Inside the Market’s roundup of some of today’s key analyst actions
Dollarama Inc.’s (DOL-T) sales momentum may be stalling and the runaway for growth of its store network may be shorter than expected, said Desjardins Securities analyst Keith Howlett.
In reaction to weaker-than-anticipated second-quarter 2019 financial results, which caused its stock to plummet 17.19 per cent on Thursday, Mr. Howlett downgraded his rating for the Montreal-based retailer to “hold” from “buy” based on a lower valuation multiple.
Before market open, the company reported earnings per share for the quarter of 43 cents, a penny below the expectations on the Street.
However, a slowdown in same-store sales growth drew a bigger reaction from investors. Dollarama reported SSS of 2.6 per cent for the quarter, missing the consensus projection of 5.26 per cent and well below the 6.1-per-cent result in the same period a year ago. The company now expects growth of 2.5-3.5 per cent for the fiscal year, versus an earlier prediction of 4-5 per cent.
“Dollarama management indicated that it reduced same-store sales growth guidance because the company has minimized price increases to consumers in order to maintain its competitive position in the market,” said Mr. Howlett. “The negative impact of that action on gross margin rate is, however, being offset by lower product cost inflation in China than management had forecast, leading to an overall higher gross margin rate. Management states that Dollar Tree Canada is not a factor in lower sales growth, based on a review of sales at stores near a Dollar Tree.
“A number of coincident factors cause us concern as to whether sales growth will be permanently less robust and/or the growth runway is shorter than had been thought: (1) Same-store traffic has been negative in five of the last 10 quarters; (2) back-to-back quarterly same-store sales growth of 2.6 per cent is the weakest since snowstorms before Christmas in 2013; (3) the number of net new store openings (53) in the prior 12 months was the lowest in many years, so cannibalization should have been relatively constrained; (4) Dollar Tree Canada has posted higher same-store sales growth than Dollarama for two quarters; and (5) Miniso and Dollar Tree both indicate intentions to expand in Canada. The valuation multiple had expanded as Dollarama posted EPS growth of over 20 per cent annually from FY15–18. Go-forward EPS growth looks to be in the mid-teens.”
With the results, Mr. Howlett lowered his EPS expectations for fiscal 2019 and 2020 to $1.70 and $1.73, respectively, from $1.73 and $1.97.
His target for the stock fell to $45 from $58. The average target on the Street is currently $49.93, according to Thomson Reuters Eikon data.
Elsewhere, CIBC’s Mark Petrie dropped the stock to “neutral” from “outperformer” with a target of 446 , down from $59.
Mr. Petrie said: “Another quarter of slower organic growth and an expectation of slower margin expansion gives us pause about longer-term earnings growth and appropriate valuation. We continue to view Dollarama as the highest-quality retailer in our coverage universe, but our previous valuation was simply too high for a company with good visibility to low double-digit EPS growth but limited near-term catalysts."
Though he called the share price drop “overdone,” BMO Nesbitt Burns analyst Peter Sklar lowered his rating to “market perform” from “outperform” with a $47 target.
“We believe the company is unlikely to continue to deliver consistently superior SSS results, and we are therefore downgrading the stock,” said Mr. Sklar.
Industrial Alliance Securities analyst Neil Linsdell called Thursday’s sell-off an “overreaction” and maintained his “buy” rating and $54.50 target.
"We continue to expect longer-term same store sales growth in the 4-5-per-cent range and Dollarama continues to adjust product offerings and optimize operations," he said." While Dollarama does trade at a premium valuation, we believe this is justified by its simple business and customer proposition, with defendable margins, and very flexible and responsive operations."
Raymond James' Kenric Tyghe lowered his target to $50 from $56, keeping an "outperform" rating.
Mr. Tyghe said: "We believe that Dollarama's F2Q19 miss (and more importantly the guidance revisions) reflects necessary tweaks to refine how Dollarama manages their compelling value proposition gap, versus a fundamental (negative) shift in their competitive positioning."
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Citi analyst Michael Bilerman made several rating changes in conjunction with his 8th annual “Fantasy REIT draft,” which is meant to highlight the firm’s top picks in the sector heading into Fall.
The analyst upgraded Regency Centers Corp. (REG-N) to “buy” from “neutral” with a target price of US$74, rising from US$67. The average target on the Street is US$69.
“We favor the company’s high quality, well located grocery-anchored strip center portfolio, which we view as more immune to risks of tenant fallout and cap rate upside versus peers,” said Mr. Bilerman. “Lower exposure to tenant bankruptcies in recent years has put REG in a position of strength with a healthy internal growth trajectory in 2018-19, supplemented by accretion from re/development activity and a solid external growth pipeline funded primarily with FCF. Combined with a strong balance sheet and disciplined capital allocation track record, we view the stock as defensive. While Gazit ownership has contributed to year-to-date underperformance versus the higher quality REIT peers, we expect greater momentum now that the position has been liquidated.”
He downgraded a trio of REITS. They are:
- DDR Corp. (DDR-N) to “neutral” from “buy” with a target of US$15, down from US$16 but slightly above the consensus of US$14.48.
“The DDR management team has made meaningful progress over the last year and a half transforming this company,” said Mr. Bilerman. “But despite the progress and the recent spin-off (which we expected to be more of a positive catalyst), the stock continues to trade at a sizeable NAV (23 per cent) and multiple (20 per cent) discount. We continue to see longer term value and expect the upcoming October investor day will serve to highlight that. But any sort of meaningful growth story will take some time to play out, while nearer term the environment for box retail remains challenged. As such, beyond added clarity from the investor day, we struggle to identify an operational or strategic catalyst that would meaningfully narrow the valuation discount in the near term enough to warrant maintaining the Buy. As such we downgrade to Neutra”
- Essex Property Trust Inc. (ESS-N) to “sell” from “neutral” with a target of US$260, falling from US$280. The average is US$261.95.
“While we continue to like the long term prospects for ESS given their exposure to dynamic west coast markets and a blue chip management team that has a long track record of creating value, we do not believe near term risks are fully priced into shares,” said Mr. Bilerman. “We see 2 near term risks: (1) the potential repeal of Costa Hawkins in CA in November, which would have a disproportionate impact on ESS vs. apartment peers given its 83-per-cent exposure to CA, and (2) decelerating same store revenue growth driven by difficult occupancy comps. Given these risks, we view valuation as fair with shares trading at a 4.8-per-cent implied cap rate and at a 5-per-cent discount to our NAV estimate, generally in-line with apartment peers.”
- MedEquities Realty Trust (MRT-N) to “sell” from “neutral” with a US$9 target, falling from US$10. The average is US$11.31.
“Although shares have declined 8 per cent year-to-date, we believe further downside is possible as the company looks to re-tenant 24 per cent of its portfolio, likely at lower rents, in addition to currently deferring rents on another 4 per cent of the portfolio into 2019,” said Mr. Bilerman. “Moreover, MRT is likely to become increasingly capital challenged, and the company’s acquisition story is largely broken at this juncture in our view. We are removing High Risk from our rating given the stock has now been publicly traded for two years, alleviating initial concerns from not having public market experience and being a small cap name.”
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Believing its current valuation is fair and properly reflects a turnaround in sales, RBC Dominion Securities analyst David Palmer lowered his rating for Dunkin' Brands Group Inc.'s (DNKN-Q) to “sector perform” from “outperform.”
"Dunkin’s sales trends seem to be improving sequentially this quarter (RBC estimate 1.5 per cent) as a result of improving limited time offers (e.g. Donut Fries) and value offers (e.g. two for $2, $3, $5 beverages and $2 snack menu)," said Mr. Palmer. "In addition, we believe the company is setting the foundation for higher franchisee investment in reimaging and improving espresso beverage demand (improved machines and marketing) in 2019. That said, we believe improved sales trends is largely built into investor expectations at current levels."
Mr. Palmer kept a US$75 target price for the stock. The average target is currently US$70.11.
"We continue to expect that Dunkin' will command a premium multiple versus franchised peers," he said. "Previous M&A transactions (e.g. Costa Coffee, Panera, Krispy Kreme, Tim Hortons) have proven that certain players have a view that coffee is one of the most attractive assets in consumer and these acquirers are willing to pay significant premiums for these growth assets. The above-mentioned assets have sold for an average 16.7 times LTM [last 12-month] EBITDA. Dunkin' currently trades for 18.5 times 2019 estimated EBITDA (vs. 15 times for the peer group), 25 times 2019 estimated EPS (vs. 21 times for the peer group), and a 4.6-per-cent 2019 FCF yield (vs. 4.9 per cent for the peer group). While Dunkin' Brands may be of interest to a potential acquirer, we believe current valuation limits the probability."
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Desjardins Securities analyst Raj Ray initiated coverage of SilverCrest Metals Inc. (SIL-X) with a “buy” rating, calling it “a silver lining in the silver space.”
"SilverCrest is currently focused on developing the Las Chispas property (Las Chispas) in northern Mexico," said Mr. Ray. "Las Chispas ranks within the top quartile of silver-gold assets based on silver-equivalent resource grade (Exhibits 1a and b). It is a potentially low-capital-intensity and high-margin asset, which makes it attractive to investors looking for a silver play (with gold credits) in an increasingly challenging silver landscape with declining mine lives and rising operating costs. It is also important to note that there are no significant royalty/joint venture/stream interests on Las Chispas, which gives SilverCrest the ability to crystallize the full value of the asset for its shareholders."
Mr. Ray set a price target of $4.75 for SilverCrest shares. The average is $4.54.
“Over the next 12–18 months, we expect a number of important catalysts, including potentially at least three resource updates (next update imminent), preliminary economic assessment (PEA) results (early 2019), pre-feasibility study (PFS) results (late 2019), as well as permitting milestones. In our opinion, this should help drive share price performance and support valuation despite the fact that SilverCrest has outperformed an otherwise lacklustre silver market in 2018,” he said. “Based on the relative quality of silver developers, we believe SilverCrest is most comparable to MAG Silver (MAG), even though MAG’s Juanicipio project (44-per-cent owned by MAG) is more advanced and, in our opinion, is the only silver development-stage asset that compares favourably with Las Chispas at this juncture based on grade and scale. However, given SilverCrest’s relatively small market cap and its wholly owned, high-quality Las Chispas asset with further upside potential, we deem it to be a more attractive M&A target for primary silver producers who have a strategic imperative to replace reserves.”
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Despite calling its hotel strategy “a solid opportunity for value creation over the long term,” Desjardins Securities analyst Benoit Poirier lowered his target price for shares of Transat A.T. Inc. (TRZ-T) in response to weaker-than-expected third-quarter results and outlook .
On Thursday before market open, the Montreal-based tour operator reported an adjusted loss of 8 cents per share, well below Mr. Poirier’s estimate of a 16-cent profit and the consensus of 32 cents. Revenue of $697-million also missed expectations ($774-million and $795-million, respectively).
The company also expects fourth-quarter results to decline, due largely to a recent increase in fuel cost and currenyt variations.
“During the quarter, management made progress on its hotel strategy and opened the division’s headquarters in Miami,” said Mr. Poirier. “From there, TRZ will have better control of the day-to-day operations of the hotel business. Following our discussions with management, we understand that valuations are expensive for existing hotels currently. Consequently, TRZ believes that it will be able to create more value by buying land directly and building hotels. On that front, TRZ has already selected an architect and is in the process of choosing a construction partner. TRZ has identified some opportunities in Cancun and Punta Cana and discussions have started. Finally, TRZ is working with a consultant to define its brand and positioning in the hotel business—an opportunity to create the right experience for the customer. With this strategy, management intends to unlock shareholder value by improving the company’s profitability during winter by removing its dependence on the US dollar while delivering an integrated end-to-end customer experience for its clients. We believe it would be fair to expect a transaction by year-end. Bottom line, we expect gradual cash deployment toward the hotel strategy, and we continue to have confidence that TRZ’s strategy will benefit shareholders over the long term.”
After lowering his EPS projections for 2018 and 2019, Mr. Poirier dropped his target for Transat shares to $13 from $15, keeping a “buy” rating. The average is $11.
Elsewhere, National Bank Financial analyst Cameron Doerksen lowered his rating to “sector perform” from “outperform” with a target of $9.50, down from $13.
Cormark Securities dropped the stock to “market perform” from “buy” with a target of $8.50, down from $14.
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Admitting he was wrong on his bullish view of DHX Media Ltd. (DHX-T), Echelon Wealth Partners analyst Rob Goff downgraded his rating for its stock to “speculative buy” from “buy” after the company provided a weaker-than-expected outlook for its fourth-quarter results.
“The EBITDA reductions taken for Q418 were essentially in line with the shortfall for FQ318,” said Mr. Goff. “We would likely have gone lower and suspect the consensus would have, other than references in the MD&A that the company was in advanced stages of significant distribution negotiations. We believe updated information on these negotiations would be purview of the strategic review and would await the committee’s report to the board and the release of DHX’s actual FQ418 results. We do not believe revenues at $99M on the quarter would reflect on these references discussions.
“Consequently, investors are left to question whether these large negotiations were unsuccessful or whether they remain to be announced/completed. The negative interpretation of the pre-release would take the view that the company moved ahead with the negative news, where they might have waited until their FQ418 results are reported, if they had offsetting positive news from the strategic review. The positive interpretation would suggest that DHX would be motivated to pre-release as soon as it was apparent that results would be below expectations irrespective of the strategic review considerations. We suspect the market to take the negative view. With the pre-release announced and digested, any announcements from the strategic review will be judged on their own merits.”
Mr. Goff dropped his target for DHX shares, which hit an all-time low on Thursday following the release, to $3.75 from $5.75. The average is now $3.44.
“We have had and continue to have a bullish view on marquee content, and in particular children’s content given its extended shelf life and potentially lucrative merchandising opportunities,” he said. “We have held to the view that DHX would take significant actions from its strategic review that would surface value. We further looked for WildBrain to become an increasingly large part of the mix. These views remain; albeit timing on execution has been disappointing. We lowered our PT to $3.75 from $5.75 assigning a more significant risk discount following on two consecutive disappointing quarters. The $10-million reduction in our F2019 EBITDA would equate to 60-cent price target reduction. Consequently, our move and those anticipated in the market are ascribing a significant risk discount for operations and strategic moves following on two consecutive disappointing quarters. The Speculative Buy is more consistent with the volatility about results and strategic moves.”