Inside the Market’s roundup of some of today’s key analyst actions
Raymond James analyst Chris Cox said Gibson Energy Inc.’s (GEI-T) Investor Day reinforced his “confidence in the strength of the financial profile and the ability of the company to deliver compelling per share growth supported by ongoing capital deployment in its legacy Terminal business and emerging opportunity set in the Permian basin.”
He emphasized a prominent topic of discussion at Tuesday’s event in Toronto was the increased attention on the company’s U.S. strategy, for which Gibson has raised its capital deployment guidance (to $50-$100-million annually from $25-$50-million).
“While we believe the U.S. strategy remains a 'show me' component of the story, the guiding vision appears to be centered on replicating some version of the Hardisty business model at the Wink hub,” said Mr. Cox. “Gibson has already purchased land in this region and believes there is an opportunity to build-out terminal connections today while large egress pipelines are seeking production to fill capacity (and where these connections may be harder to come by in the future). Importantly, Management stressed discipline with respect to this capital allocation, targeting returns in excess of those realized in the legacy Terminal business, reflecting the increased risk profile of these investment.”
With the event, Gibson announced the sale of its Canadian Truck Transportation business for $100-million to complete its asset sale program, which brought aggregate proceeds of $325-million. The company also received a BBB (low) rating from DBRS, which Mr. Cox said reflects “the transformation of Gibson into a primarily infrastructure-based company with significant contractual underpinning and a strong financial outlook. In addition to an improved cost of capital, the new rating should allow Gibson to lengthen the tenor of its debt maturities to reflect the duration of its contracts in the Terminals business, as well as opening up the preferred market as an alternative source of capital.”
Maintaining a “market perform” rating for Gibson shares, Mr. Cox raised his target to $25 from $23. The average on the Street is $25.10.
“Offsetting our fundamental enthusiasm for the story, we believe near-term upside could be capped with the stock outperforming peers by 5.4 per cent year-to-date, despite the significant contraction in heavy oil differentials,” he said.
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Seeing it insulated from any potential downside and calling its yield/growth opportunity attractive, Evercore ISI analyst Stephen Richardson raised his rating for Canadian Natural Resources Ltd. (CNQ-T) to “outperform” from “in-line” with a $48 target, exceeding the consensus of $45.43.
At the same time, Mr. Richardson downgraded Suncor Energy Inc. (SU-T, SU-N) to “in line” from “outperform, ” saying the move is “more of a reflection of attempting to narrow our ratings to higher conviction names.”
His target for Suncor dipped to $54 from $58. The average is now $55.07.
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Pointing to “favourable trends” and relative valuations in the current macro and equity environment, CIBC World Markets adjusted its rating for several utility stocks on Wednesday.
The firm believes the sector will benefit from from funds flow as investor seek defensive stocks in the wake of the U.S. Fed’s decision to keep rates unchanged.
Analyst Robert Catellier upgraded Hydro One Ltd. (H-T) to “neutral” from “underperformer” with a $21 target, rising by a loonie. The average is currently $20.50.
He also raised AltaGas Canada Inc. (ACI-T) to “outperformer” from “neutral” with a $19 target, up from $17 but 40 cents below the average.
Meanwhile, Mark Jarvi downgraded TransAlta Renewables Inc. (RNW-T) to “underperformer” from “neutral” with a target of $13.50, up from $13 and above the average of $13.15.
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Warning its backlog growth is poised to turn negative in the next quarter, Deutsche Bank analyst Chad Dillard downgraded Caterpillar Inc. (CAT-N) to “hold” from “buy,” calling it “the biggest risk to the bull case.”
“During these cycles, Street estimates typically get cut by 45 per cent and shares fall by 40 per cent from the peak,” he said.
Mr. Dillard said the company is facing other headwinds, including the fact that synchronized global growth has “collapsed.”
“The China Land Cycle is rolling over (and will continue to weaken despite the single positive data point this week), Europe is slowing more than expected and the U.S. is oversaturated with construction equipment. Each of these factors alone are powerful drivers of CAT’s earnings, but together this synchronized slowdown will not only usher in a negative earnings revision cycle, but also make 2019 the cyclical peak,” he said.
Mr. Dillard dropped his target for its shares to US$128 from US$152. The average is currently US$149.
“Street numbers for 2019 and 2020 are 5 per cent and 20 per cent too high, but the current share price does not reflect this reality,” he said.
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Following Tuesday’s release of better-than-anticipated fourth-quarter financial results, Canaccord Genuity analyst Matthew Lee thinks Kew Media Group Inc. (KEW-T) is poised for both “solid” EBITDA growth and cash flow generation in fiscal 2019.
“Kew has seen an acceleration in net content investment (additions to film and TV rights) over the last two years as the company built its distribution library and worked to develop quality content,” said the analyst. “While we still expect investment in film between production and distribution to be $80-million, the increasing delivery and distribution of content will drive up amortization and lead to a more even cash flow profile. We currently forecast Kew’s investment in content net of amortization at negative $16-million for F19 (vs. negative $36-million in F18) with a working capital drain of $11-million (vs. negative $13-million in F18). The improvements in these areas, in tandem with higher EBITDA, drive our FCF estimate of $8-million.
“Due to the timing of production deliveries, we expect the company to report a modest Q1 with year-over-year declines in both revenue and EBITDA. However, we forecast a substantial ramp-up throughout the year as the produced TV shows are delivered to the buyers. We forecast EBITDA of $34.6-million for the year (8-per-cent growth), which is relatively in line with management’s guidance.”
Calling its valuation “attractive,” Mr. Lee maintained a “buy” rating for Kew shares while lowering his target to $9 from $9.50 due to the weaker-than-expected FCF in the fourth quarter. The average on the Street is $11.50.
“We continue to see upside for Kew given its favorable business mix, EBITDA growth, and mid-single-digit FCF yield,” he said.
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Incyte Corp.’s (INCY-Q) “solid” fundamentals are now better reflected in its valuation, said RBC Dominion Securities analyst Brian Abrahams, who downgraded the Delaware-based pharmaceuticals company to “sector perform” from “outperform.”
“Our thesis on the company having underappreciated value that could potentially be unlocked has mostly played out,” he said. “We continue to expect solid execution on commercial Jakafi, potential for pipeline expansion and diversification, and life-cycle efforts; however, at current levels, other than if the company were to be acquired, we see fewer opportunities for a further significant near-term value inflection. As such, while we would continue to hold positions for the long term in what we view as a leading oncology player with solid fundamentals, we see in-line trade near-term.”
Mr. Abrahams maintained a target price for Incyte shares to US$89. The average is US$89.33.
“We believe INCY’s lead marketed product, Jakafi, has considerable long-term potential of $3-billion-plus in U.S. sales, limiting downside risk on commercial execution and supporting a strong revenue foundation for the company in the long term, though life-cycle extension efforts will likely continue to come into increasing focus given concerns about the 2027 patent cliff,” the analyst said. “While the company has one of the deeper cancer-focused pipelines in biotech, reflecting a strong drug discovery engine and business development expertise, competitive spaces make it difficult to pinpoint the next firstin-class blockbuster from the pipeline, and with somewhat increased perceived risk to the inflamm franchise due to questions about Jak-1 safety, and GvHD a moderate indication, we view fewer opportunities for an additional near-term value inflection from current levels.”
Separately, Mr. Abrahams raised his rating for Merus N.V. (MRUS-Q), a biotechnology company based in the Netherlands, to “outperform” from “sector perform.”
“Merus has continued to make quiet progress, moving toward a 2H19 that we believe should showcase its portfolio and provide several potential value-creating events: detailed initial data from MCLA-117 in AML; updates from ’128 combos in breast cancer; and progress in the clinic with ’145 and ’158,” he said. “Merus should also likely generate increased attention as the overall bispecifics space — for which we continue to believe the company has a best-in-class discovery/production platform — matures. With shares toward the bottom of their trading range and an EV of just $140-million, we see a compelling long-term entry point.”
He raised his target to US$23 from US$18, which sits below the consensus of US$28.
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In other analyst actions:
Barclays analyst Jeanine Wai initiated coverage of Encana Corp. (ECA-N, ECA-T) with an “overweight” rating and US$11 target. The average is US$10.01.
Eight Capital cut Frontera Energy Corp. (FEC-T) to “neutral” from “buy” with a target of $14.50, falling from $21. The average is $17.13.
AltaCorp Capital analyst Tim Monachello reinstated coverage of ShawCor Ltd. (SCL-T) with an “outperform” rating and $28.50, which exceeds the consensus of $28.30.
GMP initiated coverage of Home Capital Group Inc. (HCG-T) with a “buy” rating and target of $21.50. The average is $18.83.
The firm also initiated coverage of European Commercial REIT (ERE-UN-X) with a $5.50 target, exceeding the consensus of $5.
With files from Bloomberg news
David Leeder