $111-million to $135-million.”
Maintaining a “speculative buy” rating for CannTrust shares, Mr. Stanley raised his target price to $21 from $18.50. The average target is $13.64.
“The broad peer group trades at an adjusted average enterprise value-to-calendar 2019 estimated EBITDA multiple of 15.9 times, based on consensus estimates,” he said. “However, companies with a $1-billion-plus market capitalization trade at 31.4x, almost twice the group average. Excluding TRST, that subgroup trades at closer to 35.7 times, as shown on the right. We have therefore increased the multiple we use to value TRST to 17.5 times from 16.0 times, resulting in our new 12-month target price of $21.00 per share.”
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RBC Dominion Securities analyst Paul Quinn upgraded International Paper Co. (IP-N) in the wake of Tuesday’s announcement that it will not make an offer for Smurfit Kappa Group plc.
“As we have said before, we liked IP on a stand-alone basis,” said Mr. Quinn, moving the Memphis-based company’s stock to “outperform” from “sector perform.”
“The company’s financial outlook looks strong given considerable tailwinds in the core NA cardboard business as well as stronger than expected conditions in its pulp and paper businesses. The 10-per-cent annual EBITDA growth guidance seems more than achievable (likely to be increased), and similar to last year, financial results should show strength in the back half of the year.”
Mr. Quinn said he thought Smurfit was not an essential acquisition and believes investors will be glad they passed on the opportunity.
“IP’s CEO Mark Sutton outlined to Bloomberg in late April that the SKG acquisition was a ‘great option’ but not a ‘must-do deal,’ and that the company had other options for allocating capital,” the analyst said. “We are encouraged that IP had the discipline to refrain from bidding against itself and can now look at the other options available to it (we think the share price had been reacting positively to the potential that IP was going to walk away). We continue to think IP is a great free cash flow generation story and returning that cash to shareholders would be a solid option.”
Mr. Quinn raised his target for IP shares to US$67 from US$57. The average is US$65.08.
“We believe IP should trade at a multiple above the typical range (6.0–8.0 times) for large U.S. paper & forest product companies, reflecting favourable market conditions across its key businesses,” he said. “We are positive on the company’s strong market position in its core NA industrial packaging business and lower OCC [old corrugated containers] exposure, and we also see strong near-term results from its pulp business and its legacy UFS [uncoated free sheet] business.”
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CIBC World Markets analyst Dean Wilkinson initiated coverage of BSR Real Estate Investment Trust (HOM.U-T) with an “outperformer” rating and target price of $11.25.
“BSR was recently listed on the TSX, providing Canadian investors with direct exposure to the U.S. multifamily sector, with a particular focus on certain suburban markets within the Sun Bel” region, trading in U.S. currency,“ he said.
“Higher-than-average near-term growth potential, a highly aligned and internalized management team, and favorable fundamentals within the REIT’s core geographies drive our rating. While we acknowledge the REIT’s relatively smaller float, we find the current 16-per-cent discount to NAV to represent an attractive entry point for a long-term investment.”
Meanwhile, BMO Nesbitt Burns’ Troy MacLean gave BSR an “outperform” rating and $11.25 target.
Mr. MacLean said: “We think the REIT’s current valuation and the expected benefit from recent capex should provide a solid tota l return in the next 12-18 months.”
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In other analyst actions:
Cormark Securities Inc. analyst Maggie Macdougall downgraded AutoCanada Inc. (ACQ-T) to “market perform” from “buy” and dropped her target to $19 from $29. The average target is $24.28.
With files from Bloomberg News
David Leeder