Inside the Market’s roundup of some of today’s key analyst actions
“Venturing into the deeper end of deep value,” Raymond James analyst Michael Glen said TSX-listed auto parts stocks remain “heavily discounted."
In a research report released Tuesday, Mr. Glen said the “most important talking point” for the sector remains investor sentiment, which he said has fluctuated between “fairly negative and something approaching neutral” over the last four years.
“While the primary driver of this sentiment has been concerns surrounding plateauing global production levels (in particular in the U.S.), there also remains significant questions surrounding the overall impact of emerging technology trends, namely autonomous driving and electrification of the powertrain, as well as overhangs related to global trade in autos and auto parts,” he said.
With investors having chosen to avoid auto parts stocks, Mr. Glen now sees a “window of opportunity.”
In the report, in which he initiated coverage of Magna International Inc. (MGA-N, MG-T) and Martinrea International Inc. (MRE-T), Mr. Glen said: "As we work beyond all of the issues and headwinds that the market and investors see for the space and Canadian auto parts stocks, our view is that a reasonable amount of uncertainty is already priced into the stocks,” he said. “Barring a clear view that we are going to see a deep cyclical downturn (or recession), particularly in the U.S. where both companies earn the majority of their operating profit (Magna 66 per cent of operating profit in 2017 was North America, Martinrea 83 per cent of operating profit was North America), we see a relatively favourable risk reward in the names. That said, at this point in time, we see Magna’s valuation as closer to fair value, with Martinrea continuing to trade at a very sizeable discount to both historical and peer valuations.”
Believing it is “underowned, undervalued and underappreciated,” Mr. Glen gave Martinrea an “outperform” rating and $16 target. The average target on the Street is currently $15.63, according to Bloomberg data.
“We view Martinrea as an extremely undervalued stock which has only seen its valuation discount widen despite tangible operational improvements realized under the direction of CEO Pat D’eramo,” he said. “In particular, Through the implementation of Mr. D’Eramo’s operational improvemment plan, we have already seen margins expand to 7.8 per cent at the end of 2018 from 4.1 per cent at the end of 2014, with management targeting further expansion to 9 per cent plus in 2021 (based on sales run rate of $4 billion). While we acknowledge that the 9-per-cent target was recently pushed out with the reporting of Q3 results, this was coupled with a report that also included a notable step change in the profitability in the European and China segments, and combined with a continued improving freecash profile.
“In terms of our financial forecast, we see relatively stable sales over the 2020-2021 timeframe, with margin expansion to 8.7 per cent in 2021. While we acknowledge that our 2021 forecast is below management’s target of 9 per cent, this is more related to a stagnant market conditions. If current industry forecasts move more readily into a growth environment (particularly in North America), we would be more comfortable with something in the 9-per-cent range. This forecast yields an earnings CAGR [compound annual growth rate] of 8 per cent over the f2019-f2021 timeframe. As an investor, this EPS growth is coupled with a dividend yield of 1.6 per cent and 2020 P/E [price-to-earnings] of 4.6 times (versus 5-year forward average of 6.4 times), offering an extremely compelling risk/reward profile. If we couple this with some optionality regarding the prospects for a (eventual) turn in global automotive demand, a more bullish top-line could provide an opportunity for some upside to our margin outlook.”
Mr. Glen called Magna International “a deep-value stock which generates a substantial amount of free cash flow.”
He gave it a “market perform” rating and target of US$60 per share, which exceeds the average on the Street by 95 US cents.
“n general, we have a constructive view on the stock and the business," the analyst said. "This view is driven by a number of factors, including: (1) Management actively evolving the product portfolio; (2) Ongoing investments being made in both ADAS and electrification; (3) Significant free-cash generation; (4) A conservative balance sheet; and (5) Aggressive activity on the share repurchase program.
"Where we have pause with our rating is valuation. On many metrics (EV/EBITDA, P/E, P/ Book), Magna is trading at its historical averages, and we remain hesitant to apply target multiples beyond this range. That said, with the company anticipated to release 2020 guidance in early/ mid-January, we will look to reassess our segment multiples at that time.”
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HLS Therapeutics Inc. (HLS-T) has the potential to “transform the cardiovascular treatment landscape” if its anchor drug Vascepa delivers on last year’s “blockbuster” clinical results, according to Canaccord Genuity analyst Tania Gonsalves.
She initiated coverage of the Toronto-based company, which focuses on the central nervous system and cardiovascular therapeutic areas, with a “buy” rating.
“HLS exited Q3/19 with $51.3-million of cash and $93.3-million in debt," said Ms. Gonsalves. "This equates to 1.2 times net debt-to-LTM [last 12-month] adjusted EBITDA, providing plenty of cushion for HLS to launch Vascepa and its two pre-registration drugs, Trinomia (CVD) and Perseris (schizophrenia). It is also one of a few Canadian healthcare stocks that is sufficiently capitalized to pay a dividend (1.0-per-cent yield). This means it may appeal to a broader set of investors.
“Management plans to grow Vascepa’s salesforce to up to 70-75 individuals by the end of 2020. We model FCFF declining from $17.3-million in 2019 to $7.2-million in 2021 to account for this upfront investment. Once complete, we believe HLS will benefit from years of Vescepa sales growth and new product launches. We forecast net sales grow from $54.3-million in 2019 to $173.0-million in 2023 (34-per-cent compound annual growth rate), two-thirds of which is attributable to Vascepa in the final year. In true specialty pharma fashion, Trinomia will leverage the Vascepa salesforce and Perseris, the Clozaril salesforce, therefore requiring minimal additional investment.”
Ms. Gonsalves emphasized the company’s “tenured tenured management team that’s done this before," noting founders William Wells, Greg Gubitz and Gilbert Godin helped “refocus away from generic drug reformulations toward in-licensing and acquiring branded CNS pharmaceuticals.”
“Its stock increased almost 150 per cent in 30 months, culminating in it acquiring and being renamed Valeant Pharmaceuticals International (now Bausche Heath Companies Inc; BHS-T) in September 2010,” the analyst said. “Now the Chairman, CEO and COO of HLS, respectively, Mr. Wells, Mr. Gubitz and Mr. Godin intend to leverage their deep industry networks to replicate Biovail’s strategy and resultant success. Given a combined over four decades of pharmaceutical experience, we believe management is well-versed in how to build a specialty pharma company from the ground up.”
Also pointing to “strong” institutional backing with two-thirds of shares held by insiders, Ms. Gonsalves set a target price of $22.50 per share. The average on the Street is $23.17.
“Although still in the early days of its existence, we believe HLS has all the makings of what could become a bellwether in Canadian specialty pharmaceuticals,” she said.
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Mackie Research Capital analyst Stuart McDougall initiated coverage of four Canadian development-stage mining companies in a research report released Tuesday.
“All reflect a bias toward selectively for asset quality, management strength or exploration potential,” he said.
Calling its Ixtaca gold-silver deposit in Mexico “a springboard to mid-tier producer status,” Mr. McDougall gave Vancouver-based Almaden Minerals Ltd. (AMM-T) a “speculative buy” rating.
“We rank Alamden Minerals among a select few junior development companies with the potential to leap to mid-tier producer status from a single asset," he said. "Moreover, management’s textbook discovery of the Ixtaca open-pit gold-silver deposit also ranks them high on our credibility list, as does their purchase of a mill three years ahead of a full feasibility study.”
He set a target price of $1.30 per share.
“In our view, AMM has done a first-rate job at discovering and advancing Ixtaca to the point where a construction decision can be made,” the analyst said. “That said, the government has placed the permitting process on hold, pending the outcome of a legal challenge against the process at Ixtaca. To recognize this uncertainty, our target price is based on a 10-per-cent discount rate to our project DCF and the omission of any exploration upside that we might otherwise include in our valuation.”
Mr. McDougall gave Dolly Varden Silver Corp. (DV-X), a Vancouver-based company focus on its silver properties in the Golden Triangle region of northwestern British Columbia, a “speculative buy” rating and $1 target.
“In Dec. 2016, DVS appointed Gary Cope as President and CEO, followed two months later by Ben Whiting as VP, Exploration," he said. "Since then, the pair have added a more aggressive and systematic approach to the property’s exploration, resulting in the discovery of four new zones and an increased understanding of existing ones, culminating in the successful update of a maiden resource estimate earlier this year. We think that progress has continued, first with the positive metallurgical update in June and, more recently, with the confirmation and extension of the unmodelled Chance zone.”
He also gave Kootenay Silver Corp. (KTN-X), which possesses a portfolio of silver properties in the Sierra Madre region of Mexico, a “speculative buy” rating and 55-cent target.
“Until the resource potential of the discoveries at Columba and Copalito become clear, our target price of 55 cents per share is conservatively based on an in situ value of US$1.00 per ounce silver equivalent,” he said. "We think that reasonable, given the exploration results to date, relative to the premium the market places on explorers and developers with high-grade deposits.
Mr. McDougall pegged Toronto-based Rio2 Ltd. (RIO-X), which is developing the Fenix Gold Project in Chile and possesses exploration projects in Peru, a “speculative buy” with a $1 target.
"In September, Rio2 announced an updated pre-feasiblity study (PFS) for the Fenix heap-leach gold project in the Atacama Region of Chile. In essence, the Company has placed the well-known multimillion- ounce deposit on a more manageable and speedier development path, one that we expect to lead to a positive construction decision in 2021.
“The stock is stock is currently trading at 0.38 times our NAV, but we expect it to re-rate as management’s track record comes into play with the advancement of Fenix. We would also note that our model discounts the potential for any costs savings associated with ongoing detailed engineering, metallurgical and economic studies.”
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Impressed by a “faster than expected start to Disney+,” Rosenblatt Securities analyst Bernie McTernan handed Walt Disney Co. (DIS-N) a Street-high target price on Tuesday.
Mr. McTernan now projects 35 million global subscribers by the end of fiscal 2020 for the company’s recently launched streaming service, rising from a 10 million estimate previously. He said an internal survey suggests high awareness of the site and the expectation users will stay on beyond the one-week free trial.
Reiterating his “top pick” rating for Disney, he hiked his target to US$175 from US$170. The average on the Street is US$155.71.
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True North Commercial REIT’s (TNT.UN-T) third-quarter results were “steady as intended,” said CIBC World Markets analyst Chris Couprie after coming off research restriction following the completion of a $80.5-million equity offering.
“The stability of True North’s cash flow profile was evident again this quarter and is a central tenet of the investment thesis,” he said. “The REIT continues to actively manage and improve its portfolio, recycling out of non-core markets and into more urban locations. The recently completed equity raise and GTA office acquisitions are a continuation of this strategy. The GTA is expected to account for 42 per cent of TNT’s GLA should the recently announced acquisitions close. At the same time, TNT is adhering to its investment guidelines of acquiring buildings with high occupancy rates, strong credit tenants, and long lease terms. We expect acquisition activity by the REIT to increase over the coming year. The 8.5-per-cent distribution yield is attractive for yield-oriented investments.”
Mr. Couprie raised his target to $7.25 from $6.25. The average is $7.35.
“We maintain our Neutral rating owing to a modest organic growth profile, above-average leverage, and a fair valuation,” he said.
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Believing a recent rally limits future near-term gains unless a rebound in the methanol market occurs, TD Securities analyst Cherilyn Radbourne cut Methanex Corp. (MEOH-Q, MX-T) to “hold” from “buy.”
She said the company’s shares have recovered by more than 30 per cent since their late-August low, adding that methanol supply and demand outlook has become weaker over this time period.
The analyst also said the commodity price weakness is unfolding as it starts construction on its Geismar 3 methanol plant in Louisiana, which she thinks is a project some investors would have preferred to see deferred in light of the current backdrop.
Ms. Radbourne kept a US$47 target. The average target on the Street is US$41.79.
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In other analyst actions:
Brookline Capital Markets analyst Kumar Raja initiated coverage of Medicenna Therapeutics Corp. (MDNA-T), a Toronto-based immuno-oncology company, with a “buy”rating and $4 target. The average on the Street is $3.90.
“In our view, MDNA55 can deliver potent cell-killing agents to cancer cells without harming healthy cells leveraging the IL4 receptor which is over-expressed in multiple cancers,” he said. “MDNA55 has promising interim clinical data in a Phase 2b trial in recurrent glioblastoma (rGBM) with further data expected this year. There are many potential value driving catalysts over next 12 months.”
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With files from Reuters and Bloomberg News
David Leeder