Inside the Market’s roundup of some of today’s key analyst actions
Though she sees long-term value in Founders Advantage Capital Corp.’s (FCF-X) acquisition of the remaining 40-per-cent interest in Dominion Lending Centres, Raymond James analyst Brenna Phelan downgraded her rating for the Calgary-based investment company based on its current valuation.
On Nov. 16, Founders Advantage announced it has entered into a definite agreement to purchase the remaining stake in Dominion for $75.772-million.
“The Founder’s Advantage Capital story started out strong, with a high-profile (and fairly reasonably priced) acquisition of 60 per cent of Dominion Lending Centres, which was at the time, Canada’s largest mortgage broker,” said Ms. Phelan. “Subsequently, acquisitions resounded less with investors, momentum slowed and sentiment around DLC became less positive as the housing market slowed quite meaningfully. In Aug. 2018, Founders announced that it was commencing a strategic review, and in Sept. 2018 it announced that the company would acquire the remaining 40-per-cent interest in DLC from its founders. We ultimately think this was the right move for the company, and in our view, valuation could be further helped by divesting of the minority stakes in its other investments.”
Ms. Phelan called DLC’s mortgage broker business a “strong franchise run by a seasoned and savvy management team”, noting both its volumes and EBITDA have “held up well in a challenging mortgage environment in 2018.”
“Historically, DLC’s mortgage broker business has demonstrated resiliency even against a backdrop of a weak housing market,” she said. “DLC added franchisees and brokers during the last recession, and grew its market share over that time period. Volumes held in well in 1H18 as well, with funded volumes up 6 per cent. We think there could be solid upside to our DLC EBITDA forecasts, which currently assume 5-per-cent year-over-year growth, from each of better volumes, stronger margins and further onboarding of brokers.
”We also see opportunity for DLC to deepen the contribution from its Newton Connectivity business and to expand to complementary ancillary products (e.g., insurance). As we view these as medium-term initiatives, these are not currently reflected in our model.”
Despite this positive stance, Ms. Phelan lowered the stock to “market perform” from “outperform” with a target price of $1.50, falling from $3 and below the average target on the Street of $2.30.
“We have revised our valuation methodology to reflect our estimate of DLC’s 2020 EBITDA plus our estimate of the cash proceeds that could be realized upon divesting minority investment positions,” she said.
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Canaccord Genuity analyst Dennis Fong lowered his target price for shares of a quartet of large-cap Canadian energy companies in a research note reviewing third-quarter earnings season.
“Given the weak share prices through Q3/18 and the strong free cash flow generation; we expect companies could look at accelerating the repurchase of shares through to the end of the year,” he said. “We saw [Imperial Oil] repurchase 10.0 million shares, [Canadian Natural Resources] repurchase 9.6 million shares and [Suncor Energy] repurchase 16.8 shares through Q3/18 and Q4-to-date. We expect that these companies will look at renewing their respective NCIB next year at the same (if not a higher) level than in 2018. On consensus estimates, the Canadian large-caps are showing production growth of 9 per cent and FCF [free cash flow] yield of 9 per cent vs. the U.S. counterparts with 12-per-cent production growth and FCF yield of 6 per cent.
“We believe this is important for investors as the focus shifts away from raising equity (or debt) to fund aggressive growth and back towards returning that value back to shareholders. … We have ranked the Canadian companies and their US counterparts on free cash flow yield (from consensus estimates) and find that investors should look at CVE, CNQ and SU which still represent value on a FCF yield basis.”
Mr. Fong lowered his target for the following stocks:
Canadian Natural Resources Ltd. (CNQ-T, “buy”) to $50 from $55. Average: $53.87.
Cenovus Energy Inc. (CVE-T, “hold”) to $12.50 from $13.50. Average: $15.79.
Husky Energy Inc. (HSE-T, “hold”) to $19 from $24. Average: $22.43.
Suncor Energy Inc. (SU-T, “buy”) to $65 from $67. Average: $60.36.
“Within our large-cap coverage universe our pecking order on a short-term basis is as follows: SU, IMO, CNQ, HSE, CVE and ECA,” he said. “We continue to highlight SU as our top defensive pick. Looking 12 months out, and in an environment of narrowing differentials we would look to companies without integrated exposure or which are long a combination of light and heavy production (most notably CNQ, CVE and IMO) as having the most torque to narrowing differentials.”
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Though he sees “some turbulence ahead,” Desjardins Securities analyst Benoit Poirier sees Bombardier Inc.’s (BBD-B-T) current valuation discount to its U.S. peers as “unjustified” and recommends investors buy its stock.
“In terms of valuation, the stock is down 63 per cent from its 52-week high and is now trading at 11.2 times our adjusted EPS forecast for 2019 (and 7.1 times our EV/EBITDA forecast for 2020), well below the peer average,” said Mr. Poirier in a research report.
“While the revised FCF guidance for 2018 and 2019 is a setback versus former expectations (pre-3Q18 results), we remain confident that BBD can successfully navigate through its upcoming debt maturities on the back of the recent divestiture and possibly potential assistance from the Quebec government if necessary. While we expect that the share price will remain volatile until investors regain confidence in its FCF-generation capabilities, we continue to see value for long-term investors and maintain our bullish stance on the name. We would also note that the market does not appear to have ascribed any value to the A220 partnership with Airbus, an opportunity that is underestimated, in our view.”
During a recent lunch with the company executives, including president and chief executive officer Alain Bellemare, Mr. Poirier said management reaffirmed that the Quebec-based company should generate free cash flow of US$250-$500-million in 2019.
“Following BBD’s 3Q18 results, investors have focused on understanding the FCF shortfall of US$900–1,000m for 2018 and 2019,” he said. “Management provided additional details on each factor during the lunch. On a normalized basis, BBD estimates that the business should generate FCF of US$250–500m in 2019 (our estimate was US$416m prior to 3Q18 results) on the back of: (1) a year-over-year improvement of US$400m in EBITDA, (2) a reduction of US$150m in capex following the certification of the Global 7500, and (3) an increase in working capital of US$150m due to the production ramp-up on the Global 7500 program. We highlight below additional details around one-time factors that are expected to bring 2019 FCF guidance to -/+US$250-million.”
Mr. Poirier maintained a “buy” rating for the stock and $5 target. The average is $4.61.
“While we expect BBD’s share price to remain volatile until investors regain confidence in the company’s FCF-generation capabilities, we continue to see value for long-term investors and maintain our bullish stance on the name,” he said. “It also does not appear that the market has ascribed any value to the A220 partnership with Airbus, an opportunity that is underestimated, in our view.”
Elsewhere, calling the recent sell-off in Bombardier shares “extreme,” CIBC World Markets' Kevin Chiang kept an “outperform” rating and $5 target.
Mr. Chiang said: “Q3 earnings season was unforgiving for a lot of companies but no more so than for BBD. BBD is a higher-risk investment but the recent sell-off is, in our opinion, overdone. We continue to forecast BBD hitting its 2020 FCF target of $750-million to $1-billion and its improving liquidity position should help alleviate concerns over its absolute debt levels as we look past 2020.”
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Amid "continued” deterioration in both dynamic random-access memory (DRAM) and NAND gate pricing, Baird analyst Tristan Gerra downgraded Micron Technology Inc. (MU-Q) by two levels to “underperform” from outperform,” expecting the Idaho-based corporation to notch eight consecutive quarters of gross margin and earnings per share contraction.
The firm projects DRAM prices to fall by 30-35 per cent in 2019 with a drop in gross margin to 50 per cent in the second half of 2020, compared to 71 per cent in the last quarter. It also expects NAND contract pricing to “decline mid teens” in each of next two quarters.
“China is a risk notably for NAND in 2021,” he said.
Mr. Gerra dropped his target for Micron stock to a Street-low US$32 from US$75. The average is US$64.43.
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Calling its risk-reward “favourable,” RBC Dominion Securities Arun Viswanathan upgraded LyondellBasell Industries N.V. (LYB-N) to “outperform” from “sector perform.”
“We believe LYB shares look attractive for investors who can look through oil/market volatility,” he said. “Growth from Schulman, IMO2020, Hyperzone HDPE, and PO/TBA could add $1-billion or more or 15-per-cent-plus EBITDA growth through 2021. While investors worry about a protracted Braskem deal, we see long-term value and believe LYB will be disciplined on price and feedstock supply.”
Mr. Viswanathan raised his target to US$130 from US$114. The average is US$109.55.
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Mackie Research analyst Andre Uddin thinks Bellus Health Inc.'s (BLU-T) BLU-5937 treatment for chronic coughs should become “a blockbuster drug” when it approves.
Mr. Uddin raised his target price for shares for the Laval, Que.-based clinical-stage biopharmaceutical company in reaction to Monday’s release of Stage 1 results for the drug, which he called “tasty” and led him to call it “best-in-class.”
Maintaining a “speculative buy” rating, his target jumped to $2.20 from $1.
Meanwhile, Bloom Burton Securities analyst David Martin, who is the other analyst on the Street currently covering the stock, moved his target to $2 from $1 with a “buy” rating (unchanged).
Mr. Martin said: “BLU-5937 will not likely be the first P2X inhibitor to market, but it has shown early clinical (and pre-clinical) signs that it might be the best.”
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BMO Nesbitt Burns analyst Devin Dodge initiated coverage of Brookfield Business Partners LP (BBU-UN-T, BBU-N) with an “outperform” rating and US$47 target.
“We expect FFO per unit to increase at a CAGR [compound annual growth rate] of 16 per cent through 2020 underpinned by organic growth, progression of its operational turnaround initiatives and contributions from recently completed deals," he said.
“In light of our outlook for earnings growth, we believe the current valuation is compelling and see several potential paths for value creation across BBU’s portfolio of investments.”
David Leeder