Inside the Market’s roundup of some of today’s key analyst actions
SNC-Lavalin Group Inc. (SNC-T) is “taking taking steps in the right direction but not out of the woods yet,” according to Desjardins Securities analyst Benoit Poirier.
Before the bell on Monday, the Montreal-based engineering firm announced a shift in corporate strategy while pre-releasing “disappointing” second-quarter financial results and withdrawing its 2019 guidance.
Mr. Poirier said he supports the decisions, which prompted a 6.7-per-cent drop in share price on Monday, but said he prefers to “remain on the sidelines as we await signs of improvement on the financial side before revisiting our thesis.”
“While we are pleased with management’s action to forge a new strategic direction with the corporate reorganization, we maintain our Hold rating pending more clarity on the turnaround in Resources and the infrastructure projects," he said. "We expect to have more details when the company reports its 2Q19 results on August 1.”
He added: “In light of yesterday’s announcement, we are adjusting our model in view of the new segmented information and breaking down the Infrastructure segment between Services (part of SNCL Engineering Services) and EPC Projects (part of SNCL Projects). We assume that revenue from EPC Projects (total of $1.3-billion in 2018) will ramp down as SNC runs off the vast majority (over 80 per cent) of its $3.2-billion LSTK backlog by the end of 2021. The two remaining projects should be fully completed by 2024. We are also adjusting our estimates and valuation to reflect the divestiture of SNC’s 10-per-cent stake in Highway 407, with the transaction to close in 3Q19. The reduced dividend from Highway 407 will be more than offset by lower financial expenses as SNC will pay down debt. Bottom line, we are tweaking our estimates and now expect core EPS of a 1-cent loss in 2019 and $1.92 in 2020, down from $1.72 and $2.20, respectively. Our new estimates also reflect more conservative assumptions for Resources (EBIT margin of 4.6 per cent in 2020, down from 6.0 per cent).”
With those changes, Mr. Poirier lowered his target price for SNC shares to $37 from $42. The average target on the Street is currently $36.83, according to Bloomberg data.
Elsewhere, calling the moves a “needed change” but cautioning about lingering execution risks, National Bank Financial’s Maxim Sytchev dropped his target to $38 from $47, keeping an “outperform” rating.
Mr. Sytchev said: “SNC’s share price represents a material discount to imbedded value but even with the new structure, current LTSK construction projects still need to be wound down (or sold). Hence, we keep a watchful eye on: 1) continued execution as said projects will have to assume 0-per-cent EBITDA margin and still have working capital requirements etc. that need to be funded by the current balance sheet; 2) employee retention knowing that SNC will no longer be bidding on LTSK projects. Using Tetra Tech’s exit from construction as a blueprint, patient investors (those who can afford it) could be rewarded with material re-rating in SNC share price, although the former took 12+ months before investors got comfortable with the new end-market exposure for TTEK ... We keep our Outperform rating but lower our target price to $38.00 (from prior $47.00) on contracted EBITDA/FCF projections in Infra / Resources, while assuming zero value to legacy Infra/Resources. With consistent underperformance, we find it hard to justify another value for those businesses at the moment given lack of earnings visibility. Perhaps going through a turnaround in a private setting could be deemed less onerous.”
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Desjardins Securities analyst Doug Young expects to see “decent” second-quarter results from Canadian insurance companies.
In a research report released Tuesday, the analyst said investors are likely to focus on a quartet of factors:
- Core earnings per share, which he expects will grow by 5 per cent on average.
- The third-quarter actuarial reviews from Manulife Financial Corp. (MFC-T) and Sun Life Financial Inc. (SLF-T). He said: “MFC and SLF typically provide guidance when 2Q results are released on potential upcoming reserves changes in 3Q. Of note, MFC will be concluding its triennial review of long-term care insurance assumptions in 3Q19 (this was last completed in 3Q16) and this will be the primary focus for us and, we believe, most investors.”
- Trends in Asia, noting: “These will be noteworthy given trade tensions with China and recent unrest in Hong Kong. And the Asian businesses remain an important part of both MFC’s and SLF’s stories.”
- Life Insurance Capital Adequacy Test (LICAT) ratios, which he expects will remain “healthy.”
“2Q19 was a decent quarter for the lifecos, with stocks up 3.1 per cent on average, outperforming the broader Canadian market (rising 1.7 per cent) and the S&P/TSX Financials sub-sector (up 2.4 per cent)," said Mr. Young. "The returns have varied however, ranging from down 6.8 per cent for GWO to up 8.2 per cent for IAG. We see a few catalysts that should drive core EPS growth for the group; however, lower interest rates, a flattening Canadian yield curve and global trade uncertainties could remain headwinds, in our view. We expect decent 2Q19 results for the group, with the focus being on management’s commentary around the macro environment as well as the 3Q assumption reviews for MFC and SLF specifically.”
Mr. Young made the following target price changes for the sector’s stocks:
Sun Life Financial (“buy”) to $60 from $59. Average: $57.34.
iA Financial Corp. (IAG-T, “buy”) to $58 from $57. Average: $60.88.
Great-West Lifeco Inc. (GWO-T, “hold”) to $31 from $34. Average: $33.05.
His target for Manulife Financial (“buy”) remains $29. The average target on the Street is $28.70.
“Compared with average historical P/BV levels, all lifecos except for SLF are trading below historical price-to-book averages," the analyst said. "Given MFC’s lower ROE outlook compared with pre-crisis levels (partially a function of hedging costs), we believe a lower multiple is warranted. GWO also deserves a lower multiple, in our view, due to issues at Putnam and its exposure to uncertainty in the UK. We believe SLF warrants a multiple above the historical average given (1) its lower risk profile (ie sale of its US annuity operations); (2) a larger portion of earnings coming from MFS; (3) its strengthened and stable Canadian operations; (4) a clearer strategy; and (5) a strong financial position.”
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Canaccord Genuity analyst Doug Taylor raised his target price for shares of Air Canada (AC-T) before what he expects to be a “noisy” second-quarter earnings report.
“Q2 includes a full quarter impact of the B737 MAX grounding, which is likely to distort unit economics, capacity and load factors,” he said. “With that said, U.S. comp commentary and Q2 results have been received generally positively by the market. In our view, Air Canada’s ability to weather the impact of the B737 MAX has helped provide investors better comfort in the resiliency of its financial model. The stock has been, and should continue to be, rewarded through an expanding multiple and further upside if the company can close the Transat transaction on the proposed terms.”
With an unchanged “buy” rating, his target rose to $50 from $45. The average on the Street is $46.50.
Conversely, Mr. Taylor said he expects WestJet Airlines Ltd.'s (WJA-T) results to be"largely academic and more interesting likely in their readthroughs for Air Canada."
He maintained a “hold” rating and $31 target for WestJet shares. The average is $29.31.
"The market will remain sensitive to any Air Canada commentary related to Transat, given the potentially accretive, but less-than-certain outcome of that proposed transaction. Updates related to the impact of the Aeroplan integration progress ahead of the new loyalty program launch (next July) will also be of interest.
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TerraForm Power Inc. (TERP-Q) US$720-million acquisition of some of AltaGas Inc.'s (ALA-T) U.S. power-generation assets increases its “distributed generation footprint,” said RBC Dominion Securities analyst Shelby Tucker, who expects modestly immediate accretion followed by longer-term upside.
“Management indicated that the $720-million purchase price reflects a 12 times trailing EBITDA multiple but estimates that the pro-forma multiple would be 10– 11 times after reflecting operating synergies and normalized solar resources (TTM solar resources were below average),” said Mr. Tucker. “We estimate that the initial CAFD/share accretion would be 3 per cent, but we see upside from cross-selling opportunities or a more cost-effective capital structure.”
“TERP’s sponsor Brookfield has a strong track record of optimizing the capital structure, driving synergies, and delivering value. For DG assets specifically, there are significant crossselling opportunities with Brookfield’s large real estate portfolio. Based on discussions with management, we understand that there is a new team in place to explore storage/back-up power opportunities for commercial and industrial customers.”
With the deal, Mr. Tucker raised his EBITDA estimates for TerraForm, an affiliate of Brookfield Asset Management Inc. (BAM-A-T), to US$783-million, US$834-million and US$861-million, respectively, from US$774-million, US$788-million and US$806-million.
Maintaining an “outperform” rating, his target for TerraForm shares increased to US$15 from US$14. The average on the Street is US$14.69.
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Beacon Securities analyst Lyndon Dunkley said AltaGas Inc.'s (ALA-T) divestment team’s “winning streak continues" with the TerraForm deal.
“Including the previously announced sale of the Stonewall Gas Gathering System, AltaGas has now successfully announced or sold $1.3-billion of assets, nearly equal to the bottom range of the $1.5 to $2.0-billion target the company set at the beginning of the year,” he said. “We expect the company will strongly consider selling its 11.025 million share position in AltaGas Canada (ACI-T, “buy” rating, $27.00 target) after the end of the lock-up period (Oct. 25, 2019) for potential gross proceeds in the $250-million to $300-million range. We believe further asset sales would be dependent on the potential price and EBITDA multiples offered, which if continue at the same level as previous divestments, may enable the company to meet or even exceed the $2-billion target.”
Mr. Dunkley kept a “buy” rating and $24 target for AltaGas shares, which exceeds the $20.57 average.
“From a low of $11.87 in late 2018, AltaGas’ share price has made a significant recovery based on the company highly successful divestment program allowing a strong rebuild of the company’s balance sheet,” he said. “With the company’s balance sheet back in order and various capital projects coming on line, the market can now safely assume ALA is back on a financial growth trajectory which should ultimately allow for a return to a dividend growth model.”
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Following Monday’s release of in-line second-quarter financial results, Raymond James analyst Jeremy McCrea said “there is no other company quite like” PrairieSky Royalty Ltd. (PSK-T).
“Between its essentially no leverage position and its ability to see some of the highest ‘value creation’ in the mid-cap space given its limited need for capital/acquisition spending, there should be considerable long-term comfort with investors as it relates to the business,” said Mr. McCrea in a research note. “As such, the company deserves a valuation premium higher than traditional E&P operators. As the 2Q results would suggest as well, activity is robust and production from increased activity could start to show up as early as 3Q. With near record new leasing arrangements signed and spud activity holding in strongly on fee title land (where higher royalty rates exist), the company has been able to stem production declines quarter-over-quarter. Unfortunately, even with oil differentials improving greatly since 4Q18, we have not seen the 3rd party operators return to spending as quickly as we would have thought. Broadly speaking, many operators are quietly indicating they are in no hurry to expand capex budgets, even for 2020. As such, we’re taking a wait-and-see approach for now and aren’t making any broad changes.”
Emphasizing leasing activity remains on the rise despite difficult market conditions, the analyst increased is cash flow per share projections for 2019 and 2020 to 96 cents and 84 cents, respectively, from 95 cents and 81 cents.
However, he maintained a “market perform” rating, citing a “valuation discrepancy among other E&P names today,” and $20 target. The average is $21.40.
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Citi analyst Gregory Badishkanian increased his target price for shares of BRP Inc. (DOO-T) after raising his earnings per share projections for fiscal 2020 through 2022 by 4 cents each year, citing “latest guidance and trends.”
With a “buy” rating, his target rose to $54 from $49. The average is $55.74.
“We believe valuation based on a relative P/E compared to powersports companies is applicable to DOO. Over the last 5 years, the other powersports companies have traded, on average, between 9.5 times and 18.7 times with a median P/E of 15.0 times. We think BRP deserves to trade at a 15-per-cent premium to peers (previously a 10-per-cent premium). We are raising our premium relative to peers due to strong retail sales momentum (especially ex-weather impact), sequential improvements in inventory which is encouraging and strong upcoming product lines following years of elevated R&D although these tailwinds are partially offset by some concerns over Mexico tariffs and late cycle economics. Applying a 15-per-cent premium to the current peer group multiple of 11.4 times yields a target multiple of 13.1 times (previously 12.0 times). Applying this to our calendar 2020 EPS estimate of $4.09 (previously $4.05) yields a target price of $54.”
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In other analyst actions:
National Bank Financial analyst Mike Parkin downgraded Eldorado Gold Corp. (ELD-T) to “sector perform” from “outperform.” He raised his target for its shares to $11 from $9.50, which exceeds the average target on the Street of $9.30.
National Bank’s Don DeMarco downgraded Semafo Inc. (SMF-T) to “sector perform” from “outperform” with a target of $6.50, rising from $6 and above the $5.94 consensus.
National Bank’s Shane Nagle lowered Maverix Metals Inc. (MMX-T) to “sector perform” from “outperform” with a $6.50 target, up from $6.30. The average is $6.34.
Haywood Capital Markets analyst Pierre Vaillancourt cut Copper Mountain Mining Corp. (CMMC-T) to “hold” from “buy” with a $1 target, falling from $1.50 and below the $1.59 average.
Mr. Vaillancourt also lowered Capstone Mining Corp. (CS-T) to “hold” from “buy” with a 70-cent target, down from 85 cents. The average is $1.12.
Canaccord Genuity analyst Carey MacRury resumed coverage of Teranga Gold Corp. (TGZ-T) with a “buy” rating and $7 target, which falls 67 cents short of the consensus.
Mr. MacRury said: “Teranga has been a single-asset gold producer since acquiring the Sabodala mine in Senegal in 2010. The company’s second mine, Wahgnion in Burkina Faso, is on track for commissioning in Q3/19 and ramp up over Q4/19. The company’s Golden Hill project in Burkina Faso has the potential, in our view, to become the company’s third mine. We expect Teranga’s shares to re-rate as it gains the benefits of operating, financial, and geopolitical diversification.”
David Leeder