Inside the Market’s roundup of some of today’s key analyst actions
The Street’s expectations for the costs associated with the completion of SNC Lavalin Group Inc.'s (SNC-T) lump-sum turnkey (LSTK) construction projects are “overstated,” according to Desjardins Securities analyst Benoit Poirier, leading him to raise his rating for the Montreal-based firm to “buy” from “hold.”
The move comes in the wake of the July 22 announcement that SNC intends to leave the LSTK construction business in order to place added emphasis on its Engineering Services business.
“SNC is turning its focus to Engineering Services, we expect investors to monitor organic growth for the business — a closely watched metric for WSP [WSP Global Inc.] and STN,” the analyst said. “While SNC does not officially disclose organic growth for the segment, we note that revenue from EDPM [Engineering, Design & Project Management] grew by 9 per cent in 1H19, almost all of which was organic growth as the FX impact was negligible, according to management; we would welcome disclosure on organic growth in the future. EDPM has posted a book-to-bill ratio of 1.1 time on average since 4Q17—a positive indicator of the health of the business, in our view, and which demonstrates that recent incidents in Canada have not impacted EDPM’s global reputation (we estimate Canada represents 1 per cent of EDPM’s total workforce). We believe generating positive organic growth at EDPM will be a key driver of value creation at SNC until the remaining LSTK construction projects are completed.”
Mr. Poirier cautioned that it is difficult to estimate the cost of completing each outstanding LSTK business due to their “uniqueness.” However, based on its current share price, he projects the market is projecting more than $3.0-billion of cash will be used toward the completion of the remaining $3.4-billion of LSBK projects. He said that is “well above” his worst-case scenario of $1.7-billion.
“For context, SNC generated negative EBIT of $374-million on revenue of $606-million in the Resources segment in 4Q18, which includes the significant losses associated with the Codelco mining contract,” he said. “Assuming a similar performance (all else being equal), we would derive EBIT of negative $0.4-billion to complete the $0.6-billion of projects remaining (worst-case scenario). Consequently, we believe investors are overly pessimistic with regard to these projects. Overall, while uncertainty remains in relation to the completion of the LSTK construction projects, we believe the current share price offers sufficient upside potential to justify buying the stock.”
With his upgrade, Mr. Poirier reduced his target price for SNC shares to $32 from $34. The average on the Street is $30.29, according to Bloomberg data.
“Overall, while uncertainties remain with regard to the SNC story, our in-depth analysis supports our view that the potential cost to complete the remaining LSTK projects, as implied by the current share price, is overstated,” he said. “We support management’s new strategy to focus on its Engineering Services business, although we note that efficient execution of construction projects will be needed for the stock to reflect its true potential. In the near term, we believe a potential divestiture of the Resources service segment represents a catalyst for the story. The current share price offers an attractive risk/reward profile for long-term investors to revisit the story and buy the shares.”
Brookfield Renewable Partners LP (BEP-N, BEP.UN-T) has the ability to deliver “healthy returns to unitholders as it continues to exploit pockets of capital scarcity or operational distress across the global renewable power sector,” said Raymond James analyst Frederic Bastien on the heels of its Investor Day event last week.
“CEO Sachin Shah did a good underlining the two key trends powering the sector’s rapid expansion,” he said. “The first one is economics. Massive advancements in technology, improvements in building materials and economies of scale have notably helped wind and solar stand on their own feet. Today, these technologies are simply cheaper to build on a pound-for-pound basis than gas plants, making smart investors even consider whether these should be shun altogether. The second one is continued government support. By this we mean aggressive carbon reduction targets that countries like China, India and the UK, and progressive US states such as California and New York are adopting. Based on this and the future electrification of all things transportation, renewables could reasonably attract an estimated $5-trillion to $10-trillion of capital in the next decade. This not only compares favourably to the $1.5-trillion invested over the past five years, but also dwarfs amounts contemplated not that long ago.”
Mr. Bastien also emphasized that chief investment officer Connor Teskey went a long way toward showing how Brookfield can move beyond the "traditional risk-reward curve and buy high-return assets with minimal downside risk.
“In the case of Saeta Yield, the European YieldCo taken private last year, speed of execution proved the differentiating factor,” he said. “BEP notably mobilized over 100 professionals to perform due diligence in three countries, and submitted a binding offer forward in less than a month. More recently, the LP structured a unique convertible security to help fund TransAlta’s previously announced coal-to-gas conversion and at the same time bring its own large-scale hydro capabilities to bear in Alberta. With X-Elio, BEP is partnering with giant KKR on both a large-scale solar portfolio as well as a massive development pipeline. This comes at a time when solar capex costs are plateauing and necessitating more capital discipline from incumbents. That may be easier said than done for some (to Brookfield’s benefit).”
Keeping a “market perform” rating, Mr. Bastien raised his target for its shares to US$40 from US$36, citing “a more supportive interest rate environment and Brookfield Renewable’s goal to accelerate equity capital deployment.” The average on the Street is US$39.43.
“However, we fear the easing interest rate environment has pushed BEP’s valuation ahead of itself, leaving little to no upside for investors in the short term,” the analyst said. “Embarrassed as we are to have missed the units’ 57-per-cent run since the beginning of 2019 (versus a gain of 19 per cent for the S&P 500), we are not going to chase them here.”
Desjardins Securities analyst Bill Cabel is expecting Northland Power Inc. (NPI-T) to exhibit “good” third-quarter operating results, however he cautions that FX headwinds may have a noticeable impact.
“We now have a decent view of how the quarter shaped up for NPI’s offshore wind assets, which contribute more than 55 per cent of our 3Q19 EBITDA estimate,” he said. “Overall, it appears that FX headwinds will slightly complicate EBITDA expectations for an otherwise solid operating quarter. We expect offshore wind to be in line with LTAs, with modest negative impacts from below-the-floor pricing at Gemini, and a potentially small negative pricing curtailment at Nordsee One. Additionally, as an offset, we have adjusted some expenses lower to better align with historical levels. We believe some potential upside to our numbers is possible through DeBu contributing to 3Q results, but we have taken a conservative stance and not included any contribution from this project. Overall, we believe it should be a good quarter for NPI as it marches toward $1-billion of annual EBITDA in 2019.”
Based on changes to his forex forecast, Mr. Cabel did lower his third- and fourth-quarter EBITDA expectations by $4-million and $8-million, respectively.
However, after reducing his risking for its DeBu offshore wind project in the German North Sea, he increased his target for Northland shares by a loonie to $30. The average on the Street is $28.83.
“We believe the upside potential from the offshore wind projects, coupled with their solid operating base, provides an attractive buying opportunity for NPI at current levels,” he said. “NPI trades at a very attractive 9.5 times EV/EBITDA vs the peer average at 12.1 times, which is unwarranted in our view , given its growth pipeline and attractive offshore wind assets.”
National Bank Financial analyst Travis Wood made a series of rating changes to TSX-listed energy stocks on Wednesday.
His moves included downgrades for the following:
Suncor Energy Inc. (SU-T) to “sector perform” from “outperform” with a $49 target, down from $55. The average on the Street is $52.67.
Canadian Natural Resources Ltd. (CNQ-T) to “sector perform” from “outperform” with a $43 target. Average: $45.22.
Vermilion Energy Inc. (VET-T) to “sector perform” from “outperform” with a $24 target, down from $28. Average: $31.67.
Peyto Exploration & Development Corp. (PEY-T) to “sector perform” from “outperform” with a $4.25 target, down from $5. Average: $5.73.
Freehold Royalties Ltd. (FRU-T) to “sector perform” from “outperform” with a $9.50 target, down a loonie. Average: $11.48.
Mr. Wood raised his rating for Painted Pony Energy Ltd. (PONY-T) to “sector perform” from “underperform” with a 75-cent target. The average is $1.41.
A day after it announced the US$42-million acquisition of privately owned Control Group, a pair of equity analysts upgraded Winpak Ltd. (WPK-T) on Wednesday.
GMP’s Ben Jekic raised the Winnipeg-based manufacturer of packaging materials and products to “buy” from “hold,” believing the deal should help “add capacity, plastic die cut lidding, and digital inspection capability."
His target for Winpak shares is now $53, up from $52.
CIBC World Markets’ Scott Fromson moved it to “outperformer” from “neutral” with a $50 target, rising from $48.
The average target on the Street is currently $50.33.
“We see this deal as evidence that, despite a frothy M&A environment, Winpak is able to create value with its sizeable cash position,” said Mr. Fromson. “Building on its base of quality products, well-capitalized production assets and strong management, we could see Winpak accelerating capital deployment on both internal investments and further acquisitions. The company is also well positioned on sustainability, a point of competitive advantage.”
Seeing bearish investor sentiment on the stock is nearing a bottom and the shares offer good upside, RBC Dominion Securities analyst Nelson Ng upgraded Methanex Corp. (MEOH-Q, MX-T) to “outperform” from “sector perform.”
Mr. Ng expects methanol prices to rise in the next 12 months, pointing to a potential resolution in the global trade war and higher methanol-to-olefin (MTO) demand.
He maintained a US$50 target. The average on the Street is US$43.60.
“The stock will be range bound for at least the next 6 to 9 months until the market can better gauge the impact," said Mr. Grandet, who added he’s already seeing “some early signs of softness” in both Great Britain and Germany.
Expecting Monster to need to "spend more to defend its brands,” which could result in margin pressure, he lowered his target for its shares to US$60 from US$74, which falls short of the consensus of US$65.41.
In other analyst actions:
Canaccord Genuity analyst Simon French downgraded Stars Group Inc. (TSGI-T) to “hold” from “buy” with a $30.65 target, exceeding the consensus of $29.31.
National Bank Financial analyst Greg Colman downgraded Step Energy Services Ltd. (STEP-T) to “sector perform” from “outperform” with a target of $2, down from $3. The average on the Street is $3.10.
Barclays analyst Jeremy Campbell downgraded TD Ameritrade Holding Corp. (AMTD-Q) to “underweight” from “overweight” with a target of US$31, down from US$57 and below the consensus of US$49.17.
Cormark Securities analyst Gavin Fairweather downgraded Quarterhill Inc. (QTRH-T) to “market perform” from “speculative buy” with a target of $1.90, falling from $2.25 and below the average of $2.46.