Inside the Market’s roundup of some of today’s key analyst actions
Capital Power Corp.'s (CPX-T) outlook “remains healthy,” said Industrial Alliance Securities analyst Jeremy Rosenfield following Monday’s release of fourth-quarter financial results that largely met his expectations.
However, given limited upside to his target price for the Edmonton-based power producer's shares, Mr. Rosenfield lowered his rating to "buy" from "strong buy."
Before the bell, Capital Power reported EBITDA for the quarter of $230-million after adjusting for non-recurring items. That fell just below the analyst's $239-million projection.
“CPX’s contracted growth continues to advance as expected, with (1) Whitla Wind I (202MW, contracted) reaching commercial operations in December 2019 (as previously reported), (2) commercial operations expected shortly at Cardinal Point (150MW, COD March 2020), and (3) Whitla Wind II (97MW, COD targeted for 2021),” said Mr. Rosenfield. “Furthermore, CPX expects to provide further updates on its re-contracting initiatives later this year, including re-contracting for the Decatur facility.”
“We expect CPX’s near-term contracted growth (discussed above) and its commitment to deploying $500-million per year of capital towards additional contracted growth to drive healthy mid-single-digit FCF/share and dividend growth over the medium term.”
Mr. Rosenfield maintained a $40 target for Capital Power shares. The average target on the Street is $38.30.
“CPX offers investors (1) a mix of contracted (more than 70 per cent) and merchant cash flows, (2) longer-term leverage to market recovery in Alberta, (3) healthy growth (mid single-digit FCF/share growth through 2023), and (4) an attractive income profile (5-per-cent yield, 7 per cent per year dividend growth through 2021, 5 per cent per year thereafter, with a 45-55-per-cent payout),” the analyst said. “Given the recent share price appreciation and the limited upside to our price target, we are moving our rating.”
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Tesla Inc.'s (TSLA-Q) recent rally “hasn’t actually been supported by corresponding fundamental data points,” according to Citi analyst Itay Michaeli, who warns investors to remain cautious.
"If anything, one could point to a number of more cautionary data points such as negative H2 U.S. revenue & registrations (including California), the 2020 capex outlook, continued legal/investigation risks noted in the 10K, a seemingly cautious Q1 guide, FSD comments on the Q4 call and of course coronavirus related risks," said Mr. Michaeli. "What we’re left with is a stock where: (a) The bull case for vehicle deliveries seems to be far ahead of consensus, with bulls seemingly expecting Tesla to sell 3-4 million vehicles annually ~2025 (street at 1.1 million)—a view that seems dismissive of risks tied to flawed demand extrapolations, overcapacity outcomes and execution; and (b) There is a perception that Tesla is well-ahead of the industry (not just OEMs, tech players too) in AVs, despite data points suggesting otherwise."
Despite that skepticism, Mr. Michaeli hiked his target price for Tesla shares in response to fourth-quarter results that were "somewhat ahead" of his expectations and seeing its recent capital raise as "wisely" de-risking its balance sheet.
"We’re raising our price target to $312 from $222 mostly to reflect improved probability-weighted terminal value outcomes — now 10 per cent/80 per cent/10 per cent our full bull, moderate bull, and bear scenarios vs. 10 per cent/55 per cent/35 per cent previously," he said. "Our target also equates to 9.7 times 2022 estimated EV/EBITDA [enterprise value to earnings before interest, taxes, depreciation and amortization], which models 815k vehicle deliveries (vs. 367k in 2019) and 10-per-cent op margin (18 times 2022 estimated P/E).
“What hasn’t changed? Our view that the current bull case narrative appears premised on a number of flawed extrapolations & data interpretations. At current levels, it’s not about being bullish or bearish, but rather about assessing risk/reward, as discussed below. We appreciate the appeal of the Tesla long-term upside potential story, but even under a blue-sky/thematic lens (Car of the Future, ESG), we see more powerful storylines with more compelling risk/reward propositions in shared mobility (EV/AVs in particular), including the likes of GM/Cruise and Uber.”
With his target increase to US$312, which remains well below the US$499 consensus on the Street, Mr. Michaeli maintained his “sell” rating and noted three factors that would cause him to become more bullish: “First, at an industry-level we’re most bullish about shared autonomous EV mobility. Though we see a number of flaws to Tesla’s approach vs. peers, this is an area we’re always watching carefully. Second, if we began seeing signs that demand is consistent with the current narrative, the stock would be a difficult Sell even under high valuations. Third, if Tesla’s margin performance (ex. credits) experienced a meaningful & sustainable expansion, then that would be supportive of a competitive advantage.”
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The resumption of Gibson Energy Inc.'s (GEI-T) dividend growth further enhances its total return profile, said Raymond James analyst Chris Cox.
On Monday, the Calgary-based company reported better-than-expected fourth-quarter results after the bell, driven by its marketing services division. Total adjusted EBITDA of $126-million exceeded the projections of both Mr. Cox ($113-million) and the Street ($116-million).
With the results, Gibson announced a "modest" 3-per-cent raise to quarterly dividend to 34 cents per share, which equates to a 4.9-per-cent yield.
“With recent projects now in-service, a balance sheet that remains best-in-class (with Investment Grade metrics to match) and given the successful re-focusing of the asset base towards the core infrastructure assets in recent years, we believe that Gibson is now much better positioned to execute on a growing dividend story, with Management articulating a plan to continue growing the dividend going forward,” said Mr. Cox. “With a modest payout ratio of only 66 per cent (one of the lowest in the space), we believe the company has ample headroom to pursue long-term dividend growth, without sacrificing the self-funding nature of the capital program.”
After increasing his 2020 and 2021 financial expectations, Mr. Cox raised his target for Gibson shares to $31 from $29, keeping an "outperform" rating. The average on the Street is now $29.36.
“Overall, 4Q19 results were fairly uneventful for Gibson, given the wave of new project announcements from the company in the final months of the year. While somewhat nominal, we do believe investors will be encouraged by the resumption of dividend growth for the story, with the combination of the company’s industry-leading payout ratio and strong balance sheet providing for plenty of running room to continue growing the dividend going forward, irrespective of any continued growth from organic opportunities in the Infrastructure business. While the resumption of dividend growth improves the overall total return outlook for the stock, we continue to believe that the large source of upside lies in ongoing project wins in the core Terminals business, coupled with potential M&A upside - within the Canadian Midstream space, Gibson screens as one of the few potential M&A targets, especially under an outlook of improving clarity on market egress out of the basin.”
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Northland Power Inc. (NPI-T) is “setting up for a huge decade” with the acquisition of Dado Ocean Wind Farm Co. Ltd., said Desjardins Securities analyst Bill Cabel.
On Monday, the Toronto-based company announced the deal for the South Korean development company, which owns several early stage offshore wind development sites.
“NPI continues to grow its development pipeline in Asia, adding a solid offshore wind (OFSW) pipeline in South Korea to an already impressive development pipeline featuring contracted OFSW projects in Taiwan and early-stage OFSW prospects in Japan,” said Mr. Cabel.
“We continue to believe NPI is set up increasingly well to participate in the massive global development of OFSW.”
The analyst maintained a “buy” rating and $35.50 target for Northland shares. The average is currently $31.39.
“The upside valuation potential from NPI’s OFSW projects and its solid operating base provide an attractive buying opportunity," said Mr. Cabel. “The stock trades at a favourable 10.4 times EV/EBITDA vs the peer average of 13.4 times, which is unwarranted, in our view, given NPI’s improving growth pipeline and attractive OFSW assets.”
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Though it currently has an “attractive” valuation and appears undervalued, Canaccord Genuity analyst Raveel Afzaal thinks Superior Plus Corp.'s (SPB-T) share price is likely to remain “side-ways” in the near term.
"SPB ended 2019 with net debt to EBITDA of 3.6 times," he said. :We believe this is likely going to keep new growth investors who want to see SPB consolidate the U.S. propane market in a meaningful way on the sidelines. Further, the leverage may deter new income-oriented investors from gaining exposure as well. Finally, we have a lack of visibility on near-term valuation catalysts that could help normalize SPB's valuation multiples relative to the peer group average. That said, we believe the current share price offers an attractive entry point for investors with a medium-term investment horizon."
Seeing macro headwinds for its Specialty Chemicals division and reducing his earnings forecast for its Energy division, Mr. Afzaal lowered his target for Superior Plus shares by a loonie to $13 with a “buy” rating (unchanged). The average on the Street is $13.73.
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Strategic concerns and the potential for a “challenging” 2020 continue to hang over Hudbay Minerals Inc. (HBM-T), said Raymond James analyst Farooq Hamed, who called the company’s production outlook for the year “weak.”
"We view HBM as being in a state of transition, both at the operations and in the Boardroom," he said. "Operationally, declining grades at Constancia and the wind down at 777 are driving a lower copper production outlook for the foreseeable future, while gold production is expected to increase (mainly starting in 2021) with contributions from Pampacancha and Lalor. At the same time, the company has gone through significant senior personnel changes over the past year with a new Chairman and new CEO and a search just beginning for a new CFO. As a result, we see 2020 as a year where management has elected to pursue the near-term opportunities (Pampacancha and Lalor) but still needs to address the question of the longer term strategy for the company.
"Unfortunately, with investment in both near term opportunities coinciding in the same year, we expect HBM will be challenged to generate FCF in 2020. Given the outstanding questions regarding long term strategy and plan coupled with negative cash flows expected for 2020, we expect investors to stay on the sidelines until they are more comfortable with new management's longer term vision."
Though he noted the company’s “improving” three-year outlook, Mr. Hamed shrunk his target for Hudbay shares to $5 from $6.50, maintaining a “market perform” rating. The average on the Street is $6.54.
Elsewhere, RBC Dominion Securities analyst Sam Crittenden lowered his target to $5 from $6 with a "sector perform" rating.
Mr. Crittenden said: " Capital spending in 2020 in Peru and Manitoba sets up stronger production in 2022; however, this limits near-term FCF. We believe the balance sheet is well positioned to complete these investments as well as stronger precious metals prices (17 per cent of EBITDA) help to offset lower base metals."
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Green Growth Brands Inc.'s (GGB-CN) decision to sell its cannabidiol business “will likely lead to a near-term focus on cost control ahead of revenue growth,” according to Canaccord Genuity analyst Derek Dley.
With the release of “softer than expected” second-quarter results on Monday after the bell, the Toronto-based company announced the execution of “Stalking Horse” agreement to sell the its CBD business to The BRN Group for an undisclosed amount.
“While we will wait until the company hosts its Q2/F20 conference call on Wednesday, Feb 26 before offering more opinion, given the limited disclosure, we believe the operating expenses to ramp up and grow GGB’s CBD business were heavier than previously expected, and forced the company to consider strategic options to better capitalize both its MSO and CBD divisions,” said Mr. Dley. “Looking ahead, assuming the transaction is completed, GGB will focus on its MSO division, which operates dispensaries in Nevada, and holds licenses for dispensaries in Massachusetts and Florida.”
"GGB also announced plans to restructure US$24 million of its outstanding 8.00-per-cent 2020 convertible debentures. The company has extended expiration to 2024, reduced the effective interest rate to 5.00 per cent , and lowered the conversion price materially. While this likely will result in incremental equity dilution, it does eliminate a near-term financing overhang. Furthermore, the company announced its intention to raise an additional US$30 million of equity, with a US$10 million backstop from a large existing shareholder. This should further help shore up the balance sheet as GGB moves to focus its business on the MSO segment."
After lowering his 2020 and 2021 earnings expectations, Mr. Dley reduced his target for Green Growth shares to 85 cents from $1.75, keeping a “speculative buy” rating. The average on the Street is $3.75.
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Canaccord Genuity analyst Robert Young lowered his target price for shares of EXFO Inc. (EXFO-Q, EXF-T) in response to its revenue guidance reduction stemming from the coronavirus outbreak.
On Monday evening, EXFO shrunk its expectation for the second quarter to US$55-million from US$66-71-million, pointing to EXFO announced that it is reducing its FQ2 revenue guidance due to manufacturing operations and supply chain disruption in China as well as an unrelated IT issue that has caused a key systems outage.
“The company did not adjust its $33-million EBITDA guide for F2020; however, there is clearly increased risk to the company achieving its profitability target,” the analyst said. “Any impact from COVID-2019 is likely to drive a pushout in demand as opposed to an absolute change in the level of demand, which may lead to a back-end loaded year. It is worth noting that peers, Ericsson, Keysight and Viavi, have indicated that they see risk of disruption but nominal current impact.”
With that drop, his target for EXFO shares slipped to US$4 from US$4.75 with a “hold” rating (unchanged). The average is US$4.71.
“We believe the impact of IT disruption will be contained in FQ2, while the effect and duration of the coronavirus outbreak is more difficult to measure,” he said. “Management asserts that revenue is expected to accelerate in upcoming quarters as these headwinds are resolved, and we anticipate further detail when the company reports FQ2 results in April. We have reduced our estimates for revenue and EBITDA for FQ2 and F2020.”
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In other analyst actions:
* CIBC World Markets analyst Cosmos Chiu raised Eldorado Gold Corp. (EGO-N, ELD-T) to “outperformer” from “neutral” with a US$13 target, rising from US$9.75. The average on the Street is US$9.38.
Mr. Chiu said: “Since the announcement of the mine plan at Kisladag and the new five-year outlook, Eldorado Gold’s share price has increased by 45 per cent. With that said, Eldorado Gold shares continue to trade at discounted multiples of 0.6x P/NAV and 5x P/2020E CF, compared to the group at 0.9x and 6.5x, respectively. With clarity now at Kisladag (25 per cent of NAV), an improving environment in Greece (35 per cent of NAV), and continued growth opportunities at Lamaque (15 per cent of NAV), we view Eldorado Gold shares as an attractive way for investors to gain exposure to the increasingly bullish environment for precious metals.”
David Leeder