Inside the Market’s roundup of some of today’s key analyst actions
IA Securities downgraded Computer Modelling Group Ltd. (CMG-T) because of the stock’s strong run in recent weeks.
“Due to strong price appreciation in the past month, we are downgrading CMG to a Hold rating from Buy, while increasing our target price by 25 cents to $7.75,” said analyst Elias Foscolos.
The median target price is $7, according to Zack’s Investment Research.
“The stock has appreciated over 30 per cent since bottoming out in April. Since we moved the stock to a Strong Buy at $5.62 on April 22, CMG has returned 34 per cent, while the Energy Services index has declined about 17 per cent. The stock is now trading close to what we believe is intrinsic value,” he said.
“Despite the recent bounce back, the stock is still yielding 5.3 per cent, which is one of the most attractive yields in the sector. We do not see any need for CMG to reduce the dividend in the near term given the company’s large cash balance,” he said.
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Citigroup initiated coverage of Electronic Arts Inc. (EA-Q) with a “neutral” rating and a target price of US$102.
The median target price is US$113.
Their price equates to 22 times the company’s fiscal 2021 non-GAAP earnings per share, said analyst Jason Bazinet.
“From fiscal 2014 through 2018, EA delivered steady single-digit bookings growth. In fiscal 2019, beset by competitive pressures and internal development challenges, the firm reduced full year bookings guidance twice. In response, investors repriced EA’s equity from nearly US$150 per share to about US$75. Today, the shares trade around US$95,” he said.
“Investors are looking for assurance that fiscal 2020 will bring a return to steady bookings growth. Assuming solid performance from EA’s core franchises, the firm’s ability to meet these expectations will turn primarily on the trajectory of Apex Legends, a free-to-play title launched in February, 2019,” he said.
“Based on our analysis of Apex Legends, we believe EA is apt to meet expectations for total bookings in fiscal 2020. We estimate US$435-million of Apex Legends bookings in the fiscal year, a tad above management’s guidance of US$300-US$400-million” the analyst added.
“First, each US$100-million change Apex Legends bookings versus our base case could add 16 cents to our non-GAAP FY21 EPS estimate, akin to US$3.60 of equity value per share. Second, EA’s cash position may reach US$6.7-billion by FY22 (equal to 23 per cent of EA’s market capitalization). In the past, EA has tended to use its cash to retire shares. Third, cloud gaming platforms are poised to launch at Google, Microsoft and (perhaps) Amazon. Long-term, we worry that cloud gaming firms may monetize gaming in indirect ways. This could put downward pressure on incumbent publishers’ revenues. But, we’ll need to see the business model and price points before we can fully assess the level of risk.”
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CIBC cut its price target on Saputo Inc. (SAP-T) after the cheese and dairy company reported weak fourth quarter results.
“Unfavourable commodity moves were the key driver of pressures through the year, but competitive dynamics have worsened, and other cost issues are not helping. Our estimates are reduced materially, our multiple cut slightly, both partially offset by now averaging F20 and F21 estimates. Our price target drops to $43 (was $47) and SAP remains Neutral-rated,” said analyst Mark Petrie.
The median price target is $47.
“Though commodity prices have generally rebounded nicely in 2019, Saputo is seeing issues across geographies that limit the benefit. In Canada and the US, lower volumes and increased competitive pressures are hurting realized margins. This will level out over time, but SAP’s sales disciplines could mean missed revenues in the near term. The company is exploring options (co-packing) to maintain volumes, but we expect this is unlikely to be accretive,” he said.
“Saputo has been on a torrid acquisition pace, spending $3.3-billion over the last two years to add an impressive array of tuck-in and more transformative businesses. Integrations are generally solid, but operating conditions limit the near-term upside. We believe SAP is an intelligent and disciplined acquirer, but it appears more patience is required to see the payoff,” he said.
“Saputo offered guidance of EBITDA [earnings before interest, taxes, depreciation and amortization] up slightly in F2020, excluding benefits from Dairy Crest, Lion and IFRS 16, all of which we have layered in to our published estimates. Our formal EBITDA growth forecast is for an increase of 20 per cent, but excluding these factors and on a comparable basis to guidance, we see 5 per cent growth,” the analyst said.
“A weaker earnings outlook and less M&A optionality given higher leverage calls for a lower multiple. However, we are hesitant to cut too much given the delayed – but still present – upside from the huge slate of M&A over the last two years. As an offset, we look ahead further than we typically do and average our F20 and F21 estimates. Applying 21 times P/E (was 22 times) generates our price target of $43.”
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CIBC raised its price target on Just Energy Group Ltd. (JE-T) on the potential the company is a takeover target.
“Just Energy has been taking some steps to improve its business fundamentals, but the market (including ourselves) has largely taken a wait-and-see approach to see if those efforts truly unlock value. With recent interest in retail electricity marketing businesses in the U.S., a sale might be a simpler proposition and a quicker means to unlock value. However, given JE’s business mix, leverage, and current valuation, we do not foresee a large premium if an offer comes. We raise our target to $5.50 from $4.50, reflecting upside from a takeout where a buyer can find synergies. With only modest upside from the current trading level, we reiterate our Neutral rating,” said analyst Mark Jarvi.
The median price target is $5.25.
“The recent acquisitions of Crius Energy by Vistra Energy and Stream Energy by NRG Energy show power generators are interested in adding retail exposure as a natural hedge to their wholesale power production. Further, the Texas market has been identified as a key market to have retail exposure – while JE doesn’t disclose its exact residential-customer-equivalent (RCE) count in Texas, we believe it’s a sizable position (potentially 5 per cent market share). However, selling JE in a single transaction might not be simple given the U.K. (20 per cent of revenues) and Canadian (11 per cent of revenues) businesses and sizable natural gas book,” he said.
“Looking at EV [enterprise value] per RCE metrics from past deals implies upside in the $8-$9 range; however, we believe EV/EBITDA and synergies analysis is a more prudent approach. Past deals have been executed at an average of about 4.5 times-5.0 times EBITDA, post-synergies. JE might get a slight premium given its scale and diversification, but potential upside primarily comes from possible synergies, which also implies a strategic buyer would be the most logical buyer,” he said.
“We have not changed our estimates. For our target, we now assume some upside from a takeout scenario where a buyer finds 5 per cent SG&A synergies as well as COGs savings (from reduced hedging & insurance costs),” he said.
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Canaccord Genuity lowered its target price on Transcontinental Inc. (TCL-A-T) after the company reported weaker-than-expected earnings.
“Transcontinental reported their Q2/F19 results and EBITDA was lighter than expected, mainly due to printing. Adj EBITDA was $115.7-million, up 29 per cent year over year, which missed our $119.5-million forecast despite our estimates having a larger negative impact from the sale of the California plant ($2.1-million higher). We estimate adj. EBITDA declined 12 per cent on an organic basis,” said analyst Aravinda Galappatthige.
The analyst kept a “buy” rating but cut the price target to $21 from $27.
“With Packaging coming in generally in line in Q2 and expectations set for H2, the key area to watch in terms of stock volatility is printing. Given the generally fixed cost base in printing, variances in revenues tend to have a substantial impact on EBITDA. We have now seen two successive quarters of meaningful misses in terms of profitability and in the case of Q2 a notable organic revenue decline. While the pullback in marketing spend by the two large customers in retail was known prior, Q2 results suggest that the reduction appears to have some longevity. Hence, much depends on management’s ability to achieve some cost adjustments to stabilize EBITDA. This, we believe, could be a catalyst to re-rate the stock to more reasonable levels. We expect to see initial traction on this front starting H2/19, further boosted by reallocation of the state of the art equipment from Freemont to the Canadian platform,” the analyst said.
“We have revised down our target to reflect the revised down forecasts as well as the current multiples in the packaging space (based on comps). The packaging multiple is lowered from 9.25 times to 8.25 times (against 2020E EV/EBITDA) to be just below its comps, given the execution ahead of TCL. Moreover, the printing multiple has been cut from 5 times to 4.5 times to reflect recent misses. This lowers our target to $21 per share. Our Buy rating is supported by the underlying FCF [free cash flow] yield of 17 per cent in F2019. For a business with a reasonable balance sheet and relatively steady underlying EBITDA, we feel that this is a compelling valuation. Furthermore, TCL offers an attractive dividend yield of 5.8 per cent with the prospect of continued annual dividend growth at the 10 per cent level.”
In other analyst actions:
Dollarama Inc: Canaccord Genuity raises price target to $40 from $37
Saputo Inc: Royal Bank of Canada cuts price target to $50 from $52
Conifex Timber: Canadian Imperial Bank of Commerce cuts target price to $1.25 from $1.50
Canfor Corp.: CIBC cuts price target to $11 from $15.
Canfor Pulp Products Inc.: CIBC cuts price target to $15 from $18.
Inferfor Corp.: CIBC cust price target to $16 from $19.