Inside the Market’s roundup of some of today’s key analyst actions
Bank of America Merrill Lynch analyst Christopher Carey raised his rating for Cronos Group Inc. (CRON-T, CRON-Q) by two notches after chief executive officer Mike Gorenstein said the cannabis producer is aiming to be “aggressive” in its cannabidiol (CBD) launch in the United States.
On Tuesday, Mr. Gorenstein told the Consumer Analyst Group of New York that Cronos' entry into the market is not "that long of a way out."
That led Mr. Carey to move the stock to "buy" from "underperform," believing the company's partnership with Altria Group Inc. will prove valuable in "winning the U.S."
"The potential to scale distribution nationally via Altria separates Cronos vs peers,” said Mr. Carey, who called the coming launch of cannabis-derived compounds south of the border a "significant catalyst."
He raised his target for the stock to $27 from $17. The average on the Street is currently $20.40, according to Bloomberg data.
“While clearly a high multiple even vs peers, following recent mgmt comments, we have improved confidence CRON is near announcing its launch, in our view a significant catalyst: (1) improving near-term visibility in the largest market for cannabis derived compounds in the world, (2) CRON beginning to flex its near group-leading balance sheet ($2.4-billion cash) and partnerships (Altria, MO) to begin a transformation we see creating a vastly different co. in the years ahead,” Mr. Carey said.
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Seeing its short-term headwinds offsetting longer-term positives, Oppenheimer analyst Rupesh Parikh initiated coverage of Tilray Inc. (TLRY-Q) with a “perform” rating.
“We look favorably on Tilray’s ability to capitalize on the longer term growth opportunities globally, but we believe the combination of a full valuation and the potential for a slower ramp in Canada given supply shortages in an ‘asset-light model’ limit the potential for outperformance near term. Recent company commentary from the Q1 (May) earnings call suggests the potential for supply shortages to last 12-24 months,” said Mr. Parikh.
He did not specify a target price. The average target among analysts covering the stock is US$78.67.
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The second-quarter results for Canadian banks “point to a deteriorating outlook,” according to Credit Suisse analyst Mike Rizvanovic.
"The Canadian banks reported relatively underwhelming Q2 results with several missing our expectations," he said. "Coming out of the quarter we have grown increasingly concerned about 1) decelerating growth in Canadian P&C Banking, which for most of the Big Six was even weaker than our below-consensus expectations; and 2) further signs of credit loss normalization, which we believe is still in its very early stages and will become an increasingly prominent headwind over the next couple of years."
Mr. Rizvanovic pointed to four key trends stemming from the recently concluded earnings season:
* Further signs of normalization in loan losses. He's projecting a "gradual uptick" toward the 40 basis points range by the end of fiscal 2020.
* Canadian P&C results were much weaker than anticipated, noting: "We now have more conviction that growth will slow further (to less than 2 per cent in F2020), particularly given the growing potential for margin contraction."
* The growing importance of international exposure, expecting it to outperform the Canadian lending business “materially” through 2020.
* A rebound in capital markets despite a "modest" outlook. "We see a very modest growth outlook for the business as the tailwind from loan loss recoveries wears off," he said.
With the results, he reduced his earnings expectations for the sector "modestly" to reflect "slightly weaker" margins in Canada as well as modestly higher loan loss ratios.
"As of June 3, the Big Six banks traded at a market-cap weighted forward PE multiple of 10.0 times (on next 12-month consensus)," he said. "While that remains comfortably below historical averages, we view the discount as largely reflective of broader market sentiment that has soured over the past several months on a weaker economic outlook and trade-related risks. As such, we do not see meaningful upside for the group in the absence of a broader recovery in equity markets."
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Canadian National Railway Co. (CNR-T, CNI-N) “makes a compelling case for above trend growth,” said RBC Dominion Securities analyst Walter Spracklin following its Investor Day event in Toronto.
“Apart from the 2019 volume growth guidance adjustments, we remain encouraged by the company’s growth opportunities, which are (and we expect will remain) toward the top end of the peer range,” he said. “At the Investor Day, management unveiled substantial $1.3-billion to $2.4-billion in incremental new above-trend revenue opportunities. The company also highlighted its emerging acquisition strategy of non-rail centric assets - a strategy that has been the source of some investor pushback. Combined, we see the growth outlook as compelling and reaffirming the industry-high target multiple we assign the CN shares - and which we consider fully warranted.”
He added: “Our approach to modelling volume growth for the rails has historically been to forecast differentiated growth rates, sub-segment by sub-segment, out 12-16 months. We do this as we believe we have some insight in the near-term growth trends based on the prevailing drivers that are at play in any given sub-segment. Beyond 16 months however, we gravitate our volume growth forecast toward our 2-p-ercent long-term volume growth rate, representing the increased challenge in the accuracy of longer term forecasts - yet still giving rails the benefit of the doubt for rising market share by assuming total revenue growth of 5 per cent (2-per-cent volume + 3-per-cent pricing), which is nicely ahead of the economy. At the Investor Day however, we think the company made a compelling case to model well in excess of the economy. Management outlined $1.3-billion to $2.4-billion in combined Intermodal, Bulk and Merchandise opportunities over and above the economy.”
Maintaining a “sector perform” rating, Mr. Spracklin nudged his target lower by a loonie to $127. The average on the Street is $126.97.
“The guidance prompted only a minor change to our estimates and more importantly, the Investor Day gave the opportunity to shed light on the company’s growth potential; the (contentious) non-rail growth strategy; its capex program; and the merits of the new management team,” he said. “We view CN’s premium valuation as properly reflective of its outlook and given the implied return to our price target believe the shares are fairly valued.”
Meanwhile, Raymond James’ Steve Hansen kept an “outperform” rating and $135 target.
Mr. Hansen said: “Broadly speaking, we came into the day with a somewhat critical eye, with our scrutiny heightened over CN’s slowing 2Q19 traffic pattern, its reinvigorated M&A strategy and healthy trading multiple … Management addressed the bulk of these concerns, or at least tempered them such that we remain constructive at this juncture and reiterate our OP2 rating. We will continue to monitor the near-term traffic pattern closely.”
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InterRent REIT’s (IIP.UN-T) joint venture (JV) with Brookfield Property Group (BPY-N) and CLV Group to develop an 8.5-acre piece of land in Burlington, Ont., into mixed-use residential and retail complex “validates the high-quality nature of the mixed-use development opportunity,” said Industrial Alliance Securities analyst Brad Sturges.
Under the deal, announced Tuesday, InterRent will hold a 25-per-cent interest in the development, known as the Burlington GO Lands. Brookfield and CLV will hold 50-per-cent and 25-per-cent stakes, respectively.
“Notably, the REIT’s internalized management structure provides InterRent the ability to enhance its unlevered returns by earning fees related to property management and residential leasing services, including project lease-up,” said Mr. Sturges. “Once construction commences, InterRent may target unlevered development yields of +100 to +200 basis points (bps) above going-in acquisition cap rates, similar in nature to its repositioning strategies.”
Emphasizing the REIT's new relationship with Brookfield provides "significant" development and related real estate expertise, Mr. Sturges added: "While this JV development project represents Brookfield’s first foray into Canadian multi-residential development, Brookfield brings a plethora of development and real estate expertise to the JV partnership as a globally recognized leading real estate investor across many property sectors. Brookfield and CLV will provide planning, entitlement, and development management services on behalf of the JV partnership with InterRent."
Maintaining a "hold" rating for InterRent units, Mr. Sturges increased his target to $15 from $14. The average on the Street is $14.75.
"Our Hold rating for InterRent balancesthe REIT’s premium NAV [net asset value] valuation, with senior management’s compelling historical track record of creating unitholder value, significant NAV and AFFO/unit growth prospects anticipated over the next few years that may be driven by continued execution of redevelopment strategies and the potential commencement of a development program, and its low 2019E AFFO payout ratio that provides the REIT the capacity for future distribution increases," he said. "The REIT’s investment risks include high geographic concentration in Ontario and Quebec, and development and redevelopment risks."
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Alithya Group Inc. (ALYA-T) is “well positioned” to deliver on its goal of doubling revenue in the next 3-5 years, according to Acumen Capital analyst Jim Byrne.
In a research note released Wednesday, Mr. Byrne initiated coverage of the Montreal-based digital strategy and digital technology consulting firm with a "buy" rating.
"Alithya has increased its offerings to address the changing needs for strategic advisory and product-based consulting services and is constantly looking to grow and evolve," he said. "The company holds several Microsoft and Oracle certifications. Alithya’s unique FinTech LAB is a dedicated digital solutions centre servicing the financial industry."
"With a larger geographic footprint we believe Alithya is better positioned to win contracts in the U.S. and has broadened its Microsoft and Oracle capabilities with Edgewater in the fold. With increased scale, Alithya should be able to pursue further acquisitions in the U.S. to drive revenue and profitability growth."
Seeing its shares trading at a discounted valuation, Mr. Byrne set a $5.25 target, which falls short of the $6.06 consensus.
“Alithya’s shares trade at 10.3 times 2020 estimated EBITDA and 25.9 times 2020 estimated P/E, compared to the peer multiple averages of 11.0 times and 17.0 times, respectively,” he said. “In our view, the shares are attractively valued given the company’s strong management team, balance sheet, and growth outlook. Management guidance is for revenue of $320-$340-million in the first year following the Edgewater deal, while generating EBITDA of $22-$24-million (7-per-cent EBITDA margins).”
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GMP analyst Deepak Kaushal thinks Drone Delivery Canada Corp.’s (FLT-X) partnership with Air Canada (AC-T) is a “major milestone” in the drone industry and provides the company with “multiple and significant strategic benefits.”
"In our view, this is the first time we have seen a major global airline sign a commercial agreement for drone delivery,” he said. “We believe this offers a significant boost to DDC’s credibility with customers, regulators and investors and accelerates commercialization and growth in Canada and worldwide.”
Mr. Kaushal added: “We believe Air Canada de-risks commercial revenue ramp given its existing customer relationships and market dominance, and offers added comfort to industry regulators and government. Furthermore, this frees DDC to focus on its strengths, being technology innovation and strategic development, with new commercial partners and regulators in Canada and beyond. On the latter, we believe Air Canada’s involvement will boost awareness of DDC beyond Canada, and accelerate decision-making by other (non-Canadian airline) commercial prospects already in discussion, which DDC continues to be free to develop under the agreement.”
Maintaining a “buy” rating, he raised his target for Drone Delivery shares to $4 from $2.38, which exceeds the $3.25 consensus.
“We believe Drone Delivery Canada has clearly entered the commercialization phase of its development,” he said. “ In the past year, the company achieved key milestones such as successfully completing the Transport Canada commercial pilot program in Moosonee/ Moose Factory, receiving pilot approval from Transport Canada and NAV Canada, signing the company’s first commercial agreement, and now is announcing a commercial partnership with a major airline, which we believe is a first in the drone industry. We continue to see DDC as a leading technology innovator in commercial drone delivery and believe long-term investors with a tolerance for start-up risk will be well rewarded."
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In other analyst actions:
National Bank Financial analyst Adam Shine raised Cineplex Ltd. (CGX-T) to “outperform” from “sector perform” with a $28 target, rising by a loonie. The average is $31.05.
Scotiabank analyst Paul Steep initiated coverage of Lightspeed POS Inc. (LSPD-T) with a “sector perform” rating and $31 target. The average on the Street is $29.20.
With files from Bloomberg News
David Leeder