Inside the Market’s roundup of some of today’s key analyst actions
Believing a market “downdraft” has changed how the Street should evaluating the competing bids for Trinidad Drilling Ltd. (TDG-T), Raymond James analyst Andrew Bradford advised investors to sell its stock and use the proceeds to purchase either Ensign Energy Services Inc. (ESI-T) or Precision Drilling Corp. (PD-T).
“The pull back in Canadian contract drillers has changed the calculus on the respective offers for Trinidad from Precision and Ensign," said Mr. Bradford. “When PD and TDG announced the all-equity/friendly deal on Oct. 5, the $1.98 implied price (0.445:1) seemed comfortably above the $1.68/sh hostile cash offer from ESI. But with PD now trading at $3.50, the 0.445:1 exchange ratio prices TDG at $1.56 per share, below the cash offer from ESI even when adjusting for the $20-million break fee, making ESI’s offer the superior offer on the table.
“When considering our suggestion to sell TDG shares in favour of either PD or ESI, we concede that either bidder could conceivably increase its respective offer for TDG and still enjoy measures of ‘accretion’. However, ESI has no motivation to increase its bid today as it has the numerically-superior offer. With respect to Precision, we doubt Precision’s board and management would have much interest in putting its share-based currency in direct competition with ESI’s hard-cash offer given the extreme volatility of today’s equity market. Though we admit this is a potential source of relative downside for our strategy. Even so, we suggest investors would still earn a positive return, if not a better risk-adjusted return.”
In a research note released Wednesday morning, Mr. Bradford raised his rating for Ensign to “outperform” from “market perform.” His target for the stock remains $6.50, which sits below the average on the Street of $7.42.
“The advantage of ESI is that it appears better-positioned to win the bid for TDG, in which case, after accretion, the stock is currently priced at 4.7 times 2019 consensus EBITDA vs. PD at 5.2 times,” he said.
Mr. Bradford downgraded Trindad Drilling to “market perform” from “outperform” with a target of $1.68, down from $2.25 and below the average of $2.28.
He maintained an “outperform” rating and $5.75 target for Precision Drillng. The average is $6.28.
“In PD’s case, investors have considerably more market liquidity with which to effect this trade; plus TDG investors can theoretically own 8 per cent more PD shares via this trade than they would have received via PD’s 0.445:1 share exchange offer and PD could benefit from the $20-million break-fee if ESI’s bid wins, adding 7-cents value per share, an extra 2-per-cent value bump,” the analyst said. “We operate under the basic assumption that whether or not TDG investors are happy with their investment in TDG, they do, at a minimum, want to keep their capital invested in energy/oilfield services. And since both the TDG/PD and TDG/ESI share price ratios are as high as they’ve been since April, 2018, this is an opportune time for TDG shareholders to reinvest at lower equity prices.”
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“Striking while hot,” Canaccord Genuity analyst Camilo Lyon upgraded Lululemon Athletica Inc. (LULU-Q) to “buy” from “home.”
“We recommend taking advantage of the stock’s 15-per-cent pullback over the last three weeks as we believe the risk/reward is now skewed to the upside as LULU’s strategic initiatives enacted over the past year have coalesced to drive an acceleration across its product engine, customer acquisition efforts, and international brand awareness, all of which combined should continue to support outsized comp growth of mid-teens+ this year and normalized high single digit comps next year,” he said. “Moreover, we believe the confluence of these drivers will yield sustainable EPS CAGR [compound annual growth rate] of at least 20 per cent and earnings power in excess of $5.00 in 2020.”
In backing up his “buy” thesis, Mr. Lyon pointed to four factors, noting: “First, our channel checks indicate that Q3 comps are trending above the Q3 “low teens” guidance range (we raised our Q3 comp/EPS estimate to 15 per cent/71 cents from 13 per cent/68 cents), and based on the solid early reception to its fall/ winter assortment, we believe this momentum will likely continue into Q4. Second, we view the work LULU is doing in product development, marketing, and digital/instore experience as transformational and should enable the company to sustain solid traffic and comp gains well into next year and beyond. Third, LULU is still in the nascent stages of its international expansion (9 per cent of sales last year) and given the focus on key growth markets (e.g. China, UK, Germany) we believe international will continue to grow at an accelerated pace (44 per cent in F17) adding 2-4 percentage points to comp growth annually for the foreseeable future. Fourth, leading these initiatives is a strong, well rounded management with two equally strong additions at the CEO and CFO roles. After meeting new CEO Calvin McDonald, we are increasingly optimistic about LULU’s opportunities to leverage its roots in experiential retailing both in store and in community while also delving deeper into online engagement via social channels, an area in which we believe the company is under-represented and presents the largest long-term growth opportunity with Millennials.”
Mr. Lyon bumped his 2018 and 2019 earnings per share projections to US$3.68 and US$4.38, respectively, from US$3.59 and US$4.01.
His target for Lululemon shares jumped to US$160 from US$152. The average on the Street is US $160.97.
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To reflect higher growth forecasts driven by new contracts for its defence segment, Industrial Alliance Securities analyst Nav Malik upgraded his rating for AirBoss of America Corp. (BOS-T) to “buy” from “hold.”
On Tuesday, the Newmarket, Ont.-based manufacturer announced AirBoss Defense, the defence products line of its engineered products segment, has been awarded an IDIQ contract from the U.S. Department of Defense (DOD) to manufacture of up to 198,240 pairs of Extreme Cold Vapor Barrier Boots (ECVBB). The contact, which consists of an initial base year and a one-year option, is projected to be worth up to US$51.5-million.
“Since early October, AirBoss has announced four new multi-year contracts for its Defense business, the largest of which was announced [Tuesday],” said Mr. Malik in a research note released late Tuesday. “The contacts are two to five years in duration, and total over $120-million assuming complete fulfillment. While some is likely replacement revenue, we believe much of it is incremental. In addition, some contracts include further revenue potential through multi-year support services.”
Mr. Malik increased his 2019 and 2020 EBITDA forecasts by 5.5 per cent and 9.1 per cent, respectively, to $33.6-million and $36-million. His estimates imply year-over-year EBITDA growth of 11.9 per cent and 7.0 per cent.
He raised his target price for AirBoss shares to $14 from $13. The average is $14.80.
“While Defense remains the smallest division by revenue, its margins are higher than AirBoss’ other segments and we expect its contribution to continue to increase going forward,” said Mr. Malik.
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Canadian National Railway Co.’s (CNI-N, CNR-T) fourth-quarter guidance is likely to prove conservative, according to Christian Wetherbee, believing the company sits “well positioned” to achieve in acceleration in incremental margins into 2019.
“Coupled with solid revenue opportunities, highlighted by crude by rail and better than expected contract renewal activity, we believe there is upside to consensus estimates in both 4Q and 2019, and we’re increasing our estimates to reflect that,” he said. “A key driver will be the 22 service related construction projects finished by early October and the completion of 5 remaining projects. CN is also taking new locomotives, allowing for the return of expensive leased units. Collectively, we see a path to 5 cents plus of upside in 4Q and likely more in 2019. Following the call, we believe shares should react positively to accelerating volume (+9% RTMs QTD and a target for +13%) and upside from more fluid operations.”
Mr. Wetherbee’s fourth-quarter earnings per share projection rose to $1.53 from $1.50. His 2019 and 2020 full-year estimates increased to $6.35 and $7, respectively, from $6.20 and $6.85.
He maintained a “buy” rating and US$100 target for CN shares. The average is US$93.22.
“We rate Canadian National Buy given recent network upgrades and industry leading OR [operating ratio],” he said. “Furthermore, we see upside to estimates in 2019, when the company should see incremental benefits from Intermodal, Coal and crude by rail shipments.”
Meanwhile, after increasing her earnings expectations, Credit Suisse analyst Allison Landry raised her target for CN shares to US$92 from US$91, keeping a "neutral" rating.
Ms. Landry said: “Although the reiterated ’18 guidance implies Q4 EPS that falls short of the consensus at the mid-point ($1.37 vs $1.47 cons.), CN’s commentary seemed to suggest that even the high end of the full year range is easily achievable. Demand is solid across the majority of markets; core pricing/renewals are as strong as we have ever seen; and cost metrics are set to improve from the elevated levels in Q3. Indeed, with implied Q4 RTM [revenue ton miles] growth in the low double digits, it’s difficult to envision much downside to numbers (save for a brutal winter or a shock to demand). A conservative approach is not inconsistent with historical CN practice, but at least in the case of the implied Q4 guidance range, it seems the co undershot what the market thinks is believable.”
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Ahead of the release of its third-quarter financial results after the bell on Wednesday, JMP Securities analyst Joseph Osha initiated coverage of Tesla Inc. (TSLA-Q) with an “outperform” rating.
“We believe the expertise Tesla has accumulated in key aspects of electric vehicle development and manufacturing is very difficult to duplicate," said Mr. Osha.
“Stretched balance sheet, but we think Tesla can make it. The combination of the Model 3 ramp, capital spending plans, and pending debt repayments have left Tesla in a difficult position. Our detailed modeling suggests the company can make it through the next 18 months without having to raise money, but there is little room for error. We believe the company would be well served by raising several billion dollars in additional equity capital."
He set a target price of US$350 for Tesla shares, which exceeds the consensus of US$314.52.
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Though he expects near-term share price performance for Barrick Gold Corp. (ABX-N, ABX-T) as management outlines strategy and reveals non-core asset sales in the wake of the merger with Randgold Resources, RBC Dominion Securities analyst Stephen Walker cautions that momentum is likely to slow in 2019, expecting the market to focus on the meeting of operating guidance and achieving development project timelines.
“The merger would create the world’s largest gold company, prior to non-core asset sales, with five of the global “Tier One” (large-scale, low-cost) gold assets, and would make ‘New Barrick’ one of the lowest total cash cost Senior gold producers,” said Mr. Walker. “However, the merged portfolio would include Randgold assets in operationally/geopolitically riskier jurisdictions (percentage of our operating NAV including Acacia equity stake located in Africa would increase from 3 per cent to 21 per cent with the Randgold merger). We would expect the merged company to monetize a significant number of non-core assets, representing an estimated 1.1 Moz of annual production, and re-allocate this capital to higher-return projects, which could provide shareholders with value.”
Maintaining a “sector perform” rating for Barrick shares, Mr. Walker raised his target to US$16 from US$14. The average is US$13.96.
“Our $16 standalone Barrick price target is based on multiples of 1.5 times P/NAV and 15 times enteprise value-to-adjusted cash flow (equivalent to 8.9 times EV/EBITDA), increased from 1.4 times and 13 times previously and more in line with NA Senior gold peers, given improved clarity regarding strategy,” he said. “We estimate the ABX/RRS merger is dilutive to Barrick shareholders on all key metrics except free cash flow, and EBITDA and operating NAV would decline further with non-core asset sales. As such, our $16 valuation would be supported post-merger by higher multiples of 1.6 times NAV and 16 times AdjCF (9.4 times EBITDA), and after assumed non-core asset sales 1.65 times NAV and 17.0 times AdjCF (10.2 times EBITDA). Higher multiples would reflect New Barrick’s greater trading liquidity, improved balance sheet and expected portfolio optimization.”
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Believing it possesses “strong” market fundamentals to drive organic growth, CIBC World Markets analyst Sumayya Hussain initiated coverage of Dream Global Real Estate Investment Trust (DRG.UN-T) with an “outperformer” rating.
“DRG’s two key markets of Germany and the Netherlands are underscored by healthy office market fundamentals, with expectations of continued improvement,” she said. “The Netherlands particularly offers meaningful growth potential from leasing. We expect underlying fundamentals to continue to strengthen, as both regions are witnessing low unemployment (3.4 per cent in Germany and 3.8 per cent in the Netherlands), and solid GDP growth (3 per cent in the Netherlands, and 2 per cent in Germany, expected in 2018). Strong absorption volumes and a limited supply pipeline are fuelling rent and occupancy improvements, setting up the REIT for solid SP-NOI [same-property net operating income] growth.”
Believing it currently possesses an attractive valuation, Ms. Hussain set a $16 target. The average is $15.53.
“DRG offers Canadian investors a unique opportunity to gain exposure to markets with greater potential (and drivers) for accretive per unit growth and cap rate compression,” she said. “Cap rates in top German office markets (70 per cent of NOI) have compressed by 150 basis points to 200 bps since the REIT’s 2011 IPO. The REIT’s Dutch portfolio (30 per cent of NOI) is valued at cap rates in the range of 7 per cent to 8 per cent, offering acquisition spreads of 600 bps to 700 bps, compared to 370 bps in the Canadian commercial property market. We believe strengthening fundamentals in the Dutch office market create a strong case for cap rate compression."
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In other analyst actions:
Credit Suisse analyst Andrew Kuske upgraded Canadian Utilities Ltd. (CU-T) to “outperform” from “neutral” while lowering his target to $36 from $38. The average target is $34.83.
“In our core infrastructure coverage universe, the energy infrastructure stocks are generally the most preferred area of exposure on a sector basis,” said Mr. Kuske. “Several factors favour exposure to the energy infrastructure names over the utilities and the power names. We note that Utility Sector valuation is more compelling with the recent downdraft and as a result, we upgrade Canadian Utilities to Outperform from the prior Neutral rating. Power sector sentiment is clearly improving, but that area faces an ongoing divide between almost entirely contracted renewables and substantially contracted fossil exposed generators with some open exposure.”
Paradigm Capital analyst David Davidson downgraded Nevsun Resources Ltd. (NSU-T) to “sell” from “buy” with a $6.30 target, which falls below the average of $6.03.
Morgan Stanley analyst Piyush Sood initiated coverage of Largo Resources Ltd. (LGO-T) with an “overweight” rating and $6 target, exceeding the consensus of $5.50.
David Leeder